When a corporation buys a boat to bareboat-charter it, when can it buy tax-free, and can it shift the tax to the charterer's use tax?

Plain-English summary

Thomas J. Troiano described two ways of owning and chartering a pleasure craft and asked about the vessel owner's sales tax duties.

I. New York corporation, boat delivered in New York. A New York resident forms a New York corporation whose only asset is a pleasure craft, and the corporation bareboat-charters it annually to its stockholder or other New York residents, collecting sales tax on the charter fee.

II. Delaware corporation, boat delivered outside New York. A New York resident forms a Delaware corporation that buys the vessel (delivery outside New York) and bareboat-charters it to the resident stockholder, who wants to report use tax on the charter fee instead.

The Department's conclusions:

• A true arm's-length rental is required for resale treatment (both situations). For the purchase to count as a purchase for resale, the bareboat charter must be a genuine arm's-length transaction — the charter fee reasonable compared with fees for similar vessels and fairly reflecting the boat's acquisition, maintenance, and operating costs (§ 526.6(c)(4)(i)). If it isn't, the "rental" is disregarded and the corporation owes sales tax (if delivered in New York) or use tax (if delivered outside and later used in New York) on the purchase price of the boat.
• Situation I — buy tax-free, then collect on the charter. A New York corporation registered as a vendor may buy the vessel without tax for resale by giving its supplier a Resale Certificate (Form ST-120). When it bareboat-charters the boat (to a stockholder or others) and harbors it in New York waters, the annual charter fee is subject to New York State and local sales tax, which the corporation must collect and remit.
• Situation II — out-of-state purchase, but New York charter still triggers vendor duties. The Delaware corporation owes no New York sales tax on a purchase delivered outside New York. But when it bareboat-charters to a New York resident with delivery in New York, it must register as a vendor and collect New York sales tax on the charter fee — it is personally liable (§§ 1132, 1133), and is not relieved by an agreement to have the charterer report use tax instead (penalties and interest under § 1145). If delivery for a charter period occurs outside New York, the corporation need not collect sales tax, but the resident charterer incurs a compensating use tax when the vessel is used or harbored in New York.
• Sham out-of-state corporations. If the arrangement isn't arm's length, the corporation is liable for use tax on its use of the vessel in New York, per TSB-M-82(1)S (which addresses New York residents forming out-of-state corporations to buy pleasure craft). A reciprocity credit applies for sales tax properly paid to another state.

What this means for you

"Buying for resale" only works if the rental is real. A charter to yourself or an insider must be priced like a real-market charter and cover the boat's costs. If it's a token rent designed to dodge tax on the purchase, the Department disregards the rental and taxes the full purchase price.

Forming an out-of-state corporation doesn't escape New York tax. Once the boat is chartered to a New York resident with New York delivery, the owner must register here, collect New York sales tax on the charter fee, and is personally liable. You can't push that duty onto the charterer's use-tax filing.

Delivery location drives the mechanism. New York delivery → the owner collects sales tax on the charter fee. Out-of-state delivery → no sales tax on that charter, but the resident owes compensating use tax when the boat is used or harbored in New York. Tax paid to a reciprocal state can be credited.

Common questions

Q: Can my corporation buy a boat tax-free to charter it?
A: Yes, if the bareboat charter is a true arm's-length rental (fee reasonable and covering the boat's costs) and you give a Resale Certificate (ST-120). Otherwise the purchase itself is taxable.

Q: I set up a Delaware corporation and took delivery out of state. Do I owe New York tax?
A: No New York sales tax on that purchase. But when you charter to a New York resident with New York delivery, the corporation must register as a vendor and collect New York sales tax on the charter fee — and can't shift that to the charterer's use tax.

Q: Can the charterer just pay use tax instead?
A: Only where there's no vendor duty (e.g., out-of-state delivery, then New York use). Where the owner is required to collect sales tax on a New York charter, an agreement to have the charterer report use tax does not relieve the owner, who remains personally liable (with § 1145 penalties).

