Were a charity's receipt, three-year lease, lease payments, and possible sale of a donated boat subject to Rhode Island sales and use tax?

Plain-English summary

Rhode Island sales and use tax did not apply to the charity's receipt and ownership of the donated boat, its three-year lease of the boat, the payments under that lease, or a possible sale to the lessees. The Division treated each transaction as covered by the exemption for the sale and Rhode Island storage, use, or consumption of a new or used boat.

The taxpayer was a 501(c)(3) charitable organization that received a donated 52-foot, 6-inch Coast Guard-documented vessel in Rhode Island. It planned to lease the vessel for three years to a married couple living in another state. At the start of the lease, while the boat was still in Rhode Island, the lessees would pay a security deposit, first month's rent, prepaid short-term rent, and a purchase-option fee. They then intended to move and berth the boat outside Rhode Island.

The boat exemption covered the charity's initial receipt and ownership. It also covered the lease because Rhode Island's definition of a sale includes a lease or rental. The initial lease payments were likewise exempt even though receipt appeared to occur in Rhode Island.

Later periodic payments were sourced to the boat's primary location for each payment period under Rule 6(b) of Regulation 12-62. The Division did not decide how the other state could tax periods when the boat was berthed there. It added that even if the recurring lease payments were sourced to Rhode Island, the boat exemption would apply.

The lessees could exercise their purchase option only during the final six months of the lease. A sale outside Rhode Island would not produce Rhode Island tax, and a sale in Rhode Island would still qualify for the boat exemption. The exemption did not extend to spare parts or other tangible personal property acquired for the vessel.

What this means for you

Boat donors and charitable organizations

The ruling's result rested on Rhode Island's specific boat exemption. It covered receipt, ownership, leasing, lease payments, and a possible sale on these facts.

Boat lessors and lessees

Track where the lessee receives the vessel and its primary location during each lease-payment period. Sourcing can determine which jurisdiction's law must be considered even when Rhode Island provides an exemption.

Buyers of boats and related property

Do not assume everything associated with an exempt boat is exempt. The Division expressly excluded spare parts and other tangible personal property acquired for the vessel from this ruling's boat exemption.

Common questions

Was the charity taxed when it received ownership of the donated boat in Rhode Island? No. The Division treated the receipt, storage, use, or consumption of the boat as exempt under R.I. Gen. Laws § 44-18-30(48).

Was the three-year lease taxable? No. A lease or rental is included in Rhode Island's definition of a sale, and the boat exemption covered the lease.

Were the initial Rhode Island lease payments taxable? No. The ruling treated them as part of the exempt boat transaction.

Did Rhode Island decide the other state's treatment of later payments? No. The Division gave no opinion on another state's sales-tax treatment while the boat was stored, used, or consumed there.

Would an eventual sale to the lessees be taxable in Rhode Island? No. If the sale occurred elsewhere, Rhode Island tax would not apply; if it occurred in Rhode Island, the boat exemption would apply.

Were spare parts covered? No. The ruling expressly said the exemption did not apply to spare parts or other tangible personal property acquired for the vessel.

Citations and references

• R.I. Gen. Laws §§ 44-18-18 and 44-18-20 — sales and use taxes.
• R.I. Gen. Laws §§ 44-18-7(1) and 44-18-8 — sale, lease, rental, and retail-sale definitions.
• R.I. Gen. Laws § 44-18-16 — tangible personal property.
• R.I. Gen. Laws § 44-18-25 — presumption that gross receipts are taxable until proved otherwise.
• R.I. Gen. Laws § 44-18-30(48) — exemption for the sale and Rhode Island storage, use, or consumption of new and used boats.
• Rule 6(b), Regulation 12-62 — sourcing for lease or rental payments.
• American Hoechst Corp. v. Norberg, 462 A.2d 369 (R.I. 1983) — taxpayer's burden when claiming a statutory exemption.

Source

• Landing page: Rhode Island Declaratory Rulings
• Declaratory order: Declaratory Order 2017-04

Original ruling text

Ruling Request No. 2017-04

Ruling Request No. 2017-04

Request for Ruling Regarding the Applicability of R.I. Gen. Laws § 44-18-30(48) to the Sale and Storage, Use, or Other Consumption of a Boat

Taxpayer requested a declaratory ruling ("Ruling Request") to determine whether R.I. Gen. Laws § 44-18-30(48) exempts from sales and use tax: (1) its receipt and ownership of a boat, (2) its lease of the boat to the lessees (“Lessees”), (3) its receipt of payments under the Lease, and (4) its potential sale of the boat to the Lessees.

