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Court Case Clouds Use Tax
BoatUS Magazine - March 2006
image" … possession within the State of a vessel purchased outside the State to be used principally in the State." - language in the Maryland State Boat Act successfully challenged in court.

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

By Elaine Dickinson

©BoatUS Magazine, March 2006