Will Purchasing an LLC Avoid Sales Tax on a Yacht?

I am considering the purchase of a fairly expensive yacht that happens to be owned by a Delaware LLC. My yacht broker has advised that I can avoid paying sales tax on the purchase if I buy the LLC itself rather than the yacht. He also indicated that this could be done without spending the time outside of California that would otherwise be required to avoid sales tax. Is this true? If so, what are the issues that I should look out for when purchasing an LLC?

Like many other people in the market for a boat, our reader is concerned about the assessment of sales tax or use tax on the purchase (sales tax is assessed on the purchase of a new boat and use tax is assessed on a used boat). The exact assessment varies from county to county in California, but the rate is now generally close to 10 percent.

Most of our readers are familiar with the political struggle that has surrounded the “boat tax” issue over the past few years. For the most part, the days of the “90-day yacht club” in Ensenada are over, and unless a buyer genuinely plans to use the boat outside California for a long time, he or she will probably need to pay the tax. However, a boat that is owned by a corporation or LLC may provide an avenue for relief.

Sales of consumer goods and most other forms of tangible personal property are subject to the assessment of sales or use tax in almost every state in the nation. However, intangible property, such as stocks and bonds, may under most circumstances be transferred without the assessment of a tax on the transaction. This is perfectly reasonable, since the assessment of a 10 percent tax on the transfer of corporate securities would bring the stock market to a grinding halt.

Where a yacht is owned by a corporation or LLC, the stock of the company may be transferred without affecting the ownership of the boat itself. The stock transfer amounts to a transfer of intangible personal property, even where the sole asset of the company is the yacht, and as such the transaction will usually be exempt from sales and use tax without the need to spend any time with the boat outside the state.

Notwithstanding the apparent simplicity of this approach for tax purposes, a stock purchase will raise all sorts of other concerns. Most important, the purchase of a company will include the acquisition of all of that company’s liabilities, even where those obligations are completely unrelated to the boat, and even where the buyer has no notice of the liabilities.

Perhaps the most important risk of unrecorded or undisclosed corporate liabilities will relate to the company’s acquisition of the boat. Under most circumstances, a yacht may not be acquired by a corporation or LLC without a corresponding payment of sales or use tax by the company. In other words, just like the rest of us, a company must either pay the tax or qualify for an “offshore delivery” or other exemption.  In these circumstances, the company itself is the taxpayer.

Other tax liabilities may be equally problematic. Corporations and LLCs are required annually to file various forms and pay fees to the state in which they are registered. Failure to do so may subject the new owner to a charge for penalties in addition to unpaid fees. Similarly, if the company has a bank account in its name the IRS may look at whether any interest income was earned on the account.

A buyer of a boat through a corporate acquisition must also consider the language of the purchase contract. Yacht brokers are experienced with the contracts used for the sale of a yacht, and the forms sponsored by the California Yacht Brokers Association are in fact very well drafted. But as noted above, the yacht itself is not being sold when the stock of a company is transferred. The parties must therefore use a contract drafted specifically for the transfer of corporate stock.

A boat that is owned by a corporation or LLC may provide a strategy for avoiding sales or use tax on a boat purchase, but the “baggage” associated with a corporate purchase may lead to more headaches for the buyer after the purchase. This type of transaction requires competent legal advice, and with all due respect to my friends in the brokerage industry, a yacht broker is neither licensed not qualified to guide the parties through the purchase and sale of a business entity. Contact an attorney who is experienced in this type of transaction.