Does a bareboat rental (no crew) get taxed differently than a boat charter that comes with a captain?

Plain-English summary

A boat owner asked the Comptroller to confirm how sales tax applies when they buy a boat and put it into rental or charter service. The Comptroller's answer: a boat bought for rental or charter use is not subject to the separate boat sales tax, but is subject to the regular limited sales tax — unless the owner holds a sales tax permit and gives the seller a resale certificate, in which case the purchase itself is tax-free (because the owner will collect tax later on the rental/charter income instead).

The letter then draws a key line the whole ruling turns on: a "rental" is giving someone exclusive use of the boat itself for a fee — that's taxable, and the owner must collect and report limited sales tax on that income. A "charter," by contrast, includes a transportation service (someone is operating the boat for the customer, not just handing over the keys). Charter fees for things like a fishing-guide trip or a pure transportation charter are normally not taxable, unless the charter is bundled into another taxable service (the letter gives touring/tour boats as an example).

The Comptroller also answered seven follow-up questions: how a later sale of the boat is taxed (based on the buyer's own use — recreational use triggers boat tax, commercial use triggers limited sales tax); that there's no state "clawback" of tax if the boat is later sold for less than it was bought for; that bareboat rental vs. captained charter genuinely matters for taxability; that switching a boat from recreational to commercial use (or vice versa) doesn't trigger extra tax retroactively, but taxable rental income along the way is still taxed, with no refund of tax already paid at purchase; what paperwork the seller has to provide at the time of sale; that there's no minimum rental/charter period, but once a boat comes back out of commercial service into personal use, tax is owed on either the original purchase price or the fair market rental value for the period it was used commercially; and that anyone renting or providing taxable boat-related services generally needs a sales tax permit (unless they already paid sales tax at purchase and only make nontaxable charters).

What this means for you

Boat owners renting out their boat

If you let someone take the boat out on their own (no captain, no crew — a true "bareboat" rental), that's a taxable rental. You need a sales tax permit and must collect and remit limited sales tax on the rental charge, the same as any other rental of tangible personal property.

Charter boat operators (with a captain or crew)

If you operate the boat yourself and are really selling a transportation or guide service — a fishing charter, a pure transport run — the charter fee is normally not subject to limited sales tax under this ruling. But watch for the exception: if the charter is really part of a broader taxable service package (the letter's own example is a tour boat), the exemption may not apply.

Anyone buying a boat for a rental/charter business

You can buy the boat tax-free by giving the seller a resale certificate (if you hold a sales tax permit and the purchase is genuinely for resale/rental). If you don't do that, you owe limited sales tax up front on the purchase, and there's no way to later "get credit" for that against tax on your rental income, and no state recapture if you eventually sell the boat for less than you paid.

If you later take a rental/charter boat out of business use

Once you pull the boat out of commercial service for your own personal use, you owe tax based on either what you originally paid for it or its fair market rental value for the time it was used commercially — there's no minimum rental period required before this rule kicks in.

Common questions

Q: Is a bareboat rental taxed the same as a captained charter?
A: No. A bareboat rental (just handing over the boat for a fee) is a taxable rental subject to limited sales tax. A charter where the owner/operator also provides a captain and is really selling a transportation service (like a fishing guide trip) is normally not taxable, unless it's bundled into another taxable service such as a tour boat.

Q: If I buy a boat for my rental/charter business, do I pay boat tax or limited sales tax?
A: You don't pay the boat sales tax on a boat bought for rental/charter use — you owe limited sales tax on the purchase, unless you hold a sales tax permit and give the seller a resale certificate, in which case the purchase itself is exempt and you instead collect tax on the taxable rental/charter income.

Q: If I later sell the boat for less than I paid, do I get some of the tax back?
A: No. The letter is explicit that there is no state recapture of tax based on the difference between the original purchase price and later resale proceeds.

Q: What happens if I pull my rental boat out of the business and start using it personally?
A: You owe tax on either the boat's original purchase price or its fair market rental value for the period it was used commercially — there's no minimum length of time it had to be rented first.

Q: Do I need a sales tax permit to rent or charter my boat?
A: If you're renting the boat or providing taxable charter services, generally yes. The letter notes one exception: someone who already paid sales tax at the time of purchase and only makes nontaxable charters would not need a permit.

Q: Can I rely on this letter for my own boat rental business?
A: Not directly — a STAR letter like this is only binding on the Comptroller for the taxpayer it was issued to, and it may not reflect current policy (the file also carries a later Comptroller alert noting the boat-length threshold used in this era's boat tax law was later changed by the Legislature). Ask a Texas tax professional about your specific facts.

Citations and references

Rules cited in the letter:

• Boat and Motor Sales and Use Tax Rule 3.741(a)(6) and (7) — Imposition and Collection of Tax, Definitions
• Rule 3.294(j) — tax owed when property is removed from rental/lease service into personal use

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9304L1238B01

Original ruling text

NOTE: This document is also indexed as a Boat/Boat Motor Tax document, STAR 9304001L, which has been superseded.

