Eds. Note: Boat tax is subject to change by state and local legislation and its application can change based on the facts.  Please call for advice concerning you individual matter.   

 

Tax on a vessel purchased outside of South Carolina (the use tax) is capped at $300.  S.C. Code Ann. § 12-36-2110.  A boat in the state and registered is subject to the casual excise tax, capped at $500.

Boats in South Carolina, therefore, are most at risk for the imposition of personal property tax.  Liability for South Carolina’s personal property tax arises when a boat is in the state for 60 consecutive days or 90 total days in a calendar year.  A local jurisdiction, however, has the discretion to increase the number of days a boat can stay without being subject to taxation to 180 days.  

SC Code Ann. § 12-37-714 provides:

(2) A boat, including its motor if the motor is separately taxed, which is not currently taxed in this State and is not used exclusively in interstate commerce, is subject to property tax in this State if it is present within this State for sixty consecutive days or for ninety days in the aggregate in a property tax year….

Also, upon an ordinance passed by the local governing body, a county may increase the number of days in the aggregate a boat….must be in this State to be subject to property tax to one hundred eighty days in a property tax year, regardless of the number of consecutive days.

 

 

 

 

 

 

 

 

 

 

Eds. Note: This article appeared in The Law Clerk, a publication of the Maryland State Bar Association, in May, 2005. Its author is Michael J. Jacobs, an attorney from Easton, on Maryland’s Eastern Shore, and the opinions expressed in this article are his. At Baylaw, LLC, we believe that many of the concerns with the process noted by Mr. Jacobs can be minimized with careful advanced planning, and by knowing when to recommend settlement as an alternative to litigation.  We do not recommend that anyone testify on behalf of themselves in boat tax cases — particularly attorneys with boats — unless they are represented by knowledgeable counsel.

Casenote.DNR.cases.5.11.05 – MSBA 2004/05 Law Clerk

Practice Tip

Sailing into the twilight zone of the Maryland vessel excise tax?  You’ll need more than running lights.

Schwartz v. DNR, Court of Appeals No. 94, September Term 2004, March 14, 2005 (Judge Raker with dissent by Judge Wilner).

Kushell v. DNR, Court of Appeals No. 96, September Term 2004, March 14, 2005 (Judge Raker).

     A client walks in the door, fuming at the assessment of the five percent Maryland vessel excise tax on his or her vessel pursuant to Natural Resources (DNR) Art. §§ 8-716 et seq.  The vessel was purchased in Maryland to be moved to permanent moorings at the client’s home in another state.  As such, it was not supposed to be subject to that tax.

However, as often occurs, the vessel had a number of serious operational problems, serious enough to prevent it from leaving Maryland until repaired.  Your client expected the dealer to remedy the problems.  And the dealer did so.  But it took some time to get the work done.

While the work was in progress, on 3 or 4 occasions, the Maryland Department of Natural Resources (DNR) made brief observations of the vessel while it was moored in Maryland waters undergoing repairs.  Those observations took about 10 to 12 minutes in toto.  That was, in fact, the total duration of the observations in theSchwartz case. 

Those observations will have been made by persons who likely have no meaningful expertise about the vessel involved.  The DNR observer likely did not try to determine why the vessel was moored there. 

Based on those events, the DNR determined that the vessel excise tax was due because those passing glimpses indicated that Maryland must be the state of principal use for the vessel, or more realistically, the DNR wished to force your client to prove otherwise.  Accordingly, the DNR issued a notice of assessment imposing the tax with interest and penalties. 

From that point on, immediately upon the issuance of that notice, there has been a lien on the vessel for the tax, interest, and penalties, a lien which has ‘the full force and effect of a lien of judgment.’  NR Art. § 8-716.1(f)(2).  Was your client planning to refinance the vessel?  Make sure that he or she discloses that judgment lien.

Did you believe that pursuant to fundamental due process requirements articulated by the Supreme Court in Sniadach v. Family Finance Corp., 395 U.S. 337, 89 S.Ct. 1820, 23 L.Ed. 2d 349 (1969), and by the Court of Appeals in Barry Properties, Inc. v. The Fick Brothers Roofing Company, 277 Md. 15, 353 A.2d 222 (1976), there could be no such judgment lien without notice and the opportunity for a hearing prior toimposition of such a lien?  Wrong.  In the three plus decades since Sniadach, the ‘ripple effect’ of the multitude of cases flowing from Sniadach and its progeny has yet to reach this Maryland law.

But wait.  You see that you should be able to help the client by denying liability within 30 days of the issuance of the notice and requesting a hearing before an administrative law judge (ALJ).  You note that if the vessel was held for maintenance or repair for 30 consecutive days or more, that time cannot be included in the calculation to determine the principal state of use.  NR Art. §§ 8-716(a)(3) & 8-701(n).  And that, of course, was the only reason that your client’s vessel was even in Maryland waters at the time the DNR wandered by.  Further, you see the obvious bases for solid constitutional challenges to various aspects of that tax.

So this should be fairly cut and dried process.  Want to bet?  Once you start the process of contesting liability for that tax, you have entered the twilight zone.  You are going to need more than running lights to find your way through the process.  That process may well take up to three years before you reach any reasoned resolution, if, in fact, you ever do reach a reasoned resolution.  In the meantime, the judgment lien for the tax will remain in effect, with interest accruing.

    How does the process work?  With the filing of the appeal, an ALJ will, in due course, conduct a hearing pursuant to the Administrative Procedures Act, State Government Art. §§ 10-201 et seq.  The DNR will establish conclusively that the vessel was in Maryland waters for the several minutes it took to make its passing observations of the vessel.  It will call as its experts, persons who will likely have little experience with or knowledge of such vessels.

You should be aware that to the extent that the ALJ bases his or her findings on the testimony of those DNR experts, at the judicial review stage, the qualifications of those experts will be difficult to challenge.  This is so because when you do reach the stage of judicial review, findings based in part on the DNR experts will, under Maryland law, be entitled to great deference.