Facts

The facts set forth below are taken from the statement of facts presented in the Ruling Request dated June 5, 2017.

Taxpayer is a not-for-profit corporation with its principal office located outside of Rhode Island but within the United States. Pursuant to a determination letter issued by the Internal Revenue Service in 1983, Taxpayer has been and is classified for federal income tax purposes as a charitable organization under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. Taxpayer and an affiliated group of fifty-five (55) other charitable organizations operate programs for troubled youth and hold property and raise funds to support those activities. The group’s most significant activity is the operation of programs to rehabilitate troubled youth through education, training, counseling, discipline, and productive work and marine, wilderness, and other environmental education and rehabilitation programs through their juvenile justice programs that are offered as an alternative to juvenile incarceration.

As part of its fundraising activities, Taxpayer receives contributions of property, including boats, from donors. One recent such donation involved Taxpayer’s receipt of a fifty-two-foot and six-inch Coast Guard-documented vessel. Taxpayer has received ownership of the vessel in Rhode Island. It is anticipated that Taxpayer will lease the vessel to a husband and wife, the Lessees, who are residents of another state, for a term of three (3) years. A copy of the proposed lease (“Lease”) was submitted with the Ruling Request.

It is anticipated that the vessel will be moved by the Lessees, following the commencement of the Lease, to a state outside of Rhode Island and that the vessel will be berthed out-of-state during the term of the Lease. At the end of the Lease term, the Lessees have the option under the Lease of acquiring the vessel for an agreed price. At the commencement of the Lease, while the vessel is still located in Rhode Island, the Lessees will make various payments to Taxpayer, including a security deposit, a first month’s payment of rent, the prepayment of so-called short term rent, and a fee for an option to purchase the vessel at the conclusion of the Lease. Taxpayer requests a declaratory ruling on its potential Rhode Island Sales & Use Tax obligations in connection with this transaction.

Ruling requested

Based on the facts provided, whether (1) receipt and ownership of the vessel, (2) its lease of the vessel to the Lessees, (3) its receipt of payments under the Lease, and (4) its potential sale of the vessel to the Lessees are exempt from the Sales & Use Tax by R.I. Gen. Laws § 44-18-30(48).

Pertinent Local Statutory and Regulatory Law

R.I. Gen. Laws § 44-18-18 imposes a sales tax on all “sales at retail” in Rhode Island. Alternatively, the state imposes a use tax under R.I. Gen. Laws § 44-18-20 “on the storage, use, or other consumption in this state of tangible personal property; prewritten computer software delivered electronically or by load and leave; or services as defined in § 44-18-7.3.” R.I. Gen. Laws § 44-18-8 defines “retail sales” or “sale at retail” as “any sale, lease or rentals of tangible personal property, prewritten computer software delivered electronically or by load and leave, or services as defined in R.I. Gen. Laws § 44-18-7.3 for any purpose other than resale, sublease or subrent in the regular course of business.”

Under R.I. Gen. Laws § 44-18-7(1), the term “sales” means and includes “any transfer of title or possession, exchange, barter, lease, or rental, conditional or otherwise, in any manner or by any means of tangible personal property for a consideration. ‘Transfer of possession’, ‘lease’, or ‘rental’ includes transactions found by the tax administrator to be in lieu of a transfer of title, exchange, or barter.” R.I. Gen. Laws § 44-18-16 defines “tangible personal property” as “personal property which may be seen, weighed, measured, felt, or touched, or which is in any other manner perceptible to the senses. ‘Tangible personal property’ includes electricity, water, gas, steam, and prewritten computer software.” Rule 6 of Regulation 12-62 discusses the sourcing rules for the lease or rental of tangible personal property.

Under R.I. Gen. Laws § 44-18-25, all gross receipts are presumed to be taxable until the taxpayer proves otherwise to the Tax Administrator. R.I. Gen. Laws § 44-18-30(48) is a sales and use tax exemption that states in pertinent part: “Notwithstanding the provisions of this chapter, the tax imposed by §§ 44-18-20 and 44-18-18 shall not apply with respect to the sale and to the storage, use, or other consumption in this state of any new or used boat.” A taxpayer claiming entitlement to a statutory tax exemption has the burden of proving it falls within the terms of the statute. American Hoechst Corp. v. Norberg , 462 A.2d 369(R.I. 1983).

