Can a business that brought an out-of-state yacht into New York for chartering pay use tax on the yacht's fair rental value instead of its full purchase price?

Plain-English summary

Entrepreneur Yacht Charters Corp. (a Delaware corporation authorized to do business in New York) bought a yacht outside New York for $635,000 and renovated it in Florida for $1,348,000. It then brought the yacht into New York for about four months each year (1984-1986) to run charters, returning it to Florida in between. It asked whether its use tax could be based on the yacht's fair rental value instead of its full cost.

The Department said no — use tax is due on the full purchase price plus renovations.

• The optional fair-rental-value method is narrow. Tax Law § 1111(b)(2) (and 20 NYCRR § 531.4(c)(2)) lets a New York resident who buys and uses property outside the state elect to pay use tax on fair rental value — but only when the property is brought in to perform an existing contract for less than six months and then removed upon completing that contract (e.g., a contractor's crane brought in for one job).
• Three criteria; the company failed the third. The yacht was purchased/used out of state (criterion 1), and there were four charter contracts predating entry (criterion 2). But the company's intent was to run an ongoing business — it signed 70-90 additional New York charters — not merely to perform the four existing contracts and leave. So it failed criterion 3.
• Result: use tax on the full cost. The company owes combined state and local compensating use tax on both the $635,000 purchase price and the $1,348,000 renovation cost.
• But a reciprocity credit applies. Under § 1118(7)(a) and New York-Florida reciprocity, the company may credit sales/use tax it legally paid to Florida on the yacht and renovations against its New York use tax.

What this means for you

Bringing expensive equipment into New York for a real business means use tax on its full cost. The fair-rental-value shortcut is reserved for property brought in temporarily to finish a specific contract and then taken back out. If you're actually operating a business in New York — soliciting and signing new work while the asset is here — you don't qualify, and the tax is measured by the property's purchase price (plus improvements).

Intent and conduct decide it, not the calendar. Even a stay of "under six months" won't get you the rental-value basis if your purpose was to run an ongoing operation. Signing many new in-state contracts is strong evidence of that purpose.

Don't overlook the reciprocity credit. If you already paid sales/use tax to another state that gives New York reciprocal credit (here, Florida), you can credit that against your New York use tax on the same property — so you're not taxed twice on the full value.

Common questions

Q: I brought my out-of-state yacht (or equipment) into New York for a few months of chartering. Can I pay use tax on rental value?
A: Only if you brought it in solely to perform an existing contract for under six months and then removed it. Running an ongoing charter business — signing new New York contracts — fails that test, so use tax is on the full purchase price plus improvements.

Q: Why did the four pre-existing charter contracts not qualify the yacht?
A: Because the company's real intent was to operate a business and generate many more charters (70-90 additional), not merely to perform those four and leave. That defeats the § 1111(b)(2) option.

Q: Do I get any credit for tax I paid elsewhere?
A: Yes, if that state gives New York reciprocal credit. Under § 1118(7)(a), New York-Florida reciprocity let the company credit the Florida tax it paid on the yacht and renovations.

Citations and references

Statute and regulation:

• Tax Law § 1110 — compensating use tax on tangible personal property used in New York
• Tax Law § 1111(b)(2) — optional fair-rental-value basis for property purchased/used outside the state and brought in to perform a contract for less than six months (then removed); not available for property completely consumed or incorporated into New York real property
• Tax Law § 1118(7)(a) — credit for sales/use tax legally paid to another state that allows New York a reciprocal credit
• 20 NYCRR § 531.4 — property used outside the State prior to use in New York; general rule (use tax on purchase price) and the fair-rental-value option (§ 531.4(c)(2), with the crane example)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a88_56s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-88 (56)S
Sales Tax
October 27, 1988