Will your client’s case depend in part on witnesses you need to subpoena from out of state?  Forget it.  No subpoena is available for such witnesses.  And even if you submit their affidavits, notwithstanding that the setting is an administrative hearing with relaxed rules of evidence, the DNR will object due to the inability to cross-examine the witness.  The ALJ can be expected, in turn, to reject or ignore that affidavit evidence.  So your best hope is that your witnesses are in Maryland, or at least willing to cooperate in providing needed testimony.

You should be aware that it is your client’s burden to prove in the administrative process, that he or she is not liable for the tax.  As a practical matter, the DNR typically only has to prove that the vessel was in Maryland waters in order to get the tax affirmed through the administrative levels.  Your client, in turn, having had a judgment lien placed on his or her vessel without the opportunity for a hearing, will be required by the DNR and the ALJ that the tax is not, in fact, due.  Unless you can prove that, the lien will remain in effect.

You will likely need to review the prior administrative interpretations of the issues involved in your client’s challenge to the tax.  However, you will find that there is no index or reporting system which permits you to accomplish that short of trying to extract that information from the Office of Administrative Hearings (‘OAH’) in Towson.  Those efforts should be premised in part, on a Public Information Act (‘PIA’) request, so as to establish your legal entitlement to such information. 

But you still may encounter resistance from OAH to your accessing the public records consisting of prior ALJ decisions.  A better course will likely be to identify a colleague familiar with the decisions, to see if you can get an assist, to avoid a trip to the OAH in Towson. 

Even if you do access the prior ALJ decisions on the issues in your case, you will not get access to the interpretations of the Secretary of DNR on the multitude of ALJ proposed decisions.  Those rulings may well evidence the policies and practices of the DNR, considerations which may be important to the case.  A PIA request to the DNR may help with that.

How about the case law, the reported decisions illuminating the judicial interpretations of the tax and its procedures.  There are few reported decisions.  The two referenced cases are amongst those that do address the tax. 

The underlying reason for the lack of case law is cost-effectiveness concerns in reaching that stage of the process.  The length and lopsided nature of the procedures needed to even reach the courts, weighed against payment of the tax, create significant obstacles to any meaningful judicial involvement in the process.  That tends to explain why the ripple effect ofSniadach has yet to reach these statutes.

You likely plan to raise the obvious procedural and constitutional challenges pertinent to these lopsided proceedings.  To do that, you must keep in mind the jurisdictional requirement that your client must first exhaust his or her administrative remedies [see, e.g., Blumberg v. Prince Georges County, 288 Md. 275, 418 A.2d 1155 (1980)].  As futile as the effort may seem, those challenges need to be raised early in the administrative processes. 

A failure to do so may leave you with the need to ask for a remand once you finally do reach the courts.  Maryland Insurance Commissioner v. Equitable Life Assurance, 339 Md. 596, 664 A.2d 862, 872-877 (1995).  You should try to avoid that risk.

In order to exhaust administrative remedies, once the ALJ issues a proposed decision affirming the tax assessment and the procedures involved, in an abundance of caution, your client should submit exceptions to the proposed decision to the Secretary of the DNR prior to secretarial action to approve the proposed decision. 

You correctly believe the prospects are nonexistent that the Secretary will say that no tax is due.  But you still need to take that further time-protracted step in order to finally reach the stage of judicial review. 

In the judicial review process, the standard of review is set forth in State Government Art. § 10-222(h).  That standard is discussed, inter alia, in the Kushell andSchwartz decisions.

The decision in Kushell addressees a narrow issue.  There, the vessel owner had purchased the vessel outside Maryland for use outside of Maryland.  He had actually used the vessel for some time in California before moving to Maryland, bringing the vessel with him. 

In Kushell, the Court rejected the DNR 12-minute rule of tax liability (see, e.g., Schwartz, supra) on the basis that the statute did not permit such an assessment where the vessel was purchased outside of Maryland with the intent to use it in another state.  Accordingly, after three years and considerable legal effort and, presumably, expense, Mr. Kushell’s vessel was finally freed of the judgment lien but with no apparent relief to the vessel owner who had been subjected to the DNR proceedings.

The Kushell briefs did raise some of the constitutional challenges apparent in this lopsided process.  However, given the focus of the Court of Appeals on the inapplicability of the tax to the Kushell vessel, those issues were left for another day.

Dirk Schwenk from Annapolis was the successful attorney for Mr. Kushell.  Dirk notes that the implications of the Kushelldecision indicate that the following situations should be exempt from the tax: (EDS. NOTE: It is our understanding that legislation is to be introduced in the 2006 legislative session that will effect the holdings of Kushell v. DNR, by changing the key language. DO NOT rely on this concerning taxability of a vessel in the future)

1.   Federally documented vessels purchased elsewhere where the owner did not plan at the time of the purchase, to bring the vessel to Maryland.

2.   State numbered vessels purchased elsewhere and properly numbered in that other state, where the owner did not intend at the time of the purchase, to bring the vessel to Maryland.

Examples for both categories would include out-of-state residents relocating to or visiting Maryland, so long as the vessel was initially purchased for use in another state before it was later relocated to Maryland.

     The decision in Schwartz is of more interest, for both the issues it did address as well as the issues it sidesteps.  TheSchwartz decision was handled by Matthew Egeli, also of Annapolis.  It has marked parallels to the hypothetical case posed here.  In Schwartz, the Court was considering the more typical history of vessel use and the tax assessment process.

     The vessel had been purchased in Maryland for relocation and use in another state.  Accordingly, following DNR regulations, the purchaser had submitted to the DNR, a completed DNR form B-110.  The procedure gives rise to a procedural exemption so that the dealer is not required to collect the excise tax. 

However, after the sale, it became apparent that significant operational and stability concerns required that the vessel remain in Maryland for some time.  Accordingly, the vessel became subject to what might be called the DNR 12-minute rule of tax liability.  A three-year odyssey of administrative and judicial proceedings ensued, with the predictable administrative determinations taking up much of that time.

