NYS Tax Dept. Finds Itself at Sea with Sales Tax

By:
RICHARD J. KORETO
Published Date:
Feb 11, 2014

When you buy certain items or services, sales and use taxes are due—that's pretty straightforward. But what if you buy something that moves, not just when you purchase it, but continually throughout its existence. That was the question before the Office of Counsel in Advisory Opinion TSB-A-14(5)S. The petitioner is a New York company purchasing a commercial ship, and it wanted to know if the ship's time spent in New York waters determined whether its purchase was subject to sales tax. The ruling isn't wide ranging—this isn't a common purchase—but the opinion provides a valuable lesson in working with the department and navigating the rules.

The ship under consideration is certified to carry 149 passengers for hire. The petitioner plans to operate it between the East Coast of the United States and the Caribbean. Each spring, the ship would arrive in New York City, and may depart the state one or more times each summer while serving as a chartered vessel. Each fall the vessel would sail to the Caribbean, also for charter service, during the winter. The vessel would be in New York waters less than half the year. The petitioner may put "New York, NY" on the vessel's stern—this "hailing port" label is an old seafaring tradition as well as a U.S. Coast Guard requirement.

Deputy Counsel Deborah R. Liebman first addressed the residency issue, noting that in general, a purchaser in such a situation would be liable for sales or use tax, based on residency status:  the petitioner has a place of business in New York and would be using the product—the ship—in New York. (The advisory opinion did not note if the petitioner was purchasing the boat within New York or outside the state.) Said Liebman: "Petitioner's charter business within the state would be an additional basis of residency for tax purposes."

The Department Gets Specific on Product and "Intent"

But all that is "in general." The state actually has specific rules for ships—perhaps a legacy of New York City's long history as a seaport. According to state tax laws 1115(a)(8) and 1118(3),  commercial vessels primarily engaged in interstate or foreign commerce are exempt from sales and use taxes, Liebman pointed out. Various rules laws and rules define how such commerce is calculated. Basically, at least half of the receipts from the vessel's activities have to be derived from interstate or foreign commerce. Liebman stressed that receipts are what counted, not the amount of time spent in each place.

As the ship has not yet been purchased, Liebman said the subtle issue of "intent" also comes into play. If the petitioner intends at the time of purchase to meet that 50 percent threshold, it may purchase the vessel exempt from sales and use taxes. So the Office of Counsel is tentatively saying that no sales or use taxes are due, if it's a correct assumption the 50 percent threshold is met.

However, if that's not the case, the taxation issues becomes complex, largely because the petitioner apparently did not provide the Office of Counsel with full details. In two paragraphs, Liebman used the word "if" six times to consider all the possibilities. For example, if sales tax is applicable (because the 50 percent threshold is not met), the ship's primary pier in New York would be considered its jurisdiction for tax purposes. Brief trips elsewhere in the state would not generate a taxable event within those other jurisdictions, as clarified in case law.

However, if the petitioner can show that it used the vessel outside New York for more than six months before its first use within New York, the state will calculate the use tax based on the market value of the vessel at the time of its first use within New York.

One thing that does not make a difference is the use of "New York, NY" as the hailing port on the ship's stern. Although it may provide "some evidence of the vessel's location," it is not determinative for tax purposes, according to the opinion. (Not cited by Liebman, but of historic interest, was that the Clermont, the world's first practical steamboat, was marked as "New York" as it chugged between New York City and Albany.)

It would seem unnecessary to note that this opinion applies only to these circumstances—purchases of large ships are not that common anyway. But the lessons are wide-ranging. It may seem careless that the petitioner failed to provide necessary details for a definitive answer, especially as the sums were likely very large—149-passenger vessels are expensive. Petitioners get the best guidance when they present the Office of Counsel with full details.

Another lesson is that it pays to read the details: tax laws and rules are full of special exemptions, such as one for ships, under the right circumstances. A few hours of research can pay off handsomely, especially when large amounts are involved.

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