Was paying $12,000 for temporary title to a scrap vessel taxable when the buyer only wanted its Dungeness crab permit?

Plain-English summary

A buyer paid $12,000 for a fishing vessel sitting in a scrap yard and described as worthless. The sole purpose was to become its record owner, transfer the attached Dungeness crab permit to another vessel the buyer already owned, and then return title to the original owner before any functional use.

Fish and Game law did not allow the permit to be sold independently. It was an incident of vessel ownership, and the person transferring it to a replacement vessel had to be record owner of both vessels.

Because acquiring title to the vessel was legally necessary, the buyer purchased the vessel itself for consideration. The transaction was not a service and did not separately transfer intangible property, so the purchase was taxable.

What this means for you

Commercial fishers, vessel brokers, and permit-transfer advisers

Map the permit statute before allocating price to an intangible right. If the right cannot move without ownership of the vessel, a temporary or nominal-title transfer can still be a taxable purchase of the hull.

Common questions

Q: Did the vessel's claimed scrap value control?

A: No.

Q: Could the permit be sold separately?

A: No, under the law described.

Q: Did returning title before functional use avoid tax?

A: No.

Citations and references

• California Revenue and Taxation Code §§ 6006, 6007, 6009, 6051, 6201, 6275, and 6283
• California Fish and Game Code §§ 7601, 8280, 8280.1, and 8280.3
• California Sales and Use Tax Regulations 1501 and 1610
• Simplicity Pattern Co. v. State Board of Equalization, 27 Cal. 3d 900 (1980)
• Navistar International Transportation Corp. v. State Board of Equalization, 8 Cal. 4th 868 (1994)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 600.0063
• Original supporting opinion: 600.0063 PDF

Original ruling text

State of California

)

Board of Equalization
Legal Division-MIC: 82

Memorandum
To:

Mr. John Emmett
Tax Compliance Supervisor

From :

Janice L. Thurston
Senior Tax Counsel

Date:

October 23, 2000

Telephone: (916) 324-2588

CalNet 454-2588

Subject:

This is in response to your August 23, 2000 memorandum to the Legal Division in which you requested a legal opinion as to whether --- purchase of a fishing vessel from --- and ---, for the sum of$12,000.00 in order to obtain title to a vessel with a vessel crab permit, so that --- could transfer the vessel crab permit to another vessel owned by him, was the purchase of a vessel subject to tax. In your memorandum, you state: "1) "2)

"3)

"4)

The contract of sale indicates the consideration of this purchase was for the sole purpose of transferring a crab permit from one vessel to another. Contact with the California Department of Fish and Game has confirmed it is customary practice for a vessel Captain to transfer title of a vessel in order to obtain a permit. A permit can only be transferred between vessels under the same captain; they cannot be sold or transferred between parties. The consideration in this case was $12,000.00 solely for the purpose of obtaining the crab permit. The vessel itself is located in a scrap yard and is considered of'no value'. The terms of the contract were completed without ' first functional use'. Coast Guard records have confirmed that title of the vessel has transferred back to the original owner. We confirmed with the Department of Fish and Game that, during the brief ownership period, the crab permit was transferred to another vessel the taxpayer owned."

DISCUSSION:
What is a Dungeness Crab Vessel Permit?
Under California law, persons may not use a vessel to obtain Dungeness crab for commercial purposes, ''unless the owner of the vessel has a Dungeness crab vessel permit for that

Mr. John Emmett
)

-2-

October 19, 2000

vessel ...." (Fish & G. Code§ 8280.l(a).) To protect the Dungeness crab fishery, the Legislature limited the number of vessels participating in the fishery to take Dungeness crab, by requiring those vessel owners to obtain and possess a permit for the vessel; the issuance of permits were limited to persons owning vessels qualifying under Fish and Game Code section 8280.1. (Fish & G Code § 8280.) Vess~ls generally qualified if the owner had a commercial fishing license in specified crab seasons prior to 1995 and used the vessel for a number of landings in those seasons. In other words, permits were issued to persons who had used the vessel to take crab by traps for commercial purposes in specified crab seasons. The law prohibits the transfer of a Dungeness crab vessel permit, except as specifically provided in Fish and Game Code section 8280.3. Upon the sale of the vessel, the owner of the vessel must transfer the permit to the purchaser unless, with the approval of the Department of Fish and Game, the owner retains·the permit to be placed on a vessel to be purchased. (Fish & G. Code 8280.3 (a)(l ).) The owner of a vessel to whom the Dungeness crab vessel permit has been issued may transfer the permit to a replacement vessel of the owner. The owner must be the record owner 1 of both vessels in order to transfer the permit to the replacement vessel. The permit is an authorization for a vessel owner to use the specific vessel to take crab; it is one of the bundle of rights of vessel ownership, an incident of vessel ownership which cannot be sold separately from the transfer of the vessel. (Cf. 81 Ops.Cal.Atty.Gen. .338 (1998) opining that a commercial salmon vessel permit does not constitute personal property of the permit holder so as to allow its sale without transfer ofthe vessel owned by the permit holder.)" Application of Tax: California law imposes a sales tax on the retail sale of tangible personal property in California (Rev. & Tax. Code § 6051) and when sales tax does not apply, imposes a use tax on the use oftangible personal property purchased from a retailer for storage, use or other consumption in California (Rev. & Tax. Code §6201), unless specifically exempt or excluded by statute. Use tax applies to the use2 of a vessel purchased from a person not required to hold a seller's permit by reason ofhis or her sales of vessels (Rev. & Tax. Code §6275, 6283, Reg. 1610), but no sale or use tax is imposed on the sale of intangible personal property or on the performance of services (Rev.
& Tax. Code§§ 6006, 6007). The California Supreme Court has (1) rejected the contention that the "true object" test of Regulation 1501 (pertaining to whether the transfer of tangible personal property is incidental to a service) renders a sale of a physical object exempt from taxation whereby the object is purchased or acquired primarily for its intellectual content (Simplicity Pattern Co. v. State Bd. ofEqualization (1980) 27 Cal.3d 900); and (2) rejected the contention that documents may not be taxed if the primary purpose of the sale was to transfer intangible or 1

Fish and Game Code section 760I defines an owner as follows: "'Owner' or 'vessel owner' means the person or persons designated as the registered owner of a vessel on a certificate ofdocumentation issued by the United States Coast Guard or on a copy ofthe vessel registration issued by the vessel registration agency of the state where the owner is a resident. For purposes ofthis section, the vessel registration agency in California is the Department ofMotor Vehicles."

2 "Use" includes the exercise ofany right or power over tangible personal property incident to the ownership of the

property. (Rev & Tax. Code §6009.)

Mr. John Emmett

-3-

October 19, 2000

intellectual content embodied in the documents (Navistar Internal. Transportation Corp. v. State th Bd. ofEqualization (1994) 8 Cal.4 868).
--- purchased the vessel for its own sake; he had to become the owner of the vessel formerly owned by the ---, with title to the vessel vested in him as shown on U.S. Coast Guard or DMV records, in order to be able to transfer the crab vessel permit to another vessel owned by him. Although --- purchased· the vessel because he was most interested on one of the rights of vessel ownership, the Dungeness crab vessel permit, he in fact obtained title to the vessel for consideration of$12,000.00. The purchase of the vessel was not incidental to the performance of a service, nor was there a separate and distinct transfer of intangible personal property, and the purchase of the vessel is subject to tax.

JLT/cmm
cc:

l

J

•

Consumer Use Tax (MIC:37)