Somewhat atypically, the venue considerations allowed the judicial challenge to be filed in the Circuit Court for Queen Anne’s County.  That Court had found by a careful an obviously careful analysis, that the law did not permit the DNR form B-110 exemption, that the dealer should have been required to collect the excise tax for a vessel sold in Maryland. 

This was not an issue which had been raised by any of the parties in the earlier administrative proceedings.  On that point, you need to read the circuit court decision in the Schwartz case in order to understand that analysis.  The Court of Appeals’ opinion does not provide any detail on the analysis below by the Circuit Court.

Unexplained in Schwartz is the point that the issue decided by the circuit court had never been raised in the administrative proceedings below, but the issue of exhaustion of administrative remedies was not addressed.  Maryland Insurance Commissioner v. Equitable Life Assurance, supra.  Unexplained in the decision of the Court of Appeals, was why that requirement was not addressed.

As with Kushell, the Court of Appeals granted by-pass certiorari.  That grant ofcertiorari in the Schwartz case was apparently to consider the striking down of the long-standing DNR form B-110 exemption by the Circuit Court.  However, as noted in a forceful dissent by Judge Wilner, the decision sidestepped the lack of a DNR form B-110 exemption.  Instead, it then went through a painstaking analysis of the administrative record to affirm the imposition of the tax.

What is really going on in these cases?  Maryland marinas in the Chesapeake Bay and its tributaries are filled with literally acres of very expensive vessels.  These vessels feed an important industry group involved in the sale of those vessels for use in Maryland and elsewhere.  The DNR form B-110 exemption provides some administrative support for that industry group.

Maryland also has a viable and important vessel service and repair industry.  That industry group services vessels from outside the state which certainly do not wish to be assessed an excise tax simply because they chose to use Maryland services and facilities.  And certainly, the businesses providing repair and related services for vessels generate business and tax revenues for the state.

It is this industry group that would seem to be victimized by the DNR 12-minute rule of tax liability.  Fortunately for that group, it would appear that the out-of-state prospective users of that service industry are not aware that the price of using those Maryland service facilities may, by reason of the DNR 12-minute rule, include the excise tax.

The DNR has an advisory group which seeks, in part, to strike a balance between keeping those industry groups viable while still permitting the DNR to use its 12-minute rule, to run roughshod over fundamental due process and related concerns.

In this straining economy replete with state budget problems, it is would seem to be apparent that the courts will have a strong predisposition to upholding the tax wherever possible and with it, the DNR 12-minute rule. 

Witness the dissent in the Kushelldecision.  As Judge Wilner notes, the issue of cert-related concern was the exemption which would have been struck down by the circuit court ruling.  If the DNR form B-110 exemption were invalid, it is foreseeable that vessel sales and the related servicing of those vessels would be lost to Maryland. 

In his dissent, Judge Wilner states that if there is no exemption, then without regard to the intended ultimate use of the vessel, the dealers for all vessel sales in Maryland should collect the tax.  He notes, as well, that there may be economic hardship for the boating industry in Maryland, that legislative action may ensue.

The majority opinion sidesteps consideration of that prospective loss of the DNR form B-110 exemption, to hold that under the facts in that particular record, the DNR had properly assessed the tax.  In doing so, it avoids the risk of hardship to the involved industries and the risks inherent in the legislative process.  On that point, it would seem to be obvious that no vessel owner’s challenge to the assessment of the tax would be likely to take issue with the DNR form B-110 exemption.

Where does that leave you and your client in the client’s prospective challenge to the assessment?  It suggests a long and uncertain voyage through waters filled with unrevealed hazards in the form of unstated agendas and concerns not apparent on the surface of the statute and the regulations.  You’ll need more than running lights to detect those submerged obstructions.  Make sure that your client understands the course to be plotted.

Eds Note – Maryland passed a $15,000 tax cap in 2013.  Please see https://boattax.com/maryland-2013-the-tax-cap-is-here-use-it-now/ for details.

Thankfully for 2010, there have been very few changes to Maryland’s boat tax provisions.  The overall scheme remains the same: boats purchased in or principally used in Maryland are subject to a one-time tax of 5% of their fair market vale.  There are, of course, myriad exceptions, traps and defenses of which boaters should be aware.  Here are few of the most important.

1. Boats Purchased in Maryland.  A boat purchased in Maryland is subject to tax unless the owner certifies on the Maryland’s DNR-B110 form that the boat is to be taken out of the state, registered and used in another jurisdiction within 30 days of the time that tax is due.  For most small boats, this simply means paying the tax on the day of sale.  For larger boats, there are many questions to consider, including whether a boat is in commissioning (if so, the time does not yet run), whether there has been a final sale (what if payment has been made but the boat has not yet been delivered to Maryland?) and whether of not to finalize a transaction in Maryland at all.  Some boat owners choose to conduct settlement in other jurisdictions so as to avoid the 30 day limit. 
2. Boats Purchased Outside of Maryland.  If a boat is purchased in another jurisdiction, it is potentially subject to the 5% use tax.  Generally speaking, Maryland law recognizes a 90 day period in which a boat can be cruised without tax.  If the boat is in Maryland for more than 90 days, then it is taxable if it is in “principal use” in the state.  Principal use means that it is in Maryland more than it is in any other single jurisdiction.  Thus, if it is in Maryland 100 days, and the remaining time is split between the Virgin Islands, Florida and Maine, it is subject to tax in Maryland, because it was not in any other single jurisdiction more than it was in Maryland. 
3. Boats under repair or listed for sale in Maryland.  There is a good deal of misinformation about these two exceptions to tax.  A boat that is held for maintenance or repair for a period of 30 days or more, on a schedule with boat repairers and that spends more for the repairs than it would for simple dockage may meet the repair exception – but it is not as simple as simply leaving it in a slip and having the bot tom periodically cleaned.  Similarly, for a boat to make the listed-for-sale exception, it is required to file a form with the DNR (your broker should provide this!) AND the boat cannot be used for personal use other than for sea trial for prospective purchasers.  We have had cases of liveaboards trying to claim their boat is listed for sale and not taxable – we do not recommend this. 
4. Penalties and Interest.  As always, the most upsetting aspects of Maryland’s tax are the penalties and interest.  Every boat that fails to pay the tax within 30 days of the date that it is due is subject to a 10% tax.  If the DNR believes that fraud or gross negligence is indicated (such as when a boat is certified to leave the state within 30 days of purchase, but does not), then there is a 100% penalty.  Interest runs at 18% — and from the DNR’s perspective it is often running during a period that the boat owner is not even aware that he or she is going to be assessed for taxes. 
5. Tax Assessments.  Maryland issues most of its boat tax assessments after it completes its annual investigations (approximately November 1), which means that many boat owners will get an unexpected bill during the first quarter of the year.  The most important thing to know about tax assessments is that THERE IS ONLY 30 DAYS TO RESPOND if one is going to appeal.  Ignoring the assessment will limit the defenses available, and may mean that there is not way to respond.  Assuming a timely response, assessments should be closely analyzed for the accuracy of the fair market value assigned to the boat and for the time period that the boat is said to have been in Maryland. 
6. Text of the Maryland Tax Section in the State Boat Act.  Here are some of the key definitions and provisions from the Maryland State Boat Act, § 8-716. Certificate of title – Fees; excise tax.

