CA specific question - LLC boat purchase

[doradodiver]

I titled this CA specific because CA, as most know, has its own pile of laws that no one understands.

I put an offer in on a catamaran that is already in an LLC. Engine survey is next week, rigging and haul out to come. My understanding from by broker is this deal will get handed over to an attorney to complete the deal later on.

I live in CA, the boat is stored in CA, though by the city listed on the transom this LLC that I'm purchasing is in CO.

With a LLC that owns investments outside of CA, most CPAs will tell you to get a CA LLC so you can comply with local laws that govern outside earnings. Take rental properties for example.

Does anyone do this with boats? Have a CA LLC that owns the out of state LLC that owns the boat? Is it necessary if you are not going to be claiming any income each year?

As tempting as it may be, please do not use the answer "just leave California". I intend to, on this boat, but not yet!

[Montanan]

Recommend that you purchase just the boat with exchange of free and clear title. Do not purchase the Colorado organized LLC that owns the boat because there may be hidden liabilities associated with that LLC and the vessel will have the tax basis of whatever that LLC has for it.

Utilize the Bill of Sale document available from the USCG.

If you desire to have the added layer of protection associated with a Limited Liability Company to own the boat then go ahead and form one.

Does not matter much which State your LLC is organized, albeit one get's into the nuances of State specific law.

The LLC will require its own State and Federal tax reporting and issuances of Form K1 to the owners of the LLC so there is that added burden and it will require yearly payment of its business license to maintain its good standing [validity] with the State it is formed.

You will pay sales / use taxation upon your purchase of your California boat and also annual property tax to the county at which it is located.

If you are a US citizen or permanent resident then you could pursue documenting the vessel via the USCG. Alternatively, you could register the vessel with the State of California Department of Motor Vehicles.

[Montanan]

The named port on the transom of the boat is basically meaningless. A port is required to be displayed and registered as the vessel's port if it is documented by the USCG, but one can pick from thousands of places that are listed in a Federal list of places, even places that have no water or places that the vessel or the owner have no connection with.

And the displayed port has nothing to do with the State in which an LLC is organized.

[CrispyCringle]

Originally Posted by Montanan

Recommend that you purchase just the boat with exchange of free and clear title. Do not purchase the Colorado organized LLC that owns the boat because there may be hidden liabilities associated with that LLC and the vessel will have the tax basis of whatever that LLC has for it.

Utilize the Bill of Sale document available from the USCG.

If you desire to have the added layer of protection associated with a Limited Liability Company to own the boat then go ahead and form one.

Does not matter much which State your LLC is organized, albeit one get's into the nuances of State specific law.

The LLC will require its own State and Federal tax reporting and issuances of Form K1 to the owners of the LLC so there is that added burden and it will require yearly payment of its business license to maintain its good standing [validity] with the State it is formed.

You will pay sales / use taxation upon your purchase of your California boat and also annual property tax to the county at which it is located.

If you are a US citizen or permanent resident then you could pursue documenting the vessel via the USCG. Alternatively, you could register the vessel with the State of California Department of Motor Vehicles.

The above isnt entirely accurate, based on my own CA residency, boat purchase and LLC for the boat. I had a lawyer handle all of the LLC part of our purchase, and I am no expert, but....

The primary reason for doing the LLC is you escape sales tax, which in CA is substantial. You also only pay a small (I think its 1.2% where I live) annual county tax. There is about a $150 annual fee paid to keep the LLC current. They state sends a form every year wanting a state tax, but I reply thats its an LLC and they go away until the next year.

So annually, Im paying a 1.2% county tax and a LLC fee of around $150. Thats it after the purchase is complete. The purchase just requires the legal cost of setting up the LLC and handling the transaction.

I had a lawyer handle the sales transaction and create the LLC. But the LLC is registered in Oregon. The previous owner also had it in an LLC.

I see no downside to using an LLC, except for the added complication of sales transactions. But its a simple legal matter that any lawyer specializing in this sort of thing can do for less than $1000 (that was a couple of years ago, I think thats right). And you save a ton of money in tax.

[Montanan]

How will an LLC provide for exemption from Sale or Use taxation for a vessel located in California?

[Montanan]

Originally Posted by CrispyCringle

The above isnt entirely accurate, based on my own CA residency, boat purchase and LLC for the boat. I had a lawyer handle all of the LLC part of our purchase, and I am no expert, but....

