Most yacht purchases are subject to sea trial and survey, and if the buyer discovers a problem during that inspection process, the parties often re-open negotiations. These negotiations may lead to a number of different outcomes, depending on the nature of the problem, the size of the transaction, the motivation of the respective parties and a host of other variables.
First, it’s important to note that the seller has no obligation to work with the buyer to solve the problem. Almost all transactions involving the sale of a yacht are done on an “as-is, where-is” basis. This means that the buyer has no right to demand that the seller fix a problem.
On the other hand, the buyer’s offer is generally contingent upon a sea trial and a survey that are satisfactory to the buyer, which means that he or she generally cannot be forced to buy an unsatisfactory boat. So, one of the outcomes of post-survey negotiations may be that the parties simply walk away from the deal. Assuming that the decision to walk away was made in a timely manner, the buyer’s deposit is usually refunded under this scenario.
Unless the problems are insurmountable, the transaction is often concluded with some sort of compromise between the parties, rather than allowing the deal to die. The seller may agree to fix some or all of the problems or, more typically, to reduce the purchase price or give the buyer some sort of credit or allowance to fix the repairs.
The question of whether to reduce the purchase price or give the buyer a credit would not seem to make much of a difference either way, since it has no effect on the total funds due from the buyer. But the actual amount of the purchase price may have an impact on a number of other calculations.
One significant calculation is the sale commission owed to the broker by the seller. The commission is based on the purchase price, and a negotiated reduction in the purchase price may, depending upon the language of the broker’s listing agreement, result in a reduction in the commission. Another significant calculation based upon the purchase price is the assessment of sales or use tax owed by the buyer — which brings us to our reader’s question.
The state of California will assess sales tax (for new boat purchases) or use tax (for used boats) on the purchase of any boat that is either purchased in California or purchased for use in California. Our reader has determined that he will owe the tax, which means that he will pay use tax calculated as a percentage of his purchase price. The percentage varies in California from county to county, ranging from 7.25 to 8.75 percent, depending on where the purchase took place.
Our reader’s purchase called for him to pay a particular purchase price, which was offset by a “repair allowance.” He is concerned that the “purchase price” on the contract overstates the amount that he paid for the boat and, as such, his use tax obligation will be overstated. This is a legitimate concern, and the answer will depend on the exact treatment of the repair allowance.
If, for example, he paid the full purchase price and the repair allowance was paid to a shipyard or mechanic to fix the boat, the purchase price will probably be deemed to be accurately stated on the contract. However, if the purchase price was directly offset by the repair allowance to reduce the actual amount paid by the buyer, the tax assessment will probably take the credit into account and, therefore, will be based upon the purchase price after subtracting the repair allowance.
This is not an exact science, and the answer to this question will vary depending upon the specifics of the transaction, and even on which particular tax analyst reviews the transaction for the California Board of Equalization. But sales and use tax are essentially taxes based on value — and the repair allowance, if credited directly against the purchase price, reflects a reduction in a vessel’s value.
Individual buyers should contact an experience tax or maritime attorney for more detailed information.