(2) “Commissioning procedures” means the initial outfitting of a vessel immediately after the purchase of the vessel, including the installation of rigging, electronic gear, propulsion machinery, generators, or other related gear. 

 (3) “Fair market value” means: 

 (i) As to the sale of any vessel by a licensed dealer or a dealer licensed by another state or a foreign country, the total purchase price, as certified by the dealer on a form acceptable to the Department, less the value of any vessel that is traded in as part of the consideration for the sale, which trade-in value may not exceed the value for the trade-in vessel as shown in a national publication of used vessel values adopted by the Department; 

 (ii) As to any other vessel that is sold by any person other than a licensed dealer, the greater of: 

1. The total purchase price; or 

2. $100; or 

(iii) As to any other vessel that is sold by any person other than a licensed dealer, either: 

1. The total purchase price, if verified by means of a certified bill of sale approved by the Department, in which the actual price paid for the vessel is stated; or 

2. The valuation shown in a national publication of used vessel values adopted by the Department if a certified bill of sale does not accompany the application. 

(4) “Used principally in this State” means that this State is the state of principal use as defined in § 8-701(p) of this subtitle, except that in calculating where the vessel is used or used most, a vessel is not considered to be in use for any period of time that it is held for maintenance, repair, or commissioning for 30 consecutive days or more. 

 (5) “Sea trial” means a period of on-the-water operations, not to exceed 1 day, that is conducted: 

 (i) For the purpose of testing the effectiveness of specific maintenance, repairs, or commissioning procedures; or 

 (ii) For a vessel held for resale by a licensed dealer under this section. 

(7) (i) “Vessel” has the meaning indicated in § 8-701(s) of this subtitle. 

(ii) “Vessel” does not include a ship’s lifeboat, a vessel propelled only by sail, or vessel manually propelled. 

(c)  Levy and amount of excise tax; title tax in lieu of sales tax or use tax; owners prior to June 1, 1965 exempt.-  

(1) Except as provided in § 8-715(d) of this subtitle and in subsections (e) and (f) of this section, and in addition to the fees prescribed in subsection (b) of this section, an excise tax is levied at the rate of 5% of the fair market value of the vessel on: 

(i) The issuance of every original certifi cate of title required for a vessel under this subtitle; 

 (ii) The issuance of every subsequent certifi cate of title for the sale, resale, or transfer of the vessel; 

 (iii) The sale within the State of every other vessel; and 

 (iv) The possession within the State of a vessel used or to be used principally in the State. 

 (2) Notwithstanding the provisions of this subsection, no tax is paid on issuance of any certifi cate of title if the owner of the vessel for which a certifi cate of title is sought was the owner of the vessel prior to June 1, 1965, or paid Maryland sales and use tax on the vessel as required by law at the time of acquisition. The Department may require the applicant for titling to submit satisfactory proof that the applicant owned the vessel prior to June 1, 1965. 

(d)  Remittance of uncollected tax.- If the tax is not collected by a licensed dealer pursuant to § 8-716.1 of this subtitle, the owner, whether or not applying for the issuance of a title, shall remit the tax directly to the Department within 30 days of the date of sale or, in the case of a vessel purchased outside the State, within 30 days of the date upon which the possession within the State became subject to the tax. 

 (e)  When fee or tax not required to be paid.- A person is not required to pay the tax provided for in subsection (c) of this section resulting from: 

(1) A transfer between members of the immediate family as determined by Department regulations; 

(2) A transfer between members of the immediate family as determined by Department regulations of a documented vessel for which the transferor applied for and was issued a valid use sticker under § 8-712.1 of this subtitle; 

 (3) A transfer to a licensed dealer of a vessel for resale, rental, or leasing purposes; 

 (4) The holding of a vessel that is titled or numbered in another state or is federally documented, provided: 

(i) The vessel is held for resale or listed for resale by a licensed dealer; and 

 (ii) The vessel owner signs an affidavit that there will be no use of the vessel on the waters of the State other than for a sea trial; 

 (5) Purchase of a vessel by the State or any political subdivision; 

 (6) Purchase of a vessel by an eleemosynary organization which the Secretary has approved; 

 (7) The purchase within the State of a vessel if the owner paid or incurred a liability for the Maryland sales and use tax on the vessel prior to July 1, 1986; 

 (8) The possession within the State of a vessel which was purchased outside the State if the owner paid or incurred a liability for the Maryland use tax on the vessel prior to July 1, 1986; 

 (9) The possession of a vessel in the State that is not used or to be used principally on the waters of the State and for which the issuance of a title is not sought or required under this subtitle, except that: 

 (i) A vessel is not deemed used on the waters of the State if the vessel is used for 90 days or less of a calendar year; and 