Citations and references

Statutes and regulation:

• Tax Law § 1101(b)(4) — "retail sale" is a sale other than for resale
• Tax Law § 1101(b)(5) — "sale" includes rental or lease
• Sales and Use Tax Regulations § 526.6(c)(4)(i) — a purchase is for resale only if the rental is a true arm's-length transaction
• Tax Law § 1134 — vendor registration; §§ 1131, 1132, 1133, 1136, 1137 — collection, remittance, and personal liability
• Tax Law § 1145 — penalties, interest, and criminal penalties for failing to file, register, or collect tax
• Sales and Use Tax Regulations § 525.2(a)(3) — tax applies at the point of delivery to the purchaser

Guidance referenced:

• TSB-M-82(1)S — New York residents forming out-of-state corporations to buy pleasure craft; use tax due on New York use, with reciprocity credit for tax paid to another state

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1982.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a82_49s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-82(49)S
Sales Tax
December 30, 1982

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S820209C

On February 9, 1982 a Petition for Advisory Opinion was received from Thomas J. Troiano,
359 West Neck Road, Huntington, New York 11743.
Petitioner describes two hypothetical situations involving the rental of a vessel, and inquires
as to the sales tax obligations and liabilities of the owner of the vessel in each instance.
I
A New York corporation is formed by a New York resident for the purpose of purchasing
and chartering its sole asset, a pleasure craft. The vessel is federally documented and the corporation
bareboat charters the vessel for one year, and intends to re-charter the vessel annually for several
years, to either its sole stockholder/officer, a New York resident, or other New York residents. The
corporation will obtain a Certificate of Authority and will collect and report sales tax on the annual
charter fee. Petitioner inquires as to whether the owner of the vessel would, under these
circumstances, have any sales tax obligations or liabilities beyond the collection, reporting and
remittance of sales tax on the rental fee.
Section 1105(a) of the Tax Law, contained in Article 28, imposes the State sales tax on "the
receipts from every retail sale of tangible personal property . . ." The term "retail sale" is defined, in
relevant part, in section 1101(b)(4) of the Tax Law, as a "a sale of tangible personal property to any
person for any purpose, other than (A) for resale. . . ." The term "sale" is defined, in relevant part,
as "any transfer of title or possession or both, . . .rental, lease or license to use or consume. . . for a
consideration. . . ." Tax Law, § 1101(b)(5). The applicable tax in each instance is that imposed by
or for the jurisdiction within which the point of delivery to the purchaser or his designee is located.
20 NYCRR § 525.2(a)(3). The tax due is required to be collected by the vendor of the property sold,
at the time the price therefor is collected, and such tax is then to be reported and remitted to the State
Tax Commission. Tax Law §§1131,1132,1136,1137. The foregoing is similarly applicable to local
sales taxes.
In order for the purchase of the vessel to be recognized as a purchase for resale, the annual
bareboat charter must represent a true arm's length transaction. The annual charter fee, thus, must
be reasonable in comparison with the annual charter fees collected by other lessors of similarly
valued, sized and equipped vessels, and must fairly reflect the acquisition, maintenance and
operating expenses for the vessel. Should the transaction fail to meet these standards, the purported
rental would not be recognized to be such, and the corporation would be liable for sales tax on the
purchase price of the boat, if the boat is delivered to it in New York, or use tax, if the boat is
delivered to it outside of New York and is subsequently used in New York. 20 NYCRR
526.6(c)(4)(i). (The substance of this paragraph applies to both of the hypothetical situations
presented by Petitioner.)
ROBERT W. BOUCHARD, ACTING COMMISSIONER
GABRIEL B. DiCERBO , DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (8/82)