Discussion

Taxpayer argues that R.I. Gen. Laws § 44-18-30(48) exempts the ownership and sale of the vessel from Rhode Island sales and use tax. Additionally, Taxpayer asserts that any payments that Taxpayer receives in connection with the sale of the vessel, such as the option payment, are not subject to tax. Taxpayer states that although Regulation SU 12-62 does not address the treatment of payments made for the lease or rental of a boat, R.I. Gen. Laws § 44-18-7(1) defines the term “sale” to include a “lease or rental”. Therefore, since the lease of the vessel is a “sale,” the transaction is tax-exempt under R.I. Gen. Laws § 44-18-30(48).

First, Taxpayer states that it received ownership of the boat or vessel in Rhode Island. A boat or vessel falls within the definition of tangible personal property under R.I. Gen. Laws § 44-18-16. Since Taxpayer’s initial receipt of the boat was the storage, use, or other consumption of tangible personal property in Rhode Island, the transaction is exempted from Rhode Island sales and use tax by the language of R.I. Gen. Laws § 44-18-30(48).

Second, the leasing of the vessel from Taxpayer to the Lessees is also exempt under R.I. Gen. Laws § 44-18-30(48). As noted earlier, R.I. Gen. Laws § 44-18-7(1) includes a lease or rental in its definition of “sales”. The sale and storage, use, or other consumption of new and used boats is not subject to Rhode Island sales and use tax.

Third, the payments under the Lease are not subject to Rhode Island sales and use tax. Rule 6(b) of Regulation 12-62 provides the sourcing rules for the lease or rental of tangible personal property. The first lease payment would be sourced to the location where receipt by the purchaser occurred. Receipt of the vessel by the Lessees here appears to occur in Rhode Island. After the three-year Lease term begins, the Lessees intend to berth the boat out-of-state during the duration of the Lease. Since the initial payments under the Lease are part of a “sale” under R.I. Gen. Laws § 44-18-30(48), they are exempt from Rhode Island sales and use tax.

Subsequent periodic lease payments after the first payment would be sourced to the primary location of the property during each period covered by the payment. Per Rule 6(b) of Regulation 12-62, “[t]he primary location of the property shall be the address for the property provided by the lessee that is available to the lessor from its records maintained in the ordinary course of business, when use of this address does not constitute bad faith.” In this case, that address would be an out-of-state location within the United States. As subsequent lease payments will be sourced to another jurisdiction where the vessel is being stored, used, or otherwise consumed, this agency has no opinion as to how that other state may treat the subsequent lease payments or the storage, use, or other consumption of the vessel under the other state’s sales tax laws. If there is no lease of the vessel in Rhode Island or any storage, use, or other consumption of the vessel in Rhode Island, then Rhode Island sales and use tax does not apply. Even if the lease or storage, use, or other consumption of the boat occurred in Rhode Island, R.I. Gen. Laws § 44-18-30(48) would exempt the recurring Lease payments from Rhode Island sales and use tax.

Finally, the sale of the vessel in Rhode Island would be nontaxable under R.I. Gen. Laws § 44-18-30(48). In the Lease, the option to purchase the vessel contains an option period that would begin six (6) months prior to the expiration of the Lease term and end at the term’s end. In other words, the Lessees could only purchase the boat during the final six (6) months of the Lease term. If the sale does not occur in Rhode Island (i.e., the Lessees do not receive the boat in Rhode Island), no Rhode Island sales or use tax would be due. Even if the sale occurred in Rhode Island, R.I. Gen. Laws § 44-18-30(48) exempts the sale of boats from sales and use tax. However, this exemption does not apply to the sale of spare parts or any other tangible personal property acquired for the vessel.

Ruling

Based on the facts provided, Taxpayer’s (1) receipt and ownership of the vessel, (2) its lease of the vessel to the Lessees, (3) its receipt of payments under the Lease, and (4) its potential sale of the vessel to the Lessees are not subject to the Rhode Island Sales & Use Tax because these transactions are exempted by R.I. Gen. Laws § 44-18-30(48).

This ruling is limited to the facts stated herein and may be relied upon by the Taxpayer and shall be valid unless expressly revoked because (1) the applicable statutory provisions of law are amended in a manner that requires a different result; (2) the underlying facts described herein materially change; or (3) a decision on point has been issued by the Rhode Island or Federal courts.

**Neena S. Savage

Tax Administrator

August 8, 2017**