 (ii) If a vessel is used for more days than 90 days in a calendar year, the period of 90 days shall be counted in the determination of principal use under this subtitle; 

 (10) The possession within the State of a vessel if the current owner, before July 1, 1986: 

 (i) 1. Was licensed by the Department to catch, for commercial purposes, finfish, eels, crabs, conch, soft-shell clams, hard-shell clams, oysters, or any other fish; and 

2. Used the vessel for any of the commercial fishing purposes described in item 1 of this item; or 

(ii) 1. Was licensed as a commercial fishing guide under the provisions of § 4-210 of this article; and 

2. Used the vessel as a charter boat with a license as provided in § 4-745(d)(2) of this article; 

(11) The possession within the State of a vessel that: 

 (i) Is owned by a nonprofit organization that: 

1. Is qualified as tax exempt under § 501(c)(4) of the Internal Revenue Code; and 

2. Is engaged in providing a program to render its best efforts to contain, clean up, and otherwise mitigate spills of oil or other substances occurring in United States coastal and tidal waters; and 

(ii) Is used for the purposes of the organization; 

 (12) The possession within the State of a vessel for a period of not more than one year if the current owner is a member of the armed services and is serving on active duty in this State; or 

(13) The sale of a vessel within the State if: 

(i) The vessel is purchased from a licensed dealer; 

(ii) The issuance of a title is not sought or required; 

(iii) The vessel is not used or to be used principally on the waters of this State; 

(iv) The vessel is duly registered in another jurisdiction within 30 days of the date of purchase; and 

(v) The dealer and the purchaser execute an agreement certifying the state of principal use for the vessel which is filed with the Department within 30 days of the date of purchase. 

(f)  Applicability to possession within the State of a vessel.-  

(1) This subsection applies to possession within the State of a vessel if: 

(i) The vessel was formerly: 

1. Titled or numbered in another jurisdiction; or 

2. Federally documented and principally used in another jurisdiction; 

 (ii) The present owner has paid a sales or excise tax on the vessel to the other jurisdiction; and 

 (iii) The jurisdiction to which the tax was paid would allow an exemption or credit under its sales or excise tax for excise tax on a vessel formerly paid to the State. 

(2) For a vessel described in paragraph (1) of this subsection: 

(i) If the rate of the tax paid to the other jurisdiction is not less than the rate under subsection (c) of this section, the tax imposed under subsection (c) of this section does not apply to possession of the vessel within the State; 

(ii) If the rate of the tax paid to the other jurisdiction is less than the rate under subsection (c) of this section, the rate of the tax imposed under subsection (c) of this section on possession of the vessel within the State is the difference between the tax rate paid to the other jurisdiction and the rate under subsection (c) of this section; and 

 (iii) The Department may require the taxpayer to submit satisfactory proof of the payment of a tax to another jurisdiction and the rate of tax paid and, where applicable, evidence of principal use of a federally documented vessel in another jurisdiction. 

(3) This subsection is applicable to any vessel incurring a liability for Maryland boat excise tax on or after July 1, 1986. 

 (g)  Tax credit.-  

(1) A person may claim a credit against any tax imposed under subsection (c) of this section on a vessel for sales tax the person has paid to the State, to another state, or to the District of Columbia on materials and equipment that are incorporated into the vessel, if: 

 (i) 1. The person is licensed by the Department to catch, for commercial purposes, finfish, eels, crabs, conch, soft-shell clams, hard-shell clams, oysters, or any other fish; and 

2. The vessel is to be used for any of the commercial fishing purposes described in item 1 of this item; or 

 (ii) 1. Was licensed as a commercial fishing guide under the provisions of § 4-210 of this article; and 

2. Used the vessel as a charter boat with a license as provided in § 4-745(d)(2) of this article. 

 (2) The Department may require a person claiming the credit allowed under this subsection to submit satisfactory proof of payment of the sales tax and that the materials or equipment have been incorporated into the vessel. 

(h)  Overpayment of tax.- If the Department determines there has been an overpayment of the tax on a vessel, or an overpayment has resulted for any other reason, the Department may submit the overpayment and supporting data whether accompanied by a written claim or not to the State Comptroller for refund to the appropriate person. 

 (i)  Vessel held for maintenance or repair.-  

 (1) For purposes of subsection (a)(4) of this section, a vessel is deemed to be held for maintenance, repair, or commissioning if: 

 (i) The maintenance, repair, or commissioning work is provided in exchange for compensation; 

 (ii) The maintenance, repair, or commissioning work is performed pursuant to a schedule preestablished with one or more marine contractors; and 

 (iii) The total cost of the maintenance, repair, or commissioning work is at least two times the reasonable current market cost of docking or storing the vessel. 

 (2) Time spent conducting sea trials shall be included when calculating the period of time a vessel is held for maintenance, repair, or commissioning under subsection (a)(4) of this section.  

Happy cruising.

 

J. Dirk Schwenk, Baylaw, LLC.

Boaters coming in to Maryland regularly ask us how long can they stay without owing tax under the State Boat Act. The answer to this question is somewhat difficult to give, because there are a lot of factors both future (repairs) and past (location of purchase), that may affect the answer to the question. There are also ambiguities in the law that may be read differently by a judge than they are by this Firm or by the personnel at the Department of Natural Resources — not to mention that the personnel at the Department of Natural Resources, being human, sometimes are not 100% consistent as to their views on what the statute says. That said, here is the short answer, and the best answers that we can give without a 25 page legal brief. I include the actual text of the 90 day exception below, so you can see why we are hesitant to speak in absolutes.

It should be noted that if you have paid sales or use tax on your boat to another state, and paid at least 5% tax on the purchase, you will not likely owe Maryland anything. You should register with Maryland if you are staying on and cruise without significant concern if not.How Long?

1. You can cruise for 90 days in a calendar year in Maryland waters without tax consequences if your boat was purchased in another state and principally used or registered there prior to coming to Maryland. 2. We are hearing that brokers are saying that one can cruise Maryland for 90 days after purchase. By our reading, this is not what the law says, although it is true that the DNR does not generally issue assessments for tax on boats that are in Maryland less than 90 days. If it did, however, tax would probably be due.

