Was a moving yacht-charter charge taxable when the cruise also included food, drinks, crew service, and optional live music?

Plain-English summary

A Bay-area charter operator earned less than 5% of its revenue from charters without food or drink. Its other contracts either charged one per-guest amount including tax and tip or separately listed yacht and crew, food, drink, music, tax, and tip. The audit viewed the business largely as a floating restaurant.

The memorandum nevertheless excluded the amount attributable to a moving yacht charter. A cruise around the bay was transportation even when passengers disembarked where they boarded, and the yacht supplied significant benefits apart from the taxable meal. A moored yacht used as the food-service facility would receive the opposite treatment.

Food-and-beverage service remained taxable. The auditor was not bound by the operator's allocation, particularly where a yacht-and-crew line included food servers. The deductible transportation amount could be no more than the price of a comparable charter without taxable property and no less than the separately quoted price for extra cruise time, assuming that price reflected the added transportation cost.

Separately charged optional live music was not part of taxable gross receipts.

Common questions

Did returning to the original dock mean the cruise was not transportation?

No. The source compared a bay tour to other transportation and treated the moving charter as providing substantial non-food benefits.

Was the entire yacht-and-crew line deductible?

Not necessarily. Any portion attributable to serving food or beverages was taxable, and the auditor could adjust the allocation.

How did the memorandum bound the transportation deduction?

It could not exceed a comparable bare charter and could not fall below the quoted charge for extra cruise time on the stated assumption.

Was optional live music taxable?

No. The source excluded the optional live-music charge.

Citations and references

• CLD 466 and the quoted underlying transportation analysis (as cited in the source)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/550-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/550-0828.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Mr. Bruce A. Belshaw
Oakland - Auditing

From:

David H. Levine
Senior Tax Counsel

Subject:

W--- H. & S--- D. P--SR --- XX-XXXXXX

550.0828

October 23, 1990

This is in response to your memorandum dated September 20, 1990 regarding application of sales tax to a business that serves food and drink aboard boats operating on the San Francisco Bay. Less than 5% of taxpayer’s gross receipts are derived from boat charters where no food or drink is provided. With respect to its other gross receipts, taxpayer enters into two types of contracts. One type provides for charges quoted on a per-guest basis, such as $49.00 per guest, whish includes tax and tip. The other type of contract separately states charges for the yacht and crew, food, drink, music, and tax and tip. You note that the yacht and crew charge appears to include a charge for food and beverage servers. You state: “We see this operation as being essentially a floating restaurant and consider gross receipts (except for the minor bare boat charters) to be the proper measure of tax. Customers are not interested in the transportation aspects of the cruise as passengers disembark at the place of original boarding. Customers are paying for the atmosphere created by the surroundings, similar to a customer’s willingness to pay for a high priced meal at an exclusive restaurant.” You note that your interpretation appeared to be in conflict with CLD 466 and you ask our opinion. By telephone, Mr. R--- M--- asked us to also provide our opinion with respect to an additional charge for optional live music. In my letter that formed the basis of CLD 466, I analyzed transportation charges in this context as follows:

Mr. Bruce A. Belshaw

-2-

October 23, 1990
550.0828

“Your charge for transportation by bus charter of persons from one place to a different place is not subject to sales tax, even if a meal is served during the transportation. The reason for this conclusion is that we would regard the bus charter as having been arranged for purposes of transportation and not for purposes of providing facilities for serving food. A closer question is your charge for a yacht charter when the yacht has facilities for a dining room or equivalent and a sit-down meal is provided. Under such circumstances it is very likely that the providing of the taxable meal service is a significant aspect of that yacht charter. However, since a yacht charter provides significant benefits to the participants that are unrelated to taxable sales of food, we will regard such charges for yacht charters as not subject to tax and such charges may be deducted on line 10 of your return. We note that we would reach the opposite conclusion if the yacht remained moored and was not used for transportation.” This is a tough area and your argument is persuasive. However, for the reasons expressed in the paragraph quoted above, we believe that we must recognize that a significant purpose for a person entering such a charter involving the purchase of taxable food is to obtain the benefits of the yacht charter. That the point of departure and the point of return are the same does not affect the analysis since tours around the bay are just as much transportation as a ferry across the bay. We conclude that charges attributable to the yacht charters are not includable in taxpayer’s taxable gross receipts. We recognize that this conclusion will make for a more difficult audit. You, of course, are not bound by taxpayer’s proration. For example, although not clear from the exhibits attached to your memorandum, you imply that taxpayer is not reporting taxes on its charges for the crew, which appears to include a charge for food and beverage service. Amounts attributable to the service of food are clearly subject to sales tax. The amount deductible as for transportation should be no more than the amount charged for a similar charter that does not involve the taxable sale of tangible personal property. It should also be no less than the amount charged for extra cruise time (the invoice attached as Exhibit 1 quotes extra cruise time at $175 per half hour) assuming this charge relates to the marginal cost for providing that extra cruise time. With respect to the question regarding charges for optional live music, we believe that such charges are not part of taxpayer’s taxable gross receipts. If you have further questions, feel free to write again.

DHL:wk
2536C