The primary reason for doing the LLC is you escape sales tax, which in CA is substantial. You also only pay a small (I think its 1.2% where I live) annual county tax. There is about a $150 annual fee paid to keep the LLC current. They state sends a form every year wanting a state tax, but I reply thats its an LLC and they go away until the next year.

So annually, Im paying a 1.2% county tax and a LLC fee of around $150. Thats it after the purchase is complete. The purchase just requires the legal cost of setting up the LLC and handling the transaction.

I had a lawyer handle the sales transaction and create the LLC. But the LLC is registered in Oregon. The previous owner also had it in an LLC.

I see no downside to using an LLC, except for the added complication of sales transactions. But its a simple legal matter that any lawyer specializing in this sort of thing can do for less than $1000 (that was a couple of years ago, I think thats right). And you save a ton of money in tax.

FYI:

As to the minimum annual tax for an LLC by California:

If the income of the LLC for the fiscal year is:

Less than $250,000 (which would include any loss), the total CA tax owed is $800 (LLC Tax plus $0 for an LLC fee)



Sales & Use tax due on vessels owned by a LLC which interest in the LLC is sold:

https://www.cdtfa.ca.gov/lawguides/vol1/sutr/sales-and-use-tax-regulations-art7-all.html#1595

Sales And Use Tax Regulations
Title 18. Public Revenues
Division 2. California Department of Tax and Fee Administration — Business Taxes (State Board of Equalization — Business Taxes — See Chapters 6 and 9.9)
Chapter 4. Sales and Use Tax


Regulation 1595. Occasional Sales—Sale of a Business—Business Reorganization.
Reference: Sections 6006, 6006.5, 6014, 6015, 6019, 6066, 6075, 6281, 6282, 6283, 6292, 6358(b), and 6367, Revenue and Taxation Code.

(a) Activities Requiring Seller's Permit.

(7) Dissolution of Partnership. A partnership is a person for sales and use tax purposes. (Revenue and Taxation Code Section 6005.) However, a partnership is defined for general law purposes as an association of two or more persons to carry on as co-owners a business for profit. (Corporations Code Section 15006.) Dissolution of a partnership is caused by withdrawal of a partner or admission of a new partner, unless otherwise provided in an agreement in writing signed by all the partners, including any such withdrawing partner or any such newly admitted partner before such withdrawal or admission. (Corporations Code Section 15031(7).)

Under Corporations Code Section 15026, a partner's interest in the partnership is the partner's share of the profits and surplus, and is personal property. Under Corporations Code Section 15027(1), a conveyance by a partner of that partner's interest in the partnership does not in itself dissolve the partnership, nor, as against the other partners in the absence of agreement, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership transactions, or to inspect the partnership books; but it merely entitles the assignee to receive in accordance with the partnership contract the profits to which the assigning partner would otherwise be entitled. The assignment of a partnership interest in this technical sense is not a sale of tangible personal property and is not subject to tax.

In common usage, however, the term "partnership interest" refers to all of the rights of a partner including (1) the person's rights in specific partnership property, (2) the person's interest (in the technical sense) in the partnership, and (3) the person's right to participate in the management. In a typical commercial transaction when a partner "sells the person's interest in a partnership" to another, it is intended that the person "selling the interest" will withdraw from the partnership and the person "purchasing the interest" will be admitted to the partnership. The legal effect of this transaction is to dissolve the first partnership and to create a new partnership, in the absence of a provision in the agreement providing for continued life of the partnership. The effect for sales and use tax purposes is that there is a dissolution of the partnership, a distribution of the assets on a pro rata basis, and a sale by the withdrawing partner of the person's ownership interest in the tangible personal property distributed to that person. Except as provided in subdivision (c), this sale of tangible personal property will qualify as an occasional sale under Revenue and Taxation Code Section 6006.5 and will be nontaxable under Section 6367, unless the withdrawing partner holds a seller's permit or the sale of tangible personal property is one of a series of sales sufficient in number, scope, and character to require the holding of a seller's permit.

Subject to the lack of exemption for vessels discussed below in section (c).

A distribution of assets, including tangible personal property, by a partnership upon its dissolution to the partners in accordance with their ownership interests in the partnership is a liquidating dividend and is not a sale when no consideration is received by the partnership other than cancellation of the partners' interests. The partnership is the consumer of such property and no tax applies with respect to the transfer provided the partnership's use of the property in California would not otherwise be subject to tax. If consideration is given or received for the transfer, such as an assumption of liabilities by the partners, tax applies measured by that consideration.