3. The DNR generally takes the position that you can cruise for 90 days even if your boat was purchased in Maryland, so long as you did not owe tax when the boat was purchased. (Generally this means that the boat was purchased in Maryland, but left within 30 days and filed the DNR’s form B110 Affidavit of Out of State Use). WARNING: We are not aware of anyone that has tested the DNR’s patience by leaving on day 29 and returning on day 31, then staying for the remaining 90 days. If you do this, or something similar, you are in a gray area of the statute, and we do not make any promises about your outcome. WARNING: If it smells to the DNR that there was a fraud-ish effort to avoid tax (for example, if you are Maryland resident) then this general rule may not apply.

4. You can stay in Maryland more than 90 days in a calendar year without tax consequences, so long as you stay more days in another single jurisdiction. If you are in Maryland 100 days and in Florida 110 days, you are fine — but you may need to demonstrate this to Maryland’s DNR, and you will therefore need to be sure that you are on the right side of Florida’s sales and use tax. WARNING: If you are in the BVI, or some combination of other states (as opposed to a single state of the United States), then you need to be under 90 days. Editor’s note: if you have spent time in a jurisdiction other than a US State or territory, and this time matters in terms of whether the boat is taxable, please call for specific advice – analysis in this area of the law is currently in a state of flux.

5. International cruising permits — we do not presently have any public position on what to expect for such a boat. If the boat is here for an extended period, taxation is an issue. If you are in this position, you should call for specific advice.

Actual Text of the State Boat Act —

(c)(1) Except as provided in § 8-715(d) of this subtitle and in subsections (e) and (f) of this section, and in addition to the fees prescribed in subsection (b) of this section, an excise tax is levied at the rate of 5% of the fair market value of the vessel on: (i) The issuance of every original certificate of title required for a vessel under this subtitle;

(ii) The issuance of every subsequent certificate of title for the sale, resale, or transfer of the vessel; (iii) The sale within the State of every other vessel; and

(iv) The possession within the State of a vessel used or to be used principally in the State. (e) A person is not required to pay the tax provided for in subsection (c) of this section resulting from:

(9) The possession of a vessel in the State that is not used or to be used principally on the waters of the State and for which the issuance of a title is not sought or required under this subtitle, except that: (i) A vessel is not deemed used on the waters of the State if the vessel is used for 90 days or less of a calendar year; and

(ii) If a vessel is used for more days than 90 days in a calendar year, the period of 90 days shall be counted in the determination of principal use under this subtitle;

Happy cruising.

J. Dirk Schwenk, Baylaw, LLC.

Eds. Note: This article originally appeared in the Waterway Guide as a feature for cruisers. http://www.waterwayguide.com/resources.php.   Updated to reflect Maryland’s cap – more here.

Dirk Schwenk, Esq., is a real estate and maritime attorney located in Annapolis, Maryland.  If you are interested in his non-tax practice, please see Baylaw, LLC. For issues specific to waterfront property, please see Waterfrontlaw.

In my last article, I wrote about Maryland, specifically Maryland’s boat tax, and while Maryland and the Chesapeake are fantastic cruising grounds, I do recognize that there are other states in the Union. Since many of you readers and many of my clients venture out in the world-visiting far flung locales from Maine to Florida, the Caribbean and far beyond-I am often asked about the tax implications of other jurisdictions. I take these inquiries to mean:

How can I legally avoid paying taxes on my boat?

There is of course no simple answer to the question. If there were, the tax authorities would close it. That’s what happened in the good old days when it was pretty safe to register a boat to Delaware, place it in Coast Guard documentation, and call it good.

After reading this, many folks will just want to buy their boat, pay the tax, and go cruising, and that’s great. Many boat taxes support boating related activities and needed facilities. Others purchasers, however, plan to leave the country, or keep the boat moving for a long time, and perhaps have a higher threshold for risk. Paying sales tax may not be desirable or necessary, and they may be willing to do what is necessary to organize their boating life in a way that is not subject to tax.

This article is the first step, and the easiest step in that direction.

Before we get into specifics, however, let’s go back to the beginning. What kind of tax are we talking about and who collects it? There is no federal vessel tax (and may the federal luxury tax stay good and dead!), so taxes are imposed at the state and local levels. Generally, there are three taxes of concern to boat owners: sales tax, use or registration tax, and personal property tax. Sales tax is imposed, if at all, at the time of purchase. Use tax is imposed by sales tax states on goods that were not taxed at the time of purchase. Personal property tax is an annual tax, payable every year, on property that is kept within a jurisdiction. This article will focus on sales tax.

It is hard to keep track of all of the state taxes, and nearly impossible to keep track of all of the county and municipal taxes. Not only are they all different, but they also all subject to change. BOAT/US provides a good general comparison of state taxes on its website www.boatus.com/gov/state_boat.asp but I understand that it is being updated now after several years without revision.

Below is a table that gives the bare-bones of the state taxes in the East Coast cruising grounds as they exist at the moment (revised 2016). It does not include many defenses, exceptions, exclusions, penalties, interest on late payments, and any number of other important details, nor is it legal advice, but it does provide a rough snapshot of the tax on the purchase of a boat.

