MoFo New York Tax Insights, Volume 6, Issue 11, November 2015

Resident Is Not Subject to Use Tax on Yacht Briefly Docked in the State

By Michael J. Hilkin

In Matter of Michael Pellino, DTA No. 825869 (N.Y.S. Div. of Tax App., Oct. 1, 2015), a New York State Administrative Law Judge concluded that two short stopovers at a New York marina did not constitute a "use" sufficient to subject a New York resident to compensating use tax on a yacht that he purchased and otherwise moored and stored outside of the New York State.

Facts. In 2005 Mr. Pellino, a New York resident, purchased and took delivery of a yacht in Virginia, and paid Virginia sales tax on the purchase. Thereafter, Mr. Pellino transported his yacht to Connecticut to be moored during the summer and stored during the winter, and in January 2008 paid Connecticut use tax in connection with such use. Mr. Pellino permanently moored and stored his yacht in Connecticut, except for a single period during 2008 and 2009, when it was moored in North Carolina so that service work could be performed.

In connection with transporting his yacht to and from North Carolina for the service work, Mr. Pellino made two "temporary stopover[s]" at a marina in Port Jefferson, New York. In 2008, Mr. Pellino stopped in Port Jefferson to pick up a crew member who was joining him on his trip to North Carolina. Mr. Pellino had dinner and stayed overnight with the crew member in Port Jefferson "as a courtesy" to the crew member, and then continued on the trip. On his return trip in 2009, Mr. Pellino made another temporary stopover in Port Jefferson for three nights. During his return trip, Mr. Pellino also made stops in Virginia and New Jersey. These two stopovers in Port Jefferson were the only times Mr. Pellino docked his yacht in New York during the decade that he owned the yacht.

After becoming aware of Mr. Pellino's two stopovers in Port Jefferson during a state-wide review of marinas and yacht clubs, the Department assessed Mr. Pellino compensating use tax.

The Law. New York imposes a compensating use tax on taxable property or services not subject to State and local sales tax. Tax Law § 1110. The Tax Law defines a "use" as "[t]he exercise of any right or power over tangible personal property . . . by the purchaser thereof, and includes, but is not limited to, the receiving, storage or any keeping or retention for any length of time . . . ." Tax Law § 1101(b)(7).

The Decision. Concluding that the "temporary physical presence" of Mr. Pellino's yacht "in New York while en route to another state . . . was not sufficient to trigger the compensating use tax," the ALJ canceled the Department's assessment.

The ALJ stated that the Department "essentially argues that the mere fact that [a] vessel was physically present in New York at all" is sufficient to demonstrate a taxable use subject to compensating use tax. The ALJ, however, found that while the statutory definition of the term "use" in the Tax Law was broad, the term is not "all encompassing," and that a use in New York "may be so de minimis that the [compensating use] tax is not triggered."

In concluding that the definition of "use" did not reach Mr. Pellino's two stops in Port Jefferson made over two calendar years, the ALJ cited two decisions by the former New York State Tax Commission holding that temporarily mooring a vessel in New York while en route to a location outside of the State, or bringing a vessel into New York for emergency repairs, did not constitute uses subject to compensating use tax. See Matter of Sunshine Developers, TSB-H-86(84) S (N.Y.S. Tax Comm'n, Dec. 13, 1985), confirmed, Sunshine Developers v. Tax Comm'n, 132 A.D.2d 752 (N.Y. App. Div. 1987); Matter of Jamco Investments, TSB-H-86(19)S (N.Y.S. Tax Comm'n, Jan. 17, 1986).

The ALJ further determined that Department regulations interpreting the term "use" for purposes of the compensating use tax require "something more than a mere stopover during the passage of a vessel through New York on a transient basis." In Mr. Pellino's case, the ALJ found that he neither intended to nor actually "kept," "stored," or "retained" his yacht in New York as such terms may be reasonably understood and applied in the context of Mr. Pellino's yacht's "ephemeral period of presence in New York." See 20 NYCRR § 526.9(a) (defining "use" to include "the receiving, storage or any keeping or retention for any length of time" of tangible personal property).

Additional Insights

New York State generally does not provide an exception from compensating use tax for property purchased by a New York resident and first used outside of the State. Tax Law § 1111. The lack of such an exception, along with the Tax Law's broad definition of "use," means that New York residents risk being subject to compensating use tax on taxable property purchased for use out of State when the Department can establish that such property was present at some point in the State. In this case, the Department discovered that Mr. Pellino docked his yacht in New York after it conducted a statewide review of marinas and yacht clubs in 2010, demonstrating how aggressive the Department has been in identifying potential use tax liabilities on high-value items such as yachts.

With respect to vessels such as yachts, however, a recent change in the Tax Law provides a more relaxed standard for determining when use tax is due. Effective June 1, 2015, a vessel purchased by a New York resident outside of the State may not be subject to use tax until the earliest of the following dates: (1) the date that the vessel is required to be registered with the New York State Department of Motor Vehicles ("DMV"); (2) the date that the vessel is actually registered with the DMV; or (3) the date when the purchaser of the vessel uses the vessel in New York for more than 90 consecutive days. L. 2015, ch. 59, part SS (amending Tax Law § 1118).

According to the ALJ in this case, the Department essentially argued that any presence of taxable property in New York is sufficient to subject such property to use tax — a position that the ALJ ultimately found to be unjustified. Thus, New York residents subject to a future use tax audit related to property that was present in New York for so short a time that it could be classified as "de minimis" may consider whether the principles underlying this non-precedential decision can be used to defend against such an assessment.

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