The Tax Appeals Tribunal has affirmed an Administrative Law Judge determination holding that a yacht hired out for charter trips between New York State and Canada was subject to New York State compensating use tax based on the market value of the yacht when it was first used in New York State. Matter of Stan Groman, DTA No. 824274 (N.Y.S. Tax App. Trib., Dec. 4, 2014). The Tribunal also upheld the ALJ’s denial of the taxpayer’s motion to reopen the record, and the imposition of penalties.
In February 2004, while a resident of California, Mr. Groman purchased a yacht in Florida. Mr. Groman did not pay Florida sales tax on the purchase of the yacht because it qualified for exemption from the tax. Shortly after purchasing the yacht, Mr. Groman moved to New York State, where he planned to operate a small charter business with the yacht out of Alexandria Bay, New York.
The yacht was not brought into New York State until May 1, 2005, after undergoing extensive repairs in New Jersey. Soon after the yacht entered New York waters, it had an accident that necessitated another 16 months of repairs, this time in Brewerton, New York. Eventually, the yacht arrived in Alexandria Bay in June 2006, and Mr. Groman began advertising and operating it as a charter boat offering personalized charters either within New York or between New York and Canada. Mr. Groman did not register the vessel with the New York State Department of Motor Vehicles, and he did not pay New York State use tax on the vessel.
In general, New York law imposes use tax on New York residents on the use within New York of tangible personal property purchased at retail, except to the extent sales tax has been or will be imposed. Tax Law § 1110(a). In cases in which the taxpayer can show that the property was used outside the State for more than six months prior to entry into the State, the use tax is imposed on the basis of the market value of the item at the time of its first use in the State, rather than its original sales price. Tax Law § 1111(b).
Mr. Groman claimed the yacht was exempt from use tax as a “[c]ommercial vessel[ ] primarily engaged in interstate or foreign commerce. . . .” Tax Law § 1115(a)(8). The New York State sales tax regulations specify that a commercial vessel is primarily engaged in interstate or foreign commerce “when 50 percent or more of the receipts from the vessel’s activities” are so derived, and that interstate or foreign commerce is “the transportation of persons or property between states or countries.” 20 NYCRR 528.9(a)(5).
At the hearing before the ALJ, Mr. Groman produced only three pages of the yacht’s daily cruising log, and an affidavit of only one of several captains hired by Mr. Groman stating that some of the charters included locations in Canada. The ALJ held that use tax was due when the vessel first entered New York State waters, and that Mr. Groman did not prove entitlement to the exemption for commercial vessels primarily engaged in interstate or foreign commerce. The Tribunal affirmed, holding that the cruising log and affidavit, without more, were insufficient to meet the taxpayer’s burden of proving that the yacht qualified for the exemption. The Tribunal also found that the ALJ properly denied Mr. Groman’s motion to reopen the record after the hearing concluded so that he could submit additional evidence, both because the motion was not timely filed and because he presented no facts that would constitute a basis for reopening the record.
The Tribunal also affirmed the ALJ’s determination that use tax was due on the market value of the yacht on the date it first entered New York State, since it was used for more than six months prior to such first use in the State, and the ALJ’s determination that Mr. Groman failed to demonstrate reasonable cause or an absence of willful neglect that justified a waiver of penalties.
This case illustrates a common pitfall when sales tax is not paid on the purchase of a vessel or an aircraft (which is subject to similar tax rules). While certain states either do not impose sales tax or provide sales tax exemptions for purchases of vessels and aircraft that are removed from the state within a certain period of time, the state where the vessel or aircraft is removed to will usually impose a compensating use tax.
In this case, the Tribunal’s analysis upholding the imposition of penalties is also interesting. Specifically, regarding Mr. Groman’s claim that the yacht was primarily engaged in interstate commerce, the Tribunal held that his failure to maintain and present records to support this claim was not consistent with reasonable cause or absence of willful neglect. The Tribunal’s holding drives home the importance of maintaining complete records. The decision suggests that the failure to do so may not only defeat the exemption claim, but may also deprive a taxpayer of the ability to have penalties waived, even where the taxpayer had reasonable cause at the time of the tax filing to claim an exemption from tax.