State	Sales tax on boats?	Personal property tax?
Alabama	2%	No
Connecticut	6%	No (but higher registration fees)
Delaware	No	No
District of Columbia	No	No
Florida	6%	No
Georgia	4% + local	Yes
Maryland	5% (2013 Edit — at least temporarily, MD is capped.  Here)	No
Massachusetts	5%	Yes
Maine	5%	Yes
New Hampshire	$10 to $1761.40 depending on size and propulsion with some exemptions	No
New Jersey	3.5% Capped in 2016 at $20,000	Yes
New York	8.25% most counties Capped at $18,975	No
North Carolina	3% with $1,500 cap	Yes
Pennsylvania	6%-7%	No
Rhode Island	No	No
South Carolina	5% with $300 cap	Yes
US Virgin Islands	No	No
Virginia	2% capped at $2,000	Yes

Mr. Schwenk provides representation in purchase, sale and tax and also buyer’s broker (selling broker) services to select clients.  It is strongly recommended that you do not enter into a contract with dual agency (one broker as both listing and selling broker).  If you would like buyer’s representation – please email with the heading “Baylaw Buyer’s Broker” or use this link: dschwenk@baylawllc.com 

To return to the question-How can I legally avoid paying taxes on my boat-the middle column is the key. Sales tax is the tax on a purchase or transfer of a boat. If you want to avoid sales tax, the easiest option is to finalize your purchase in a jurisdiction that doesn’t tax the sale or caps the tax at a low number. This may mean driving to Delaware and choosing a boat at a Delaware dealer.

There are more sophisticated strategies as well, such as writing a contract that requires a Massachusetts boat to be purchased through a transaction that takes place New Hampshire. Or taking final possession and completing the purchase of a boat in international waters-this is where most of the big boats go. These latter items have their risks, however, particularly the fact that they make local tax authorities suspicious, even if the transaction is properly done. It does not help matters that some unscrupulous purchasers will fake an out-of-state or international transaction, and thereby paint legitimate purchases in a bad light.

Another very good option to avoid initial sales tax is to identify an escape clause in your local tax jurisdiction. In Maryland, for example, one need not pay sales tax on a boat that files a certification stating that it is going to leave the state within 30 days of purchase. Similarly, in Florida, a non-resident need not pay tax if the boat is taken to a different state shortly after purchase. If you anticipate taking your boat out of the country, using it in a state that does not have a sales tax, or actively cruising between lots of jurisdictions, avoidance of paying the initial sales tax can be a big cost savings. If nothing else, a boat can depreciate a good deal over the course of a few years.

I stated above that this article would address the first step in legally avoiding tax on a boat. Well, that was it. The first step is to legally avoid sales tax. Anyone that has been around boats, however, will recognize that this is just the beginning. Most sales tax states have two other closely related taxes, title tax and use tax. Use taxes were devised to take the profit out of going across state lines to purchase products, which is exactly the conduct we’re talking about here.

Use tax is usually imposed at the same rate as sales tax and is imposed when you bring the boat back into a state. Use tax must be of primary concern to anyone that has not paid sales tax. (If you have paid sales tax to a state however, you can rest easy, as sales tax is an offset to use tax). For Marylanders, use tax is the tax that a buyer will face on the boat purchased in Delaware and brought home on a trailer.

Future installments of this Waterway Law column will address use tax and personal property tax. These taxes are more complicated in their application than sales tax and take much more sophistication to legally avoid. Use tax is triggered by the use of the vessel and is subject to lots of argument about how much time triggers the tax as well as exceptions and defenses. Personal property tax is often collected by local counties or cities, and so it can be widely different even within a single state. There are no simple answers here.

In the meantime, if you are buying or have purchased a boat for a significant amount of money, you should seek specific legal advice about how to conduct your affairs. Avoiding sales tax is only the first step, but if done improperly, can bring far worse consequences such as penalties, interest, liens, etc. A good lawyer can provide advice about how to maintain your boat in a situation in which it does not owe tax, and if you follow that advice, you can save a significant amount of money.

Happy cruising!

Boat Tax 2007 Maryland Overview from Waterway Law
Eds. Note: This article was published in the online Waterway Guide, December, 2007. It is reproduced with thanks to Dozier’s Waterway Guide and Skipper Bob Publications.

Maryland’s winter of discontent

(because that’s when the taxman comes)

Editor’s note: With controversy roiling over South Carolina’s boat tax policy, we thought we would ask the experts from the Annapolis law firm of Baylaw, LLC to explain how taxes work in some of the big boating states along the Waterway.

By J. Dirk Schwenk

Yes, its that time again, the winter ducks arrive, the cold fronts roll in, and Boat Tax Enforcement Division on the Maryland Department of Natural Resources wraps up its seasonal investigations and issues vessel tax assessments. You will know it if you get one, it says “Assessment of Tax” and it’s printed on colored paper. It notifies you that you have 30 days from its issuance to appeal or it becomes final-and you do not have much of a remedy if you do not agree with its contents. Do not dawdle, the 30 days is a real deadline.

For the uninitiated, this paper can be quite a shock. It is the culmination of an investigation which typically includes monthly surveys of your boats location, an analysis of its fair market value, and an investigation into its ownership, including the ownership of any corporation that may it may be titled to. For a $100,000 boat, the assessment is an unexpected bill for 5 percent of the value ($5,000) plus a 10 percent penalty ($500) plus interest running at 18 percent from the date that the boat became taxable, up to three years.

Interest can easily eclipse the amount of the penalty, and so the bill can easily reach and surpass $6,000 on a $100,000 boat. Scaling up, the bill on a $1 million boat can easily reach and surpass $60,000. If for any reason the DNR believes that tax was avoided on the basis of fraud or gross negligence, the penalty will be 100 percent of the tax, and so the total assessment will be growing toward $12,000 or $120,000.

Most boaters will not face such an assessment because they will have paid sales tax on their vessel at the time of purchase or they will have paid tax when they registered and titled the vessel. Such is the case for a runabout purchased from a Maryland dealer or titled with Maryland. There are, however, lots of boats that are not subject to sales tax at purchase, including boats purchased in non-tax states (i.e. Delaware or Rhode Island), boats purchased abroad, home-built boats and some commercial vessels.

If those boats are federally documented, they are not subject to state titling laws, and they may not have been legally obligated to pay tax. This is the favorite bait of boat tax enforcement: the federally documented vessel that has not previously paid sales or use tax to any state. The second favorite bait? The boat that is registered to a non- or low-tax state such as Virginia, but that is principally used in Maryland. If you are in one of those categories (and you have not yet fallen asleep) you should definitely continue reading.