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S880707B

On July 7, 1988, a Petition for Advisory Opinion was received from Entrepreneur Yacht
Charters Corp., 2 East 93rd Street, New York, New York 10128.
The issue raised is whether Petitioner's use tax liability can be computed on the basis of the
fair rental value of its yacht during the period of use within New York State as provided in Sales and
Use Tax Regulation Section 531.4(c)(2).
Petitioner, Entrepreneur Yacht Charters Corp., was incorporated in the state of Delaware.
Petitioner was authorized to do business in New York State and maintained a business address at 2
East 93rd Street, New York, New York 10128.
Petitioner purchased a yacht, outside of New York State, on December 20, 1983 for
$635,000.00. The yacht was renovated in Florida during late 1983 and early 1984 for an additional
cost of $1,348,000.00.
Petitioner states that the yacht was initially purchased for chartering Florida clients. Petitioner
decided to move the yacht to New York for 4 months to determine if the business could operate at
a profit in New York.
The yacht was brought into New York State for its initial charter on May 26, 1984 and
remained within the state performing charters until October 16, 1984. At that time the yacht was
returned to Florida. Subsequently, the yacht was brought back into New York State and performed
charters here during the periods from May 5, 1985 through October 27, 1985 and from May 2, 1986
through October 19, 1986. During the interim periods the yacht was returned to Florida where it was
sold on January 20, 1987.
Petitioner entered into four charter contracts prior to May 26, 1984, whereby Petitioner was
to perform charters within New York State on or after May 26, 1984. Each of the four charters were
of four to six hours in duration. Subsequent to May 26, 1984, Petitioner entered into approximately
70-90 additional charter contracts, all of which were to be performed within New York State during
the period May 26, 1984 to October 16, 1984 and all of which were also to be of four to six hours
in duration.
Petitioner contends that its use tax liability should be computed on the fair rental value of the
yacht as provided in Regulation Section 531.4(c)(2), because the yacht was in New York State for
use in performing charters for a period of less than six months and then was removed to a location
outside New York State.
Section 1105 of the Tax Law imposes a tax upon:
(a) The receipts from every retail sale of tangible personal property...
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TP-9 (9/88)

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Sales Tax
October 27, 1988

(c) The receipts from every sale, except for resale, of the following services:
(3)

Installing ... maintaining, servicing or repairing tangible personal property ... not held
for sale in the regular course of business ....

Section 1110 of the Tax Law states as follows:
Imposition of compensating use tax. Except to the extent that property or services have already been
or will be subject to the sales tax under this article, there is hereby imposed on every person a use
tax for the use within this state ... except as otherwise exempted under this article,
(A) of any tangible personal property purchased at retail,
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(D) of any tangible personal property, however acquired, where not acquired for purposes of resale,
upon which any of the services described under paragraphs ... (3) of subdivision (c) of section
eleven hundred five have been performed.
Section l109(a) of the Tax Law states as follows:
Sales and compensating use taxes for the metropolitan commuter transportation district. (a) General.
In addition to the taxes imposed by sections eleven hundred five and eleven hundred ten of this
article, there is hereby imposed ... and there shall be paid, additional taxes at the rate of one-quarter
of one percent, which shall be identical to the taxes imposed by sections eleven hundred five and
eleven hundred ten of this article ....
Section 1111(b) of the Tax Law provides as follows:
Special rules for computing receipts and consideration. (b) Tangible personal property, which has
been purchased by a resident of New York State outside of this state for use outside of this state and
subsequently becomes subject to the compensating use tax imposed under this article, shall be taxed
on the basis of the purchase price of such property, provided however: ...(2) That the compensating
use tax on such tangible personal property brought into this state (other than for complete
consumption or for incorporation into real property located in this state) and used in performance
of a contract or sub- contract within this state by a purchaser or user for a period of less than six
months may be based, at the option of the taxpayer, on the fair rental value of such property for the
period of use within this state.
Sales and Use Tax Regulations Section 531.4 provides as follows:
Property used outside of State prior to use in New York. (a) General rule. When tangible personal
property is purchased outside of the state by a resident of the State, for use outside of the State, and
is subsequently used in the State, the compensating use tax is due on the purchase price.

