Federal Documentation or
State Registration?

by Nicholas Walsh, PA

Sometimes a client buying or building a new boat will ask me to federally document the boat with the Coast Guard, “So I don’t have to pay state taxes.” The truth is state taxes are due, if at all, whether the boat is documented or state registered, but there are reasons to choose one form of documentation over another.

Let’s hit the basics first. Any boat of at least five net tons, wholly owned by a U.S. citizen, can be documented. Net tonnage is a measure of the ship’s interior space, with 100 cubic feet equaling a ton, minus space not usable for carrying cargo such as engine and shaft spaces, accommodation etc. (The term “ton” as used here is from a kind of huge barrel, carrying about 240 gallons, called a “tun”. Each tun required about a hundred cubic feet of space in the hold.) Net tonnage is not to be confused with the vessel’s weight, which may also be expressed in tons, nor with gross tonnage, which measures the entire cubic volume of the boat’s interior.

Most vessels more than about 25 feet in length will measure five net tons or more. Naval architects can measure net tonnage, but the Coast Guard’s National Vessel Documentation Center has a handy short form used to measure smaller craft (Application for Simplified Measurement, CG-5397).

With rare exceptions only a U.S. citizen can document a vessel. This applies to corporations, LLCs and partnerships as well. An LLC may document a vessel only if all members are U.S. citizens. A corporation may document a pleasure craft only if the corporation is at least 50% owned by U.S. citizens, and if its CEO and chairman of the board are citizens. If the boat will carry cargo, commercially fish or carry passengers (so all charter boats), the citizen share ownership must be 75% or more. The exceptions apply to some craft involved in U.S. mining or manufacturing (the Bowater Amendment), and some boats involved in oil spill cleanup, rare stuff.

Don’t play games with the citizenship requirements. The truth will out and the penalties are steep. Talk to a lawyer: often there is a solution.

So, suppose you have decided you or your entity qualifies by citizenship to document the boat, and it’s big enough. Should you do it? In some cases you have no choice. If the boat will commercial fish, or carry passengers or cargo, and it measures 5 net tons or more, it must be documented, and there are some advantages.

For me and my first boat, it was to some extent a matter of avoiding those ugly bow numbers. All the Coast Guard requires is the ship’s name and hailing port in four-inch letters, and that was enough for me right there. (There is an official number issued, but it is inscribed inside the ship.) But there are other advantages. Banks like documented vessels, because the Coast Guard provides a single national location in which to record a Preferred Ship’s Mortgage, more suitable than the state equivalent recording location. The Coast Guard maintains an abstract of title for each documented vessel, a single clearing house for sales, liens, arrests, and all the other legal events in the life of a ship. If your boat sails foreign, the customs agents of other countries will be happier with a Coast Guard Certificate of Documentation than with some flimsy state paper from a state the official may never have heard of.

The one thing Coast Guard documentation won’t do is save you money on taxes. Sales tax is assessed on sales occurring in the state. Use tax, at the same rate, is assessed on items brought into the state for use; a credit is given for sales tax paid to another state. When I documented my boat, the Coast Guard sent Maine a notice advising the state of that fact, because I gave a Maine address on the application for documentation. Had I not paid sales tax on the conveyance I would have been assessed the Maine taxes plus a penalty. Maine assesses an annual excise tax as well, and again it doesn’t matter that the boat is documented.

On the other hand, if I bought my boat in New Hampshire, and kept her there, I would have avoided sales or use tax, because our neighbor does not assess those. But the hailing port on the stern doesn’t matter, nor does the federal documentation – it is just a matter of where the boat is located. And I’d still have to pay an annual New Hampshire excise tax.

Stay out of trouble.

Nicholas Walsh is an admiralty attorney with an office in Portland, Maine. He may be reached at 207-772-2191, or nwalsh@gwi.net.