Was a lump-sum charter of a 35-foot sailboat a taxable lease when the owner always remained aboard as the required skipper?

Plain-English summary

A partnership bought a 35-foot sailboat with a resale certificate and described its business as sailing cruises. It later reported use tax on charter receipts as though it leased the vessel. Every charter, however, required the owner to remain aboard and skipper the boat, and customers paid one lump sum.

Legal staff said the arrangement was not a lease. A true rental gives possession and control to the customer. Here, the owner retained possession, custody, and control through the required skipper, so the business was providing transportation services.

The memorandum did not resolve the audit's other hypothetical charter questions because legal staff was still reviewing them.

What this means for you

Boat owners offering crewed charters

Calling a transaction a lease did not control. Required owner operation and retained control made this arrangement a service.

Accountants and tax professionals

Document who possesses, navigates, and controls the vessel. The payment format and contract label were less important than actual operational control.

Common questions

Q: Who skippered every charter?

A: The vessel owner.

Q: Did customers take possession and control?

A: No. The owner retained both through the required skipper arrangement.

Q: How did the business bill customers?

A: One lump sum for the charter.

Q: Did the memorandum answer every hypothetical raised by audit staff?

A: No. It expressly deferred those additional questions.

Citations and references

• California Sales and Use Tax Regulation 1660(a), as raised by audit staff
• Entremont v. Whitsell (1939) 13 Cal.2d 290
• California Civil Code §§ 1925 and 1955, as cited in the memorandum
• Business Taxes Law Guide Annotation 330.2660

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 585.0350
• Original supporting opinion: 585.0350 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

San Mateo Audit (D.S.)

From:

Headquarters – Legal (RLD)

Subject:

G--- M--- S---

585.0350

January 29, 1988

SR -- XX-XXXXXX

This is in reply to your August 11, 1987 memorandum regarding the application of use tax to the purchase and purported lease of a vessel by G--- M--- S--- (taxpayer), a partnership owned by Mr. M--- K. and Mrs. D--- L. G---. We understand that the taxpayer obtained a seller’s permit on June 22, 1984. The form BT-400, Application For Seller’s Permit and Registration As A Retailer, shows the nature of business to be “sailing cruises”. On August 21, 1984, the taxpayer purchased a 35-foot sailboat and issued a resale certificate to the seller. The taxpayer made no use of the vessel between August 21, 1984 until October 31, 1984. You note that, on October 21, 1984, the taxpayer “leased” the vessel and timely elected to report and pay use tax on lease receipts. You also note that, in all cases, where the taxpayer charters the vessel, the taxpayer skippers the vessel. The taxpayer bills a lump sum for the charter. Given this information, you asked the following: “1) When the owner ‘skippers’ the vessel, does it qualify as a bonafied (sic) lease or is the rental a hire of a transportation service, since control of the vessel is exercised by owner (Reg. 1660(a))?” Assuming that the owner requires, as a condition to his providing the vessel, that he skipper the vessel, we believe that the vessel owner is providing transportation services to the customers. The chief characteristic of a renting or leasing is the giving up of possession to the hirer, so the hirer and not the owner uses and controls the rented property (Entremont v. Whitsell, 13 Cal.2d 290, citing Civ. Code §§ 1925, 1955). When possession, custody, and license to use equipment remains totally in the hands of the owner or his employees, such a transaction is not a lease for sales and use tax purposes. (BTLG Annot. 330.2660.)

San Mateo Audit (D.S.)

-2-

January 29, 1988
585.0350

You also posed various hypothetical situations concerning similar situations. As we discussed, the legal staff is reviewing the application of sales tax to situations posed by the hypothetical questions you raised; therefore, we are not providing answers to your questions at this time. However, if you have further questions as to this case or other actual cses as to which you need answers, feel free to write again.

RLD:sr