By John Freeman

The temporary one-year law in California that requires residents to keep new yachts offshore for a full year if they wish to avoid paying state sales and use taxes appears headed for a year’s extension.

The law, which applies to all yachts purchased after Oct. 1, 2004, was set to expire on June 30. It extends to 365 days the traditional 90-day window that yacht owners used to avoid taxes. Called Chapter 226, the provision is included in the state’s proposed 2006-07 budget and would push the expiration date for the law to June 30, 2007.  A final decision by the state’s legislature was expected July 1.

The extension was strongly opposed by the yachting industry.

“I felt like I got kicked in the gut when I found out it was back in the budget,” said Paul Trusso, a San Diego-based maritime attorney who has followed the situation. “This law was drafted and designed to automatically sunset after one year, but it looks like we’ve lost this one.”

The state’s official Legislative Analyst’s Report concluded that the temporary one-year law had not resulted “in the sharp reduction in vessel-related sales that some had feared.” According to the report, the law resulted in a $20 million increase in state and local tax revenues from yacht sales made to California residents. The law also applies to the taxation of vehicles and aircraft.

Though that figure was relatively small, the yacht buyer’s provision is tied to a much higher tax-producing law called the teacher tax, which eliminates the $250 deduction state’s teachers could claim for purchasing school supplies. That tax brought in $175 million to state coffers last year. Legislators had to extend the yacht provision in order to get the teacher tax passed, according to a source in the state’s Legislative Analyst’s Office.

Prior to the passage of Chapter 226, it was common for California yacht buyers to take delivery of their vessels in international waters, then travel to Mexico or the Northwest and remain out-of-state for at least 90 days.

Many yacht owners would berth in Ensenada, Baja California – some 60 miles south of San Diego – to avoid paying taxes. Indeed, the 90-day “offshore” period has been so much a part of yacht transactions that Trusso named his firm’s Web site www.offshoredelivery.net.

In 2003, 1,150 out-of-state usage exemptions were filed. By contrast, once the one-year law was enacted, that figure dropped to 209, a decline of 82 percent.

“What I’m feeling from the industry these days is that the increase in fuel prices and increase in interest rates figures to slow down the state’s marine industry,” Trusso said. “It’s my feeling that if this law is continued, our state’s marine industry will be hit by a perfect storm of higher fuel costs, higher interest rates and higher taxes.”

Contact freelance writer John Freeman through editorial@the-triton.com.

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