Maryland taxes boats in three main instances, all of which are subject to certain caveats and exceptions. Those instances are:

1) a boat that is purchased in the State;

2) a boat that is titled in the state; and,

3) a boat that is principally used in the state during any particular calendar year, assuming that it is in the State more than 90 days in that year.

The first item is pretty clear. If the money and the boat change hands in this state, it’s a Maryland purchase, if parts of the transaction take place out of state, well, it depends. The second item is clear. If you apply for a Maryland title (or you are required by law to do so), tax is due. The third item is the one that causes the most consternation for boaters -Principal Use.

Under Maryland law a boat is in principal use in the state or territory of the United States in which it is used most during a calendar year. Thus if you use it 100 days in Maryland, 200 days in the BVI and 50 days in Florida, the state of principal use is in Maryland. BVI does not count (it’s not a state of the United States) (EDS NOTE — AS OF JANUARY, 2008, IT IS POSSIBLE THAT THE BVI AND OTHER NON-US JURISDICTIONS MAY COUNT — IF IT MATTERS TO THE ANALYSIS OF YOUR CASE, PLEASE CALL FOR SPECIFIC ADVICE), and Florida has less days than Maryland.

Things get a bit tricky from that point, though. Days only count in Maryland if the boat is “in use.” In use does not mean its being used (in the sense of operating it), but means by definition any time that it is in the water or any time that it is kept in a structure in readiness for use. Thus (stay with me here) a boat that is in Maryland, outside, and out of the water is not in use; but a boat that is in the water but not being used, is in use. Also, it is generally recognized that a boat that is in the water but winterized is not in use for principal use analysis, but it is considered that a boat on a trailer, indoors or out, is in use.

Confused? No worries … so is everyone else.

So what should you do if you get an assessment, or perhaps more importantly, if you would like to avoid getting one? First, you should be aware that Maryland recently extended its cruising window to 90 days-if the boat was not purchased in Maryland, you can cruise for no more than 90 days without facing tax liability, even if you do not spend more time in another single state.

Second, you should be aware that there are exceptions for boats that are out of the water, winterized, or undergoing significant repairs. The details of those exceptions will have to wait for another article, but they should be considered if the boat is going to be (or has been) in Maryland for an extended stay. Third, you can be sure to keep (and keep evidence of keeping) your boat in another state for more days than in Maryland. Finally, if you receive an assessment, be sure to act quickly. If you have good defenses, and you do not raise them in time, they will not be so good.

If you are going to need counsel-that is, if you may have a defense and there is a significant amount at issue-identify one who knows this area, hire them in time get an appeal in the 30 day deadline, and do so before contacting the DNR yourself. I often see people revealing facts that were better left unsaid, or paying tax that was not owed. A little bit of good advice can save a lot of heartache in the long run, it may also be able save money in any negotiation if tax must be paid.

(This explainer comes courtesy of J. Dirk Schwenk.  He has been active in maritime and Admiralty law since 1999, is based in Annapolis, MD, and focuses on issues of concern for vessel owners, marine businesses and those that live, work and play on the water.)

Dirk Schwenk’s note, December, 2009: On April 1, 2005, the Ocean City Dispatch picked up the story on the Kushell v. DNR decision. Boat owners should be aware that the statute was changed after this decision and no longer requires that a boat be purchased with the intent that it be used in Maryland waters.  If you receive an assessment in 2010, there remain significant other defenses to an assessment for vessel tax. 

High Court’s Boat Tax Ruling May Have Local Impact

Benjamin L. Mook, Editor

OCEAN CITY (05/01/2005) – A legal setback dealt to the Department of Natural Resources (DNR) this month over what amounted largely to comma placement could set a precedent for out-of-state boat owners who bring a vessel to the resort area.

The Maryland Court of Appeals ruled this month in the case of Charles J. Kushell IV v. Maryland State Department of Natural Resources. The case centered on the agencies efforts to collect over $14,000 in unpaid boat excise tax and penalties. Kushell bought The Genesis, a 58-foot Spindrift Motoryacht, in 1989, in California. He later moved to Maryland part-time, where he was targeted by the DNR’s boat tax enforcement division.

In Maryland, boats purchased in-state are subject to sales tax. According to the DNR, boats purchased outside the state, but used principally in Maryland are subject to a boat excise tax.

The DNR not only levies an excise tax of 5 percent of the fair market value, but also a 10 percent penalty and 18 percent back interest. The late penalty interest generally goes back three year, which is the statute of limitations.

This law was challenged by Kushell, who claimed he did not intend to use the boat principally in Maryland. Kushell and his attorney, Dirk Schwenk, argued that the wording of the legislation supported this belief.

The court’s opinion, written by Judge Irma S. Raker takes the argument further and is sprinkled with grammatical references highlighting the importance of comma placement in the vein of the bestselling book “Eats, Shoots and Leaves: The Zero Tolerance Approach to Punctuation,” by Lynne Truss.

“An actor playing Hamlet would hardly expect his audience to accept, ‘Or not to be: that is the question,’ as an inconsequential alteration,” Raker wrote in her opinion.

In the end, the Court of Appeals overturned the Anne Arundel Circuit Court, which favored the DNR.

Schwenk said this week the new ruling gives ammunition to boat owners who want to fight the DNR-imposed penalties. He said the ruling is especially important to the Ocean City and West Ocean City areas, which are home to private and commercial vessels that could be affected.

“The majority of the new cases I’ve been seeing have come from the Ocean City area,” Schwenk said. “DNR has targeted that area for enforcement.”

Locally, DNR has filed three boat tax liens in Worcester County Circuit Court since January. Two of the cases were filed this month alone, after the court’s decision.

The agency is seeking over $2,000 in unpaid tax from one boat owner and over $6,000 from another. It also levied a lien against a local commercial fishing company for over $20,000.

With the Maryland General Assembly now in its final stretch, the legislation will likely be addressed later this year. Schwenk said he hoped DNR would open the process up for comment when it addressed re-writing the law to meet the court order.

“Hopefully, this will be a cooperative process and everyone will be involved, and not just a rewrite of the same legislation that was overturned,” Schwenk said.