Sink This Tax Loophole
California has heard a lot of anti-tax rhetoric since the passage of Proposition 13 in 1978, but the tirade reached an absurd level in Sacramento last week as tax foes tried to defend the yacht tax loophole that deprives the state of an estimated $55 million each year. It would be bad for the yachting business, they said, to require owners of expensive new boats to pay the sales tax on them. The rich would just buy their boats elsewhere, suggested Senate Republican leader Dick Ackerman of Irvine, who owns a 42-foot sailboat. Alas for Ackerman, he said his boat wasn’t expensive enough to park in Mexico for 90 days to avoid the tax.
The loophole developed decades ago when the state allowed auto buyers to escape paying the sales and use tax if their cars were bought out of state and operated there for at least 90 days. The idea was to avoid dinging buyers twice if, for example, they bought a car in New York state and then moved to California. But the loophole also applied to other forms of transportation, such as boats.
What has happened is that wealthy Californians take possession of their high-end yachts -- most go to the trouble only if they’re buying boats costing upward of $400,000 -- at least three miles off the coast. That’s beyond the state’s jurisdiction, so no sales tax is charged. The proud new owner takes the boat somewhere else -- Ensenada, Mexico, is particularly popular -- for 90 days and escapes the tax when he or she brings it back to the state. Buyers of airplanes and very expensive recreational vehicles also use the loophole, for a total estimated at 1,900 vehicles each year.
Democrats are supporting AB 2107 by Assemblyman Lloyd Levine (D-Van Nuys) to extend the waiting period from 90 days to one year. Buyers of boats costing more than $1 million might still find it advantageous to harbor them in Ensenada, but most probably would cough up the tax.
Levine and others tried to close the loophole as part of the budget discussions, arguing that it was unfair to give the wealthy this tax break when the little guy buying a 16-foot fishing boat pays.
Ackerman responded: “You have to look at the big picture when it comes to fairness. How many jobs are created when someone buys a half-million-dollar boat? I would argue a lot.” The more relevant question is, how many of those jobs might be lost if millionaires had to pay the sales tax? Probably not many, if any.
Though $55 million represents pretty small change in the face of California’s $103-billion budget, the loophole should be closed simply out of fairness. Such breaks benefit only the super-wealthy at the expense of the vast majority of Californians.