ALERT: HB 4032, 86th Leg. Session (2019), amended Tax Code Section 160.001(2) to define a boat as a vessel not more than 115 feet in length (previously 65 feet) and subject to the boat & boat motor tax effective 09/01/2019; vessels in excess of 115 feet in length (previously 65 feet) would be subject to the limited sales tax (Section 151.3291). See STAR 201908009L

April 23, 1993

Dear **:

This is in response to your letter regarding the applicability of boat sales

tax or limited sales tax on boats purchased for rental/charter use.

In your letter you listed three statements, requesting the correctness of each

be confirmed. I am repeating the statements below, followed by our response:

Statement 1. A boat purchased for rental/charter use is not subject to the boat

sales tax, but is subject to limited sales tax.

RESPONSE: Your statement is correct.

Statement 2. If the owner has a limited sales tax permit and provides the

seller with a resale certificate, the purchase is not subject to the limited

sales tax.

RESPONSE: Your statement is correct, providing the purchase is for resale

(including rental).

Statement 3. Rental/charter revenue is subject to limited sales tax and must be

reported by owner through the filing of sales tax returns. However, if the boat

is chartered through a charter company who collects the charter fees, then they

provide a resale certificate to the owner, who then files sales tax returns

showing no taxable sales (provided this is the only activity). The charter

company files returns for and remits the tax on the charter fees.

RESPONSE: Keep in mind that the "rental" and charter" of a boat are not the

same. A rental is giving exclusive use of the boat itself to another for a

consideration. A charter includes a transportation service. Rental of a

bareboat is subject to limited sales tax and must be reported through the

filing of sales tax returns. However, charter fees for chartered boats are

normally not subject to limited sales tax (e.g., fishing guide boat charter or

pure transportation service) unless the rental is part of a taxable service

(e.g., tour boats).

Your letter then followed with seven questions. I am repeating your questions,

followed by the response to each:

Question 1: When the owner later sells the boat, is it subject to boat sales

tax or limited sales tax? Does this depend on the contemplated use of the boat

by the buyer?

RESPONSE: If the boat is 65 feet in length or less, then the tax due (boat tax

or limited sales tax) is determined by the purchaser's use of the boat. Boat

tax is due if the boat is sold to be used primarily in a recreational manner.

Limited Sales Tax is due if the boat is sold to be used primarily for

commercial purposes.

Question 2: When the owner sells the boat, and the revenue generated while in

rental/charter was less than the original purchase price, is there any

recapture by the state of tax on the difference?

RESPONSE: No, there is no recapture of tax by the state.

Question 3: Is there any distinction between types of rental/charter? For

example, does it make a difference whether the boat is chartered as a "bare

boat" or with a captain?

RESPONSE: Yes, there is a difference whether the boat is rented as a bare boat

or with a captain (founded); see the response to Statement 3 (page 1).

Question 4: If a buyer of a boat paid boat sales tax upon purchase, then places

the boat in charter, is the buyer liable for additional tax because limited

sales tax is at a higher rate than boat sales tax? Are charter fees still

taxed? If so, can the owner recoup the tax paid at time of purchase even though

he did not have a tax permit at that time?

RESPONSE: The boat tax is a transaction tax. If the boat was originally

purchased and used primarily for recreational purposes, the boat tax was due

(as long as there is no tax avoidance). If it is later diverted to commercial

use, no additional sales tax (limited) is due on the purchase of the boat.

Sales tax would be due on any taxable rental of the boat. There is no recouping

of tax paid at time of purchase.

Question 5: What are the responsibilities of the seller with respect to boat

sales tax, specifically the affidavit required, when a buyer indicates the boat

will be used for charter? Does the seller still complete the affidavit and

provide it to the seller? Does the seller need to require a resale certificate

from the buyer at the time of closing of the transaction, or can it be provided

later?

RESPONSE: The seller is required to furnish the purchaser the required

documents to title and register the boat and motor. [The seller may wish to

obtain a statement from the purchaser that the title, etc., has been provided

and that the purchaser has been told that the boat tax (if applicable) should

be paid to the Tax Assessor-Collector or Parks & Wildlife Department]. For

boats not defined as taxable under Boat and Motor Sales and Use Tax Rule

3.741(a)(6) and (7), Imposition and Collection of Tax, Definitions, the seller

must either collect the limited sales tax, or secure a limited sales tax resale

certificate or an exemption certificate (when applicable).

Question 6: Is there a certain minimum length of time that the owner must rent

or charter the boat? For example, if the boat is placed in charter for three

months and then removed, is there recapture by the state of the limited sales

tax on the boat purchase?

RESPONSE: There is no minimum length of time that the owner must rent or

charter the boat. Once the boat is removed from rental or charter service to be

placed into personal use (regardless of the period of time it was in commercial

use), the owner owes tax on either the original purchase price or the fair

market rental value for the period used [see enclosed Rule 3.294(j)].

Question 7: Is everyone who owns a boat in rental/charter required to have a

sales tax permit?

RESPONSE: Anyone who owns a boat for renting or providing taxable

services/amusements is required to have a sales tax permit. However, someone

who pays sales tax at the time of purchase and makes nontaxable charters of a

boat would not be required to have a sales tax permit.

This opinion is based on the facts presented. If there are additional or

different facts, the opinion could change.

If you have any questions, please don't hesitate to write the Tax

Administration Division or call one of our tax specialist toll free at

1-800-252-5555.

Sincerely,

Joan Hale

Tax Administration Division

NOTE: Previous Accession Number 9304015L