Where a partnership distributes some of its assets in the form of a partial liquidation of the business, the transfer will be regarded as a liquidating dividend, subject to the rules set forth in the previous paragraph, if an entire segment of the business of the partnership is being liquidated. For example, a partnership operates a lumberyard and an automobile repair and parts business. If the partnership ceases operation of the lumberyard and distributes its assets to the partners in accordance with their interest in the partnership and the partnership receives no consideration from the partners such as an assumption of liabilities, the transfer is a liquidating dividend subject to the rules set forth in the previous paragraph. If, however, the partnership ceases operating the repair portion of the automobile repair and parts business and distributes the assets of that portion of the business, it is not liquidating an entire segment of its business and the transfer does not qualify as a nontaxable liquidating dividend.

. . .

(c) Vehicles, Mobilehomes, Commercial Coaches, Vessels, and Aircraft. There is no occasional sale exemption for the sale or use of vehicles required to be registered with the Department of Motor Vehicles, or off-highway vehicles subject to identification under Division 16.5 of the Vehicle Code, mobilehomes and commercial coaches required to be registered with the Department of Housing and Community Development, vessels, or aircraft, as defined by the law and in Regulation 1610 (18 CCR 1610) or in Regulation 1610.2 (18 CCR 1610.2), except when such property is included in a transfer of all or substantially all the property held or used in the course of business activities of the person selling the property and the real or ultimate ownership of the property is substantially similar to that which existed before such transfer. The rules set forth in subdivision (b)(2) of this regulation are applicable in determining under this paragraph whether a transfer is of substantially all the property and whether the ownership is substantially similar.

[CrispyCringle]

Originally Posted by Montanan

How will an LLC provide for exemption from Sale or Use taxation for a vessel located in California?

Because CA sees it as an encumbrance to tax an LLC's assets in a sales transaction. I bought from one LLC to another.

As for your other post and questions, I have no idea. Take it up with your tax lawyer.

[Montanan]

Originally Posted by CrispyCringle

Because CA sees it as an encumbrance to tax an LLC's assets in a sales transaction. I bought from one LLC to another.

As for your other post and questions, I have no idea. Take it up with your tax lawyer.

Specific reference to Regulation 1595. Occasional Sales—Sale of a Business—Business Reorganization.

Highlighted above.

[CrispyCringle]

Originally Posted by Montanan

Specific reference to Regulation 1595. Occasional Sales—Sale of a Business—Business Reorganization.

Highlighted above.

Do what you want. Im not going to go back and forth with you on this. There is a reason people use LLCs in CA.

[Montanan]

Further guidance:

Business entities are taxpayers like everyone else, and the LLC’s acquisition of an asset such as a boat will be subject to the assessment of sales or use tax unless it qualifies for an exemption.

Also note that the ownership of a boat by an LLC as the company’s sole asset is unlikely to provide any special protection against legal liability. A “corporate shield” against personal liability may exist for a corporation or LLC that operates a legitimate business, but here we are talking about a company with no business purpose whose sole asset is a recreational vessel. In the event of a lawsuit against the owner of the vessel, a plaintiff’s attorney may be able to “pierce the corporate veil” and pursue the shareholders personally, as if the business entity did not exist.

Another logistical issue concerns the broker’s involvement in the transaction. In California, a broker who represents parties in the purchase and sale of a company or business opportunity must be licensed by the Department of Real Estate whereas, a California Yacht and Ship Broker’s license is required for the sale of a yacht.

[Montanan]

In California, the sale of a vessel are never occasional sales and requires a seller's permit.



https://www.cdtfa.ca.gov/taxes-and-f...uals/am-10.pdf

State of California Audit Manual

Audit Manual
Chapter 10
OCCASIONAL SALES — SALE OF A
BUSINESS

SALE OF A BUSINESS 1004.00
WHEN SUBJECT TO THE TAX 1004.05
The following types of sales are subject to tax unless they meet one of the criteria described in Section 1004.10 or are otherwise exempt.
a) The tax applies to that portion of the gross receipts from the sale of an entire business which represents the selling price of tangible personal property held or used in an activity for which the seller is required to hold a seller’s permit and acquired by the purchaser for use rather than resale.