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(b) ...
(c) Use of property in performing a contract. (1) Tangible personal property brought into
New York State for use in the performance of a contract or subcontract within this State is
subject to the compensating use tax based on the purchase price of such property.
(2) Where the tangible personal property brought into the state will be used for a period of
less than six months, the user, at his option may elect to pay the compensating use tax based
on the fair rental value of the property for the period of use within New York. This treatment
is not applicable to
tangible personal property completely consumed, or incorporated into
real property located in the state.
Example:

A contractor performing a construction contract in New York State purchases
a crane for $100,000 outside the State and brings it into this State for
temporary (less than six months) use in the contract work. The crane has a
fair rental value of $2,500 per month. The contractor is liable for the
compensating use tax on the $100,000 purchase price unless he elects to
report such tax based on the fair rental value of $2,500 per month.

Section 1111(b)(2) of the Tax Law offers residents of New York State an optional method
for computing the amount of use tax due on purchases of tangible personal property where the
following criteria are met:
1.

The tangible personal property is purchased and used outside of New York State
prior to being brought into New York State.

2.

The tangible personal property is brought into New York State (other than for
complete consumption or for incorporation into real property located in the State) for
the purpose of being used to perform an existing contract(s) or subcontract(s),such
contract(s)or subcontract(s) having been entered into on or before the date the
tangible personal property was brought into New York State.

3.

The property was temporarily (less than six months) used in performance of the
existing contract(s) or subcontract(s) where upon completion of its use in such
contract(s) or subcontract(s), the property was removed from New York State.

When a resident of New York State brings tangible personal property into the State under
criteria 1, 2 and 3 stated above, the resident may choose the optional method of computing use tax
due based on the fair rental value of the tangible personal property for the period of its use within
New York State.
In the instant case, Petitioner purchased and used the yacht outside New York State prior to
bringing it into the State on May 26, 1984, thereby meeting criterion 1.
Petitioner entered into four contracts for chartering with New York clients on or before May
26, 1984, thereby meeting criterion 2.

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However, since Petitioner's decision to initially bring the yacht into New York State for 4
months (May 26, 1984 to October 16, 1984) was to determine if the business could operate at a profit
in New York, it is obvious that Petitioner's intent was not to bring the yacht into New York to
perform the four contracts and then remove the yacht from New York upon completion of the yacht's
use in such contracts. Rather, Petitioner intended to keep the yacht in New York State for 4 months
for the purpose of using the yacht in the operation of an ongoing business and generating additional
charters within the State by holding the yacht out as available for charter. Petitioner demonstrated
this by entering into an additional 70-90 contracts with New York clients during the period from
May 26, 1984 to October 16, 1984. On this basis, Petitioner has failed to meet criterion 3 inasmuch
as it did more than merely bring equipment into the state for use in the performance of a contract or
subcontract.
Whereas Petitioner did not meet all of the 3 criterion stated above, Petitioner's contractual
activities are not considered to have fallen within the provision of Section 1111(b)(2). Accordingly,
Petitioner does not qualify to use the optional method for computing the compensating use tax due
as provided under Section 1111(b)(2). Rather, Petitioner is liable for the combined statewide and
applicable local compensating use taxes on both the original purchase price of the yacht and the
additional cost of the renovations.
However, it is noted that Section 1118(7)(a) of the Tax Law provides a credit against the
compensating use tax liability in respect to use of property on which sales or use tax was legally due
and paid thereon, without any right to a refund or credit thereof, to any other state which allows a
corresponding credit for sales and use tax paid to New York State. Because New York State and
Florida practice reciprocity, Petitioner may be entitled to a credit for any sales or use tax paid to the
State of Florida on the purchase price plus the cost of renovations of the yacht.

DATED: October 27, 1988

FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.