Taxing Questions About Personal Property Tax

I have a question regarding the assessment of property tax on a boat. I understand the tax bill is created Jan. 1 of each year, but the tax payment is not due until later in the year. If the boat is sold between Jan. 1 and the due date for the tax bill, and the seller fails to pay the tax, will the county place a lien on the vessel against the new owner?

Personal property tax will be assessed on a boat annually if the “situs” of the boat is in a California county on Jan. 1 of any particular year. “Situs” is basically the location where the boat is usually moored or stored. Our reader is correct in that the tax is assessed by the county against the person who owned the boat on Jan. 1, and the obligation is delinquent if it is not paid before Aug. 31.

The parties to a yacht sale transaction often agree to pro-rate the tax obligation based upon the purchase date of the boat. This is a negotiable provision, but the parties will usually agree that the allocation of property tax for the year of purchase is fair and reasonable, if the buyer and seller are residents of the same county. However, even if the tax is pro-rated, the legal obligation to the county remains with the seller. The question presented by our reader considers whether that obligation may be asserted as a lien against the boat.

The U.S. Supreme Court has ruled that unpaid taxes do not give rise to a maritime lien, regardless of the nature of the tax and regardless of whether or not the taxpayer still owns the boat. Period.

Maritime liens are complicated security devices, but it is generally accurate to say that they arise from obligations that keep a vessel operating and in service. Taxes are obligations of the individual taxpayer that have no relationship whatsoever to the operation of the vessel.

Unfortunately, that has not stopped tax agencies from recording a claim against the title. The problem is that the recording of a “Notice of Claim of Lien” does not actually mean the same thing as recording a “Lien.” As we have discussed often in prior installments of this column (for example, “A Lesson on Liens,” The Log, Aug. 24, 2006), “liens” are not recorded with the Coast Guard. The recorded instrument is actually a “Notice of Claim of Lien,” and it is simply a notice to the rest of the world that somebody out there claims to have a lien. The filing of the notice actually has NO legal effect, and as such, the Coast Guard will accept anything for filing, without questioning the validity. This is substantially different from real estate liens, which, in fact, do trigger certain legal consequences when a claim is filed against a property.

In view of the realities of the lien recording system, it is one thing for me to say that a tax obligation does not give rise to a maritime lien, but it is quite another to say that a government tax agency cannot record his claim against a title. As noted previously, the recording will have no legal effect but it will clearly interfere with a future effort to try to sell the boat.

In our experience, the recording of the claim is not so much a problem with county property tax, but the State Board of Equalization takes a different position. They are not at all reluctant to record a claim for unpaid sales and use tax, and the boat owner will face an expensive legal battle to clear the title. The Board of Equalization will not, however, record a claim against a vessel after it is sold by the taxpayer to a new owner.

The purchaser described in our reader’s question may therefore be confident that he will not be burdened by a prior tax obligation, if he or his broker perform a careful review of the Coast Guard Abstract of Title. If he has further concerns, he should, of course, contact a maritime attorney experienced in title issues.