Minimizing Boat Taxes

by Nicholas Walsh, PA

Last month’s column addressed the question of whether to state register or federally document a boat, and I observed that federally documenting a boat would not typically allow the owner to avoid paying Maine sales and use tax. But there is a way, entirely legal although involving some modest cost and requiring a disciplined approach by the owner.

Brief recap. As though you don’t already know, Maine charges 5.5% sales tax on all purchases except those exempted by statute. The list of sales exempt from sales tax is found in Title 36 Section 1760, and that statute lists no less than 101 sales on which no tax is payable. It includes groceries, as we all know, but also bibles, fuel used to burn blueberry fields, and organic bedding for farm animals, among many others.

The purchase of machinery and equipment for use directly and primarily in commercial fishing, which would include the fishing vessel itself, is exempt from sales tax (Title 36 Section 2013). Fuel and supplies used in commercial fishing are also exempt, but you need a special card to get this exemption. If you believe you qualify – which you do, if you earn your living as a commercial fisherman – call Maine Revenue Services at 624-9693. So this article concerns primarily boats not used in commercial fishing.

The 5.5% tax is not only on items sold in Maine, but also on items USED in Maine. That’s Title 36 Section 1861. So if you go to New Hampshire and buy a refrigerator, you owe Augusta “use” tax on your fridge, at the same 5.5% rate. Thing is, the authorities are unlikely to find out about your fridge, most people never even think about paying taxes on such a purchase, and the state loses out.

On boats and cars and other items required to be registered in Maine, however, the registration cannot occur unless the owner proves that the taxes have been paid or that the transaction is tax-exempt. So when you go to your town clerk to register the boat or car you bought in New Hampshire, be prepared to write a check for the use tax. And if you federally document your boat using a Maine address, the Coast Guard will tell Maine that you bought a boat, and you’ll likewise be assessed the sales or use tax, along with a painful penalty if you waited until you heard from Augusta before filing your sales or use tax return.

But there is a way, perfectly legal, to be a Maine resident and avoid paying sales or use tax on a pleasure boat purchase. The applicable statute is Title 36 Section 1760(25)(B), which says “The purchase of a watercraft outside this State is exempt if the watercraft is registered outside the State by the purchaser and used outside the State by the purchaser and the watercraft is present in the State not more than 30 days, not including any time spent in this State for temporary storage, during the 12 months following its purchase. For purposes of this paragraph, ‘used outside the State’ does not include storage but means actual use of the watercraft for a purpose consistent with its design.”

Let’s take that in parts. The boat has to be purchased out of state. That means the closing occurs out of state, really and truly. So you and the owner sit down and exchange funds for a bill of sale, not in the Kittery rest area or in some mid-coast boatyard, but out of state or offshore. And you’d better be able to prove it – right after the closing, write a little memo to yourself about the closing, including details as to time, location, persons present, documents and funds exchanged and the like. Know that the law places on the taxpayer the burden of proving any sale is tax-exempt.

The boat has to be registered out of state, or documented, with a non-Maine haling port. To my way of thinking the best approach, especially if very serious money is at stake, might well be to form an out of state corporation to own the boat, thus avoiding any direct connection with the Maine taxpayer.

The boat is used outside of Maine for the twelve months following purchase, except that it can be in Maine for 30 days. The statute says “’used outside the State’ does not include storage but means actual use of the watercraft for a purpose consistent with its design.” Seems to me that a New England pleasure craft is typically laid up come cold weather, so winter storage is consistent with the design, maybe. But probably better to do a winter cruise that year.

There is another way to avoid sales or use tax on a boat purchase, and that it to show that the boat is an “instrumentality of interstate or foreign commerce.” That’s exemption 41 of Title 36 Section 1760. Boats that carry freight or passengers for hire from port to port interstate, including from the US to a foreign port, qualify. I once saved a client a bundle in taxes on a schooner that primarily did sail training but occasionally made a voyage out of the country with paying guests. It took some doing to persuade the tax authorities, however. I do not believe a boat used in, say, fishing charters (even offshore charters) would qualify for this exemption. This is a fuzzy area with Constitutional implications, so Maine’s statute may not be the last word, be advised.

Complicated stuff. I intend this article simply to point up some issues and possible strategies: consult your lawyer or your accountant.

And 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.