From a tax perspective, boats are unique. There is no universal state titling system like for road vehicles, and they can move between jurisdictions unlike real property. As a result, their mobility can be used to help arrange ones affairs to minimize or delay tax consequences.
In most states, laws concerning the sale of goods (including boats) are guided by the Uniform Commercial Code (UCC), which is a model code that seeks to make laws on the sale of goods as uniform as possible in all 50 states. All fifty states have incorporated at least some parts of the UCC into their commercial code. While the UCC does not address or control sales tax, in many states it will define the “sale” and that will give a strong indication about where the sale takes place. In those states which have adopted the UCC’s definition of when a sale occurs, the buyer and seller have several ways in which they can dictate where the sale takes place, and thus where taxes must be paid.
Rule 1: The location called for in the contract controls.
The UCC provides “Title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties.” Md. Code Ann., Com. Law § 2-401. The most important thing in working out the logistics of anything having to do with a contract for the sale of goods — including where it takes place– is the language of the contract itself. Although this is the law, I do not recommend identifying a non-tax state in the contract, but finalizing the transaction with the boat in a taxing jurisdiction.
Rule 2: If there is not an express agreement, the sale happens where the boat is delivered.
“Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even though a document of title is to be delivered at a different time or place.” Md. Code Ann., Com. Law § 2-401.
If the contract does not specify where the sale is going to happen, then the location of the sale is generally determined by whether the location where the boat is delivered, notwithstanding the delivery of title documents elsewhere. If the seller is responsible for delivery, then the sale occurs wherever the boat is delivered to the buyer. If the buyer is responsible for delivery, then the sale happens where the boat is transferred to the buyer or to a shipping company at the direction of the buyer. So, if the boat is built in North Carolina for a buyer located in Maryland, and the buyer goes to North Carolina to get the boat — the sale takes place in North Carolina. If the contract calls for the dealer to deliver the boat to Maryland, however — the sale probably takes place in Maryland.
Rule 3: If the boat is staying put, the sale happens where the last key paper is delivered.
Unless otherwise explicitly agreed where delivery is to be made without moving the goods, (a) If the seller is to deliver a tangible document of title, title passes at the time when and the place where he delivers such documents and if the seller is to deliver an electronic document of title, title passes when the seller delivers the document; or (b) If the goods are at the time of contracting already identified and no documents of title are to be delivered, title passes at the time and place of contracting. Md. Code Ann., Com. Law § 2-401.
If the boat is not being moved as part of the purchase contract, then the sale will happen when the seller gives the buyer the title documents — which generally does not happen until after payment is made (there are exceptions!). The location is easy to determine if the seller and buyer are in the same location, and the buyer physically hands the seller the title documents. If the seller is either mailing or electronically transferring the title documents, the law is a bit less clear. The parties can still stipulate in the contract whether the sale is complete upon sending or receiving of the title documents, and the contract will control the location. If the parties have not stipulated when the sale is complete, then it is like the sale happens where the buyer receives the contract, but Maryland has not addressed that directly.
It is also noteworthy that a Coast Guard Document (and the Bill of Sale that must be filed to transfer a documented vessel) are not considered to be title documents, at least by most Courts. This means that a boat that has a state title may be treated differently from a boat that is Coast Guard Documented.
Final Thoughts
Buyers of high value boats that will not be used exclusively in a single jurisdiction can choose when and where a boat becomes taxable, and they can choose to pay low or no sales tax at initial purchase. This is extremely important for purchasers that intend to leave the United States after purchase, since they can arrange their affairs to avoid taxation altogether. As such, it is a time where a relatively small investment of attorney time can lead to big savings.
J. Dirk Schwenk is a Maryland Real Estate, Waterfront Property and Maritime Lawyer from Annapolis, Maryland. He represents hundreds of boat owners from around the world in purchase and sale transactions. He graduated cum laude (with honors) from the University of Maryland School of Law and has been in private practice in Maryland ever since.