California Use Tax Exemptions

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Generally, a purchase of a vehicle, yacht or aircraft, whether purchased in California, or brought into California for use in California, is subject to a use tax of 7.75% in San Diego, or up to 10.25% in some cities in Los Angeles County.

When registering a vehicle or vessel with the California Department of Motor Vehicles (“DMV”), the DMV collects the use tax during the registration process.  Thus, if you have a qualifying exemption and intend to register your vehicle or vessel with the DMV you should obtain a use tax clearance certificate from the California Department of Tax and Fee Administration (“CDTFA”) prior to registering the vessel or vehicle.

There are two types of certificates, the CDTFA-111, Certificate of Vehicle, Mobile home or Commercial Coach Use Tax Clearance and the CDTFA-111-B, Certificate of Vessel Use Tax Clearance. A use tax clearance certificate is a document issued by the CDTFA stating that you qualify for a specific exemption and that you may register your vehicle or vessel with the DMV without payment of use tax.

If you are documenting your vessel with the USCG or registering your aircraft with the FAA, absent a use tax exemption, your tax payment is due on or before the last day of the month following the month you were mailed a return by the CDTFA, or the twelfth month following the month in which you purchased the vessel, if you did not receive a return from the CDTFA, whichever period expires first.

If you are not registering with the DMV, you need not, but may, request a Certificate of Use Tax Exemption from the CDTFA.  Regardless, you should carefully document your purchase to ensure you can show your purchase was exempt should you ever be challenged by the CDTFA.

To find the specific tax rate for your area or business location, go to Find a Sales and Use Tax Rate by Address.

There are several exemptions to California’s use tax, the most common of which are described below. There are complex rules to be aware of when seeking these exemptions, so you should always speak to someone well versed in the tax rules to ensure you qualify.

Forming an LLC or Corporation and Placing your Yacht or Airplane into the Entity – Exempt Unless Assuming Liabilities.

When starting up a corporation, limited liability company, or partnership and you are placing a vehicle or vessel  into the company as an asset solely in exchange for the first issue of stock in the corporation or for an ownership interest in the limited liability company or partnership, the transfer is nontaxable. However, if the corporation, limited liability company, or partnership assumed a liability or paid any other consideration, it must pay use tax based on the liability assumed and any other consideration given or paid to acquire the vehicle or vessel. A lienholder on the title generally indicates an assumption of liabilities.

Transferring a Yacht or Airplane Into An Existing LLC or Corporation – Exempt  if No Consideration

The transfer of a vehicle, aircraft or vessel to an existing corporation is not subject to use tax if the property is transferred to the corporation without payment of consideration.

Examples of consideration include cash, credits, shares in the corporation, promissory notes, the fair market value of any trade (including “even” trades), the cancellation of a debt, or the assumption of a loan.

If the corporation gives consideration for the vehicle or vessel, the transfer is subject to use tax based on the value of the consideration given.

Transferring Your Yacht or Airplane into A Revocable Trust – Exempt.

The transfer of a vehicle or vessel into a revocable trust is not subject to tax if all of the following conditions are met:

  • The trustees of the living trust have the unrestricted power to revoke the trust;
  • The transfer does not result in any change in the beneficial ownership of the property (the people who actually use or benefit from the use of the vehicle or vessel);
  • The trust provides that upon revocation of the trust, the vehicle or vessel will revert wholly to the transferor; and
  • The only consideration for the transfer is the assumption by the trust of an existing loan for which the tangible personal property being transferred is the sole collateral.

Family Transfers – Exempt.

The Sales and Use Tax Law provides an exemption from the use tax when the person selling a vehicle, vessel, or aircraft is related to the purchaser as either:

  • Parent
  • Grandparent
  • Grandchild
  • Child
  • Spouse
  • Brother or sister, if both are under the age of 18 and related by blood or adoption.

Immediate Removal From California After Purchase – Exempt.

A purchaser is not required to pay California use tax if the only use of the vehicle, vessel or aircraft in California is to promptly remove it from the state and it will be used solely thereafter outside of California.  No other use can be made of the property in California.  Delays for emergency repairs made to the vessel or vehicle must be verified as functionally necessary for the vehicle or vessel to continue its departure from the state.

California Resident Taking Delivery Offshore and Keeping Vessel Out of California for at Least 12 Months – Exempt.

A presumption is made that if a vehicle, vessel, or aircraft is purchased outside of California, first functionally used outside of California, and brought into California more than 12 months after purchase, the vehicle, vessel, or aircraft was not purchased for use in California and use tax does not apply.

A limited exception exists to the 12-month requirement is that the vessel or aircraft may be brought into California during the first 12 months of ownership for the exclusive purpose of the repair, retrofit, or modification (“RRM”) performed by any one of the following:

  • A county licensed repair facility;
  • A city licensed repair facility;
  • A city and county licensed repair facility; or
  • A repair facility located within a county that has no licensing requirement.

Therefore, a vessel that enters California during the first 12 months of ownership for the purpose of repair, retrofit, or modification performed by an unlicensed repair facility in a county with a licensing requirement will be presumed to have been purchased for use in California.

The CDTFA may request any documentation that demonstrates out-of-state delivery and use of the vehicle outside of California during the applicable test period. Such documentation may include, but is not limited to:

  • Mooring receipts;
  • Service/fuel receipts;
  • Credit card receipts/bank statements;
  • Miscellaneous receipts (incidentals, meals, or toll receipts);
  • A copy of the purchase agreement or contract;
  • Documents that show delivery outside of California and who contracted for that delivery (buyer or seller);
  • Documents to show the first functional use outside of California;
  • Insurance documents which indicate the location and time period of coverage of vessel and its navigational limits;
  • Receipts for lodging; and
  • Any other documents showing the location of your vessel during the appropriate test period after purchase.

Non-Resident of California Taking Delivery Offshore and Keeping Vessel Out of California for at Least 6 Months and 1 Day – Exempt.

A non-resident, taking delivery outside of California’s territorial; waters need only keep the vessel out of California for more than 6 months in a 12-month period.  The RRM limited exception also applies.

Purchase of an LLC or Corporation That Owns a Yacht or Airplane as Its Asset – Exempt.

When purchasing an LLC or corporation that owns a yacht or aircraft as its principal asset, the ownership of the LLC or corporation changes, but the LLC or corporation’s ownership of the yacht or aircraft does not change.

Under California’s “occasional sales” rules, the sale or purchase of a shareholder’s shares of stock of a corporation is not a sale of tangible personal property and is not subject to tax. The sale or purchase of a partner’s partnership interest in a general partnership or limited partnership or limited liability partnership, where the transfer of the interest does not cause or result in a dissolution of the partnership, is not a sale or purchase of tangible personal property and is not subject to tax. The sale or purchase of a member’s membership interest in a limited liability company, where the transfer of the membership interest does not cause or result in a dissolution of the limited liability company, is not a sale or purchase of tangible personal property and is not subject to tax.

Michael Wales is a Maritime Law Attorney in San Diego, California. Mike also owns AGL Yacht Sales, Inc., a San Diego Yacht Brokerage, with his wife Leilani Wales. For assistance with any maritime legal matter you may contact Mike at mwales@waleslaw.com or at 619.493.1700. For information on brokerage boats please visit www.aglyachts.com.