Would California tax a resident's customized vessel delivered offshore and taken directly to Mexico before any California entry?

Plain-English summary

A California resident planned to buy a customized new 43-foot vessel for about $600,000 from a California dealer. The seller would retain possession, control, and risk of loss until final inspection and delivery at an offshore point. The buyer would travel there in a separate vessel, accept delivery if the boat met the contract, and take it directly to Mexico without entering California waters.

Counsel assumed title did not pass before offshore delivery. Under section 6396 and Regulation 1620, the sale was outside California if the seller delivered the vessel outside the state and title passed there.

Use tax also would not apply if the vessel was first functionally used outside California, used outside California for more than 90 days after purchase, and did not enter California until after that 90-day period. The buyer planned about four months of Mexico use before later travel.

If the boat entered California within 90 days, California use would instead be taxable unless the vessel was used or stored outside California at least half the time during the six months after entry.

What this means for you

Buyers planning offshore vessel delivery

The contract, risk of loss, possession, inspection, acceptance, and title passage all supported the place-of-sale analysis. The buyer here traveled separately and planned to take the vessel directly abroad.

California residents using a vessel elsewhere first

Offshore delivery alone did not settle use tax. The historical result also required genuine first use and more than 90 days of use outside California before entry.

Accountants and tax professionals

Preserve the contract, delivery records, logs, acceptance documents, proof of foreign use, and California-entry date. A change in timing could reverse the conclusion.

Common questions

Q: When did final payment become due?

A: After the buyer's final inspection and acceptance at the offshore delivery point.

Q: Who bore the risk of loss before delivery?

A: The seller.

Q: Could the boat enter California during the first 90 days under this result?

A: Not without triggering a different presumption and six-month outside-use test.

Q: How long did the buyer plan to keep the vessel in Mexico?

A: About four months after offshore delivery.

Citations and references

• California Revenue and Taxation Code §§ 6051, 6201, 6396, and 6401
• California Sales and Use Tax Regulation 1620(b)(3)
• California Uniform Commercial Code § 2401 and Regulation 1628(b)(3)(D), as cited by the requester for title passage

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 585.8000
• Original supporting opinion: 585.8000 PDF

Original ruling text

585.8000

STATE OF CALIFORNIA

JOHAN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
TELEPHONE (916) 327-2291
FAX (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
KATHLEEN CONNELL
Controller, Sacramento
___

July 9, 1997

JOHN CHIANG
Acting Member
Fourth District, Los Angeles
___
E. L. SORENSEN, JR.
Executive Director

Re: A
Dear Mr. ---:

This is in response to your letter of May 28, 1997 in which you inquire about the application of sales and use tax to a proposed purchase of a vessel which will be delivered to your client at a point outside of California. You explain that your client, A (Buyer), is purchasing a new vessel, a 43 foot X Model 53, from the B (Seller), which you describe as a “California Dealer of X Yachts.” Seller will purchase the vessel for resale from the X manufacturer and customize the vessel per the contract with the Buyer. It is anticipated that the Buyer will accept delivery of the vessel in July of 1997 at an “Offshore Delivery Point.” Buyer will be transported to the “Offshore Delivery Point” via a separate transport vessel and, if the vessel meets the contracted specifications, will accept delivery and take the vessel to Mexico without entering California waters. It is Buyer’s intent to “use the Vessel on short voyages and weekend trips while the Vessel is moored in Mexico. While long range international voyaging plans have not yet been solidified it is certain the Vessel will be kept and used in Mexico approximately four (4) months after delivery of the Vessel to the Buyer at the Offshore Delivery Point. Thereafter the Vessel will be used for international and domestic leisure travel.” Although you have not included a copy of the contract for the purchase of the vessel you have outlined the provisions regarding payment, risk of loss and possession. The purchase price is “approximately six hundred thousand dollars,” consisting of “partial payment deposits” with the final payment due and payable after Buyer’s final inspection and acceptance of the vessel at the “Offshore Delivery Point.” Seller’s right to retain the deposits are contingent upon Buyer’s acceptance of the vessel after final inspection. The risk of loss remains with the Seller up to the “final inspection and delivery” to Buyer. Possession and control of the vessel is to remain with Seller prior to delivery of the vessel to Buyer. You have not stated whether there are any title passage clauses in the contract. However, in your letter you cite Uniform Commercial Code section 2401 and Regulation 1628(b)(3)(D) in support of your conclusion that, absent a

Mr. ---

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July 9, 1997
585.8000

contractual provision that title passes prior to delivery, title passage occurs at the time the seller completes its duties with respect to physical delivery of the property. Accordingly, we assume that there are no provisions indicating that title will pass to Buyer prior to Seller’s delivery at the “Offshore Delivery Point” and that title passes at the time and place of delivery. It is your conclusion that, under these facts, your client’s purchase of this vessel will not be subject to sales or use tax in accordance with Regulation 1620(b)(3). Although it has not been specifically stated, for purposes of this analysis, we will assume that Buyer is a California resident. As you know, retail sales of tangible personal property in California are subject to sales tax, measured by gross receipts, unless the sale is exempt from taxation by statute. (Rev. & Tax. Code § 6051.) When sales tax does not apply, use tax, measured by the sales price, applies to the use of tangible personal property purchased from a retailer for the storage, use, or other consumption in California, unless the use is exempt from taxation by statute. (Rev. & Tax. Code
§§ 6201, 6401.) Revenue and Taxation Code section 6396, as explained by Regulation 1620, exempts from sales tax the gross receipts from sales of tangible personal property which, pursuant to the contract of sale, is required to be shipped and is shipped to a point outside the state by the retailer by means of facilities operated by the retailer or by delivery by the retailer to a carrier, customs broker or forwarding agent, whether hired by the purchaser or not, for shipment to such out-of-state point. Subdivision (b)(3) of Regulation 1620, under the use tax portion of this regulation, states the general rule that property sold and delivered to a point outside of the state by a California retailer to a resident of California, is presumed to have been sold for use in California. However, Regulation 1620(b)(3) continues: “[P]roperty purchased outside of California which is brought into California is regarded as having been purchased for use in this state if the first functional use of the property is in California. When the property is first functionally used outside of California, the property will nevertheless be presumed to have been purchased for use in this state if it is brought into California within 90 days after its purchase, unless the property is used or stored outside of California one-half or more of the time during the six month period immediately following its entry into this state. Prior out-of-state use in excess of 90 days from the date of purchase to the date of entry into California, exclusive of any time of shipment to California or time of storage for shipment to California, will be accepted as proof of an intent that the property was not purchased for use in California.” Accordingly, so long as the vessel is delivered outside of California, is first functionally used outside of California, is functionally used in excess of 90 days outside of California, and does not enter this state until 90 days after purchase, the Buyer’s subsequent California use, if any, will not be subject to California’s use tax. If the vessel is delivered outside of California and enters California waters within 90 days after purchase, Buyer’s California use will be subject to use tax unless the vessel is used or stored outside of California one-half or more of the time during the six months after the vessel entered California waters.

Mr. ---

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If you have any further questions, please feel free to contact this office again.

Sincerely,

Patricia Hart Jorgensen
Senior Tax Counsel
PHJ:cl
cc:

San Diego District Administrator (FH)
Consumer Use Tax Section

July 9, 1997
585.8000