Transfer of Partnership Interest (Cont.) 1004.40

. . .

g) Vehicles, Vessels and Aircraft. Transfers of vehicles, vessels and aircraft are never occasional sales and transfers of these items may be subject to use tax even though the sale of other assets may be exempt occasional sales.
h) Tax applies to sales of an interest in an LLC and distributions of liquidating interests in an LLC in the same manner as it applies to sales of partnership interests and liquidating partnership distributions


There is an exception when the real ownership does not substantially change":
VEHICLES, MOBILEHOMES, COMMERCIAL COACHES,
VESSELS AND AIRCRAFT OCCASIONAL SALES 1001.40
Neither sales nor use tax applies to the sale or use of vehicles required to be registered with the Department of Motor Vehicles, nor to off‑highway vehicles subject to identification under Division 16.5 of the Vehicle Code, nor to mobilehomes and commercial coaches required to be registered with
the Department of Housing and Community Development, nor to vessels or aircraft, providing:
a) Such property is included in a transfer of all, or substantially all, the property held or used in the course of business activities of the person selling the property and the real or ultimate ownership of the property after the transfer is substantially similar to that which existed before such transfer; or
b) The sale or transfer qualifies for the family exemption provided by Section 6285. Claimants
of this exemption must submit satisfactory evidence of qualifying relationship to the Department of Motor Vehicles.



Reference:
https://www.cdtfa.ca.gov/lawguides/vol1/sutr/1595.html

(b) Sale or Reorganization of All or Part of a Business.

(1) General. In general, when a person sells a business which is required to hold a seller's permit, tax applies to the gross receipts from the retail sale of tangible personal property held or used by that business in the course of its activities requiring the holding of the seller's permit. The gross receipts from the sale of the business include all consideration received by the transferor, including cash, notes, and any other property as well as any indebtedness assumed by the transferee. It is irrelevant that the indebtedness assumed may have arisen solely in connection with the transferor's acquisition of the tangible personal property transferred, the other property transferred, or some combination thereof. That is, the transferor is selling a business, and all consideration received is for that business. The measure of tax is the price agreed to by the parties. In the absence of an agreement as to the price of the tangible personal property, the gross receipts from that sale is allocated among the taxable portion and the nontaxable portion by dividing the selling price of the tangible personal property acquired by the purchaser for use rather than resale by the selling price of the entire business sold, and then multiplying that amount by the total gross receipts (i.e., all consideration) received for the business. Book value will be regarded as establishing the price of properties sold. (See Regulation 1610 for special rules applicable to sales of vehicles, vessels, and aircraft.)


Reference for section 1610:
https://www.cdtfa.ca.gov/lawguides/vol1/sutr/1610.html

Sales And Use Tax Regulations
Title 18. Public Revenues
Division 2. California Department of Tax and Fee Administration — Business Taxes (State Board of Equalization — Business Taxes — See Chapters 6 and 9.9)
Chapter 4. Sales and Use Tax
Article 9. Special Provisions Affecting Vehicles, Vessels, and Aircraft
Regulation 1610

(a) Definitions. For purposes of this regulation the following definitions govern:

. . .

(2) "Vessel." "Vessel" means any boat, ship, barge, craft, or floating thing designed for navigation in the water, except:

(A) A seaplane.

(B) A watercraft specifically designed to operate on a permanently fixed course, the movement of which is restricted to or guided on such permanently fixed course by means of a mechanical device on a fixed track or arm to which the watercraft is attached or by which the watercraft is controlled, or by means of a mechanical device attached to the watercraft itself.

(C) A watercraft of a type designed to be propelled solely by oars or paddles.

(D) A watercraft eight feet or less in length of a type designed to be propelled by sail. A motor or other component of a vessel shall be deemed to be a part of the vessel when sold therewith.

. . .

2) Vessels and Aircraft.

(A) Aircraft and Documented Vessels. Except as provided in subdivision (c)(2)(C), purchasers of aircraft or documented vessels from any person other than a person required to hold a seller's permit by reason of the number, scope, and character of the person's sales of documented vessels or of aircraft, as the case may be and not otherwise specifically exempt shall report and pay tax to the board. A documented vessel means a vessel which is required to be documented by the United States Coast Guard and for which the United States Coast Guard has issued a valid marine certificate.

A purchaser who holds a seller's permit, or to whom a consumer's use tax account number has been assigned, must include the tax in the purchaser's return for the period in which the aircraft or documented vessel was purchased.

A purchaser who does not hold a seller's permit, or to whom a consumer's use tax number has not been assigned, shall make a return and pay use tax, measured by the sales price of the vessel or aircraft, on or before the last day of the calendar month next succeeding the month in which a return form is mailed to the purchaser, or the last day of the twelfth month following the month during which the vessel or aircraft was purchased, whichever period expires the earlier.