-2­
TSB-A-82(49)S
Sales Tax
December 30, 1982

Accordingly, a New York corporation, which is registered as a sales tax vendor, may
purchase a vessel without payment of sales tax provided such vessel is purchased solely for resale
(rental) purposes, and provided that the corporation furnishes its supplier with a properly completed
Resale Certificate (Form ST-120). When the vessel is annually bareboat chartered to either a
stockholder or non-stockholder and harbored in New York waters, the annual charter fee collected
by the New York corporation will be subject to New York State and applicable local sales taxes. The
New York corporation will be required to collect sales tax on the annual rental and to remit such tax
to the Tax Commission, along with the applicable sales tax return.
II
A New York resident forms a Delaware corporation which then purchases a vessel, with
delivery occurring outside New York State. The vessel is federally documented and the corporation
bareboat charters the vessel on an annual basis to its New York resident stockholder. The New York
resident stockholder will file an annual use tax return, reporting and submitting use tax on the annual
charter fee. Petitioner inquires as to whether the corporation's sales tax obligations are satisfied by
the stockholder's receipt and remittance of use tax.
Section 1134 of the Tax Law provides, in part as follows: "Registration. (a)(1) Every person
required to collect any tax imposed by this article . . ., (2) every person purchasing or selling tangible
personal property for resale . . . shall file with the tax commission a certificate of registration, in a
form prescribed by it, at least twenty days prior to commencing business or opening a new place of
business or such purchasing or taking of possession or payment whichever come first . . . ."
Pursuant to section 525.2(a)(3) of the Sales and Use Tax Regulations, the Delaware
corporation, which purchases the vessel with delivery occurring outside New York State, will not
be liable for New York State or local sales tax on such transaction. However, when such corporation
bareboat charters the vessel to a New York resident, with delivery occurring within New York State,
it must register as a sales tax vendor. Further, the corporation must collect New York and local sales
tax on the annual charter fee billed to the lessee and will be personally liable for the tax imposed,
collected or required to be collected. Tax Law, §1132,1133. The corporation will also be required
to collect sales tax on all subsequent annual charter fees where delivery occurs within New York
State. Finally, the Delaware corporation is required to submit the sales tax collected, along with the
applicable sales tax return, to the State Tax Commission. It will not be relieved of its obligations and
liabilities under the Tax Law by reason of an agreement to have the lessee report and pay a use tax
on the annual charter fee. It is to be noted, in this regard, that section 1145(a) of the Tax Law
provides for the imposition of penalties and interest for failure to file a return or pay over tax, and
section 1145(b) provides for criminal penalties for failure to file a return or report, failure to file a
registration certificate, or willfully failing to collect the tax from a customer.
If delivery of the vessel for any charter period occurs outside New York State, the Delaware
corporation will not be required to collect sales tax on the charter fee. However, if the New York
resident lessee subsequently uses or harbors the vessel in New York waters, such resident will incur
a compensating use tax liability based on the annual charter fee.

-3­
TSB-A-82(49)S
Sales Tax
December 30, 1982

In the event that the purported rental failed to meet the standards for a true arm's length
transaction, as described above, the corporation would be liable for use tax, upon its use of the vessel
in New York, in accordance with the terms of Technical Services Bureau Memorandum TSB-M­
82(1)S, which provides the following:

"The following is representative of transactions which involve New York
State residents forming corporations outside this State for purposes of purchasing and
owning pleasure craft.
A New York resident arranges for the purchase, financing, insuring,
mooring and storage of a vessel. Either prior to or immediately
subsequent to these arrangements, a corporation is formed outside
New York State. One of its purposes is to purchase and own a
pleasure craft to be used in New York State. The newly formed
corporation completes the purchase of the pleasure craft and takes
delivery outside New York State. The pleasure craft is subsequently
used in New York State. Use typically includes mooring, storage, etc.
"Although sales tax is not due on this transaction, as delivery occurred outside
the State, New York State and local compensating use taxes are due once the pleasure
craft is used inside the State. The activities of the purchaser described above, even
when the purchaser is a foreign corporation, indicate liability for use taxes.
"In the event a sales tax was properly paid to another state in which delivery
occurred and such state has a reciprocity agreement with New York State, the
purchaser will be entitled to a credit for such taxes paid to the other state."

DATED: December 13, 1982

s/FRANK J. PUCCIA
Director
Technical Services Bureau