Vessel Owners Beware – You May Not Have To Pay That Property Tax Bill

[vc_row][vc_column][vc_column_text]Copyright © 2013 Law Office of Alexander T Gruft

In these troubled economic times, counties are becoming more aggressive in their assessments of personal property.  This is particularly true with respect to unsecured tax assessments of vessels.  Vessel owners may receive tax bills based on a county assessor’s erroneous information regarding the vessel’s location or because the vessel was in California only temporarily.  The purpose of this article is to discuss one ground for cancelling an unsecured tax assessment against a vessel – lack of tax situs.

Unless otherwise exempt under California or federal law, all property, including vessels, is taxable.  Cal. Constit., Art. 13, § 1; Cal. Rev. & Tax. Code § 401.3.  All property subject to tax shall be assessed in the jurisdiction in which it is situated.  Cal. Constit., Art. 13, § 14.  According to the Assessor’s Handbook, published by the California Board of Equalization, “situated” connotes a more or less permanent location or situs.  Thus, a vessel will earn tax situs when it is kept or maintained in the county on more than a casual or transitory basis.  This includes habitual moorage at a California location, or regularly plying California waters.

Situs, the place where property is legally situated, is, therefore, one of the essential factors for a valid assessment.  Generally, because of its movable nature, vessels do not have a fixed situs.  It is the county assessor’s obligation to determine that  a vessel has established a situs in the county for the tax year before assessing property tax.

For property tax purposes, a vessel’s taxable situs is established on the January 1 lien date.  Cal. Rev. & Tax. Code §§ 401.3, 2192.  If the vessel is in the county on January 1, it will be considered to have a taxable situs in the county and it will be assessed for the tax year.  If the vessel is outside of the county on January 1 it will not be assessable unless it has otherwise established a more or less permanent presence in the county.

Unfortunately, counties tend to base the determination of situs on inaccurate information resulting in the burden shifting to the taxpayer to establish a lack of situs.   Counties rely on information from the California Department of Motor Vehicles or the United States Coast Guard.  These agencies are backlogged in their paperwork and recent sale information or amendments to a vessel’s Certificate of Documentation may not be readily available.  Marinas are also a source of information.  But slip rental does not necessarily equate with the vessel’s presence in the county.  Further, a vessel may be only temporarily moored in a “Port of Convenience” on the first of the year for refueling or minor maintenance before continuing its cruise elsewhere.  A deputy assessor may also physically search marinas asking questions of persons on or around vessels.  An erroneous assessment could , therefore, be based on a thin discussion between the deputy assessor and a novice crew member who has little understanding of “lien dates” or the vessel’s itinerary.

Clearly, vessel assessments are not black and white and a vessel owner must know how to avoid an assessment and his or her rights when faced with an assessment.  Remaining outside of California waters on January 1 is a prerequisite.  Although a vessel’s home port, identified on a Certificate of Documentation, is not determinative of situs, a location outside of California should be listed.  Stops in California should be kept to a minimum.  Visiting a California county to refuel, restock provisions and undergo repairs and maintenance will not result in tax situs if the length of the visit is only for as long as necessary to complete the vessel’s mission and all other indicia do not point to “habitual moorage” in California.  It is also persuasive if the vessel has established a situs in an alternative jurisdiction even if the alternative jurisdiction does not have a property tax.

Maintaining a vessel log with regular entries showing the vessel’s itinerary is crucial.  It is also advisable to maintain receipts for gas, repairs and maintenance, lodging and moorings, and evidence of customs importation permits.  The owner should be proactive upon receipt of a tax bill.  Contacting the assessor’s office to determine the basis of the assessment and offering to provide the assessor with evidence of an alternative situs will result in a quicker cancellation and possibly eliminate the need to pay the tax before the payment deadline.

If informal discussions with the assessor’s office do not result in cancellation of the tax bill, the taxpayer must file an appeal with the county.  The appeal is initiated by the taxpayer filing an Application for Changed Assessment.  For regular assessments, the Application must be filed between July 2 and September 15.   Appeals of supplemental assessments and escape assessments must be filed with the county within sixty days of the mailing date shown on the tax bill.

Filing an appeal does not excuse the taxpayer’s obligation to pay the tax by the deadline stated in the tax bill.  The taxpayer is still responsible for timely payment of the tax.  See Cal. Constit., article XIII, § 32; Pacific Gas & Electric Co. v. State Bd. of Equalization (1980) 27 Cal.3d 277.  Failure to pay the tax on time will result in a 10% penalty, additional late fees and a tax lien.

One last point bears mentioning.  Many owners wonder whether they are liable for property tax if they sell the vessel during the year.  They are unless other arrangements are made with the buyer.  The owner of personal property as of January 1st is responsible for the unsecured tax bill.  Sale of the property after the January 1st lien date will not affect the tax bill and taxes will not be prorated due to the sale of the vessel after the lien date.  Therefore any vessel sale agreement should include, among other things, a provision providing for the proration of property tax between the seller and buyer.  It would be unsettling, to say the least, for a former owner to receive a tax bill mid-year and to realize he alone is responsible for the taxes for the coming fiscal year.

Taxes are a fact of life.  But as Judge Learned Hand stated, “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury.  There is not even a patriotic duty to increase one’s taxes.”  Gregory v. Helvering 69 F.2d 809, 810 (2d Cir. 1934).  Attention to these key elements regarding situs can help a vessel owner keep his or her taxes as low as possible.

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with IRS requirements, we inform you that any tax advice contained in this communication was not intended or rendered, and cannot be used to: (i) avoid penalties under the Internal Revenue Code; and/or (ii) promote, market or recommend to anyone else anything the communication addresses.

This article is distributed with the understanding that Wright & L’Estrange is not providing legal, or other professional advice. Facts and circumstances differ among taxpayers and you should contact our firm to discuss the specifics of your situation and how they may apply to information presented here.[/vc_column_text][/vc_column][/vc_row]

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