How to Avoid Sales Taxes on Boats

Vessel Name and Hailing Port on the Transom

It is possible to avoid sales taxes on certain types of boats as long as the sale meets the right criteria. The same holds true for a 17-foot bay boat purchased in a neighboring state all the way up to an 80,000-ton freighter flying a flag of convenience. All that is required to avoid sales taxes on boats is for the purchaser to follow the guidelines established in his home jurisdiction. Ironically, the larger and more expensive a boat is, the easier it is to avoid paying the sales tax on it.

Difficulty:

Moderate

Instructions

1. Register any boat under 25 feet in your home state. Any boat under 25 feet must be registered in the owner's state of residence. This is usually the point at which the sales tax is demanded. For example, if you buy a new 17-foot bay boat from the dealer across town, the dealer will handle the registration of the boat and collect the appropriate sales tax. When purchasing a used boat, the purchaser must handle the registration himself, and will have to pay the sales tax at that point.

   However, due to interstate commerce laws, many states offer a sales tax loophole to those boats purchased in another state. Often, the boat must remain in the state where it was purchased for a required length of time (usually 90 days) in order to qualify for the tax exemption.

2. Transition any state-registered boat over 25 feet to federal documentation. The qualification for the Coast Guard documentation of a vessel is a minimum length overall of 25 feet and displacement of 5 gross tons. When purchasing a boat that meets these guidelines but happens to be registered with the state department of motor vehicles or wildlife and fisheries, it is a good idea to file for Coast Guard documentation and remove the vessel from state registration. Upon approved documentation, the vessel falls under federal jurisdiction and the owner is no longer required to pay state sales tax.

3. When purchasing a boat that is already documented by the Coast Guard, re-document the vessel after the sale. There is no advantage to removing a vessel from Coast Guard jurisdiction and registering it with the owner's home state. Documented vessels should remain documented. Transferring the documentation from one owner to the next is not a taxable event and thereby avoids any sales tax. The fees to do so total less than $300 regardless of the vessel's size or value.

4. Transfer ownership of the boat to a Delaware corporation. As an added layer of liability protection, many boat owners will set up a Delaware corporation to handle the paperwork on their boat. This is the reason U.S. boats all over the world have Dover or Wilmington, Delaware, as their hailing port. Delaware has no state income tax and the most relaxed corporate reporting requirements of any state. Owning a boat through a Delaware corporation is the closest thing a private U.S. citizen can do to attain the advantages of a flag of convenience.

5. For shipping companies, flying a flag of convenience avoids most taxes. More than half of the world's commercial ships take advantage of "open registry," commonly known as flying a flag of convenience. In admiralty law, the registry of a ship determines the laws the owner of that ship must obey, including tax and labor laws. For this reason, corporations register their ships in countries with little or no taxes on that registration, thereby avoiding a raft of taxes including sales tax. Unfortunately, these countries usually have little in the way of labor laws as well, enabling the ship owners to hire chattel labor, pay close to slave wages, and be free from any occupational safety standards.

References

• USCG National Vessel Documentation Center

Resources

• USCG Bill of Sale
• USCG Application for Vessel Documentation