" … possession
within the State of a vessel purchased outside the
State to be used principally in the State."
 A
plot on television’s “Boston Legal” could
not have come up with a stranger twist in an otherwise routine tax
case. A decision in March 2005 by the Maryland Court of Appeals that
struck down a $14,304 tax bill for a boat owner who had purchased
his boat in California and used it there for 10 years
before moving it to Maryland may be of interest to boaters
in other states.
Since this case was decided on one small issue of grammar,
boaters elsewhere may want to scrutinize the excise
tax laws in their state to see if any similar leeway
or mistakes exist in the language of the law that could
be challenged.
The Maryland case involves the
state’s “use” tax
which is levied on boats brought into the state when
no tax has been paid to another state. The majority
of states have either a sales tax, excise tax or personal
property tax on boats, but there is little consistency
among them.
The court’s decision generated shock waves because
three previous appeals had steadfastly upheld the state’s
5% tax on a vessel used in Maryland for more than the
90-day grace period. But in a final appeal, the Court
of Appeals zoomed in on the actual grammar, deciding
that a boat owner needed to buy a boat with an intent
to use it in Maryland in order to be subject to Maryland’s
use tax. The boat’s owner, Charles Kushell IV,
had not done this and did not owe the $14,304, the court
ruled.
The Fix Is In
An emergency bill to fix the use tax law was expected
to move through the Maryland General Assembly rapidly.
The session only lasts until April but the bill, drafted
by the Dept. of Natural Resources, is almost assured
of passage. It would make it clear that vessels subject
to the 5% excise tax are those purchased in Maryland
or brought into Maryland and used there more than six
months a year. Like most states, Maryland gives credit
for a sales tax already paid to a previous state on
the same boat and the boat owner owes the difference
in tax rates, if there is one.
However, following the Kushell bombshell, thousands
of boat owners who also paid taxes were expected to
petition for refunds. It is estimated some $25 million
a year is collected in excise taxes in Maryland, half
of it from out-of-state boaters. Surprisingly, only
27 boat owners have contacted DNR and most have received
written notices that their claims are denied.
“Our denial letters are based on the fact that
the case cannot be applied retroactively,” said
Sharon Carrick, director of licensing and registration
for Maryland DNR. “Enforcement actions, and the
individual's defense of those actions, must be based
on the law and regulations in place at the time.”
DNR’s position is that taxes paid prior to March
2005 as well as cases in which the boat owner never
appealed an excise tax — a process that takes
them on an odyssey of four levels of appeal — cannot
now come in and request a refund based on the Kushell
case. But even this interpretation by DNR will now be
reviewed. So far, DNR has given only one refund — to
a military family that never should have paid the tax.
“Everyone else is in limbo,” said Dirk
Schwenk, the attorney who argued and won the Kushell
case. “We’re awaiting a response from DNR
on about a dozen cases.”
Four refund requests are awaiting review while some
18 have received the denial letters, Carrick said. Eight
of those have appealed and hearings are scheduled.
A Permit to Stay Longer?
In the meantime, excise tax enforcement has long plagued
marinas and boatyards who depend heavily on transient
boaters for slip fees and repair work but are often
treated as though they’re harboring fugitives.
In Maryland, as well as other states, it is common
practice for authorities to subpoena marina records
in their search for uncollected excise taxes. According
to the Marine Trades Association of Maryland, out-of-state
boaters generate $154 million in business. Aggressive
excise tax enforcement has led at least one large cruising
group to scratch Maryland off its list of destinations
for summer rendezvous due to its members being pursued
for excise taxes.
One possible solution for any
state could be creation of a state cruising permit
for boaters wishing to stay longer than the legal
grace period (usually 60 or 90 days) but who are not
moving permanently and do not want to re-register
their boats in a new state. A reasonable fee for such
a permit would generate additional income for the
state and, in Maryland’s case at least,
that money would go into the state’s Waterways
Improvement Fund so boaters would reap benefit from
the fees.
BoatUS is interested in what members
think of a state cruising permit concept and whether
it would help avoid the many state tax hassles that
so often ruin an otherwise great cruise to another state.
Please send your comments and ideas to GovtAffairs@BoatUS.com.
By Elaine Dickinson
©BoatUS Magazine, March
2006
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