Any purchaser of a vessel or aircraft who registers it outside the state for the purpose of evading the payment of taxes due shall be liable for a penalty of 50 percent of any tax determined to be due on the sales price of the vessel or aircraft.

(B) Undocumented Vessels. Any vessel which is not required to have, and does not have a valid marine certificate issued by the United States Coast Guard is an undocumented vessel.

Purchasers of undocumented vessels, the sales of which are exempt from sales tax under (b)(1) above, shall pay the use tax to the Department of Motor Vehicles, acting for, and on behalf of, the Board pursuant to section 9928 of the Vehicle Code, at the time of making application for registration except:

1. When the applicant establishes that the tax is inapplicable under the general exemptions in (b)(2)(A) and (b)(2)(C) above.

2. When the applicant furnishes to the Department of Motor Vehicles a certificate of use tax exemption or tax clearance certificate issued by the Board.

3. When, operative January 1, 1996, the applicant has proof of payment of sales or use tax to a broker under the provisions of subdivision (c)(2)(C).

If at the time of registration the purchaser does not have the necessary documentation to establish that tax does not apply but wants to secure immediate action upon his or her application for registration, the purchaser will be required to pay the tax to the Department of Motor Vehicles. If the purchaser can thereafter establish that no tax was applicable, he or she may file with the Board a claim for refund of the tax paid to the Department of Motor Vehicles.

If the purchaser makes an application to the Department of Motor Vehicles which is not timely, and is subject to penalty because of delinquency in effecting registration or transfer of registration of the undocumented vessel, he or she then becomes liable also for penalty as specified in Section 6591 of the Revenue and Taxation Code, but no interest shall accrue.

If the purchaser does not make application to either department, or does not pay the amount of use tax due, or files a return with the Board under section 6455 of the Revenue and Taxation Code which is not timely, interest and penalties shall apply with respect to the unpaid amount as provided in Chapter 5 (commencing with section 6451) of the Revenue and Taxation Code.

Any purchaser of a vessel who registers it outside the state for the purpose of evading the taxes due shall be liable for a penalty of 50 percent of any tax determined to be due on the sales price of the vessel.

(C) Vessels and Aircraft Purchased Through Brokers. Notwithstanding any other provision, when a person purchases a vessel or aircraft, on or after January 1, 1996, from another person through a broker, the purchaser is relieved from the liability for use tax on the transaction only to the extent that he or she:

1. has paid an amount as sales or use tax to the broker, and

2. has obtained and retained a receipt from the broker showing the payment of such tax.

The purchaser is relieved from liability only to the extent of the amount paid, and for which a receipt is provided, but remains liable for any amount of tax later determined to be due. An amount designated as sales or use tax collected by the broker from the purchaser constitutes a debt owed by the broker to the state and the broker shall be liable for that amount as if he or she were a retailer engaged in business in this state required to collect that amount as use tax from the purchaser.

[Island Time O25]

When shareholders of Hertz corp change does CA tax every vehicle owned by Hertz each time there is a change among the list of shareholders? If not why would change in any other corp shareholders' list would trigger such a "sales" tax?

[Montanan]

Originally Posted by Island Time O25

When shareholders of Hertz corp change does CA tax every vehicle owned by Hertz each time there is a change among the list of shareholders? If not why would change in any other corp shareholders' list would trigger such a "sales" tax?

Sole Proprietorships: A sole proprietor and his or her business are indistinguishable for tax purposes. Thus, the sale of a sole proprietorship is treated as a sale of the assets of the sole proprietorship.

Limited Liability Company (LLC): Generally, the sale of an interest in an LLC will be determined in accordance with the partnership rules. The tax treatment of the sale of an interest in a one-member LLC (if permitted by state law) will generally be determined in accordance with the sole proprietorship rules. The tax treatment of the sale of an LLC taxed as a corporation will generally be determined in accordance with the C corporation rules.

[CrispyCringle]

Purchasing a boat through an LLC rather that purchasing just the boat: https://aglyachtsales.com/purchasing-a-boat-owned-by-an-llc/#:~:text=The%20answer%20is%20that%20by,California' s%20sales%20or%20use%20tax.

[Montanan]

In California, every LLC, wherever organized, is deemed to be “doing business” in California, if the LLC owns an asset based in California with a value of $50,000 or more. Thus, even a Delaware LLLC must pay the annual minimum franchise tax of $800 to the California franchise Tax Board every year.