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By Robert S. Schriebman
2021

Introduction

There are literally thousands of pages of California tax regulations. Buried within this labyrinth of statute interpretations is a dozen lines setting forth a rule of legal use tax avoidance when personal property is purchased outside of California and eventually brought into this state for personal use. I became acquainted with this little gem about 30 years ago when I represented the purchaser of a pleasure boat; more about that story later. 

In the 50 plus years I have been practicing, I have never seen a judicial decision concerning this regulation until now. This article will discuss the Appeal of R. Battistoni, OTA Case No. 20035913, 2021-OTA 223, May 9, 2021. Mr. Battistoni walked away from a large use tax bill by observing a few simple rules.

The Case of R. Battistoni

The Battistoni case centers around use tax regulation § 1620(b)(3). The events in the case occurred in the years 2002 and 2003. Battistoni purchased a pleasure boat on June 20, 2002 off the coast of San Diego. The sale was consummated outside of California territorial waters. On that same day the boat returned to San Diego where Battistoni rented a slip from June 20, 2002 to September 17, 2002. During that time, the boat went on several fishing trips that all took place either outside California waters or in Mexican waters. On September 17, 2002 the boat left San Diego and traveled to Ensenada, Mexico, where Battistoni rented a slip between September 17, 2002 to July 10, 2003. On July 10, 2003, over one year since the boat was purchased Battistoni, the boat docked in Avalon Bay where it was registered with the US Coast Guard on August 5, 2003.

On March 9, 2006, Battistoni filed a California use tax return reporting the boat’s purchase price of $105,000. The return stated that the boat was not purchased for use in California and that no part of the purchase price was subjected to California use tax. The SBE disagreed and assessed a use tax of almost $10,000 and a failure to file penalty close to $1,000. Battistoni appealed to the Office of Tax Appeals (OTA).

Supporting Documentation

To support his claim that no taxes were owed, Battistoni was well prepared and submitted the following documentation:

• Ship’s log.
• Declaration of the San Diego slip lessor.
• Passenger declarations regarding various fishing trips in Mexican waters.
• Contract for the slip rental in Ensenada, Mexico
• Invoices for slip fees and work done on the boat while it was docked in Ensenada
• US Coast Guard documentation showing that the boat arrived in Catalina and was registered on August 5, 2003.

The SBE did not offer any documentation.

What Is a Use Tax?

A use tax applies to the storage, use, or other consumption in California of tangible personal property purchased for use and used in California (R&TC § 6201). The tax is owed by the person using or storing the property in California (R&TC § 6202(a)). The difference between a use tax and sales tax is the sales tax is usually charged and collected by a retail seller and applies to new items. The use tax, on the other hand, usually applies to personal property brought into California by an individual or is assessed against the sale and transfer of a used item such as a used boat, car or airplane.

What Does This Obscure Regulation Say?

Cal. Code Regs. Tit. 18, § 1620(b)(4)(A) says that a use tax does not apply to the purchase of personal property such as a boat, or an airplane, if it is physically located outside of California one-half or more of the time during the six-month period immediately following its entry into this State. It must first be “functionally used” outside of California. A functional use is a use for the purposes for which the vessel was designed; here a recreational vessel first operated outside of California (Cal. Code Regs, tit. 18, § 1620(b)(3)). 

Back in 2004, when the events of this case occurred, the regulation’s subsection was § 1620(b)(3). The regulation was revised thereafter and the new regulation was changed to § 1620(b)(4).

The OTA’s Decision

Battistoni won his case before the OTA and did not owe one dime in California use tax! Here’s why. The boat was purchased in international waters on June 20, 2002. The boat departed San Diego on September 17, 2002 and did not return until July 10, 2003 when Battistoni docked in Catalina and registered the boat with the US Coast Guard. During all that time, the boat was docked in Ensenada, Mexico. This was more than one-half of the 182-test period from June 20, 2002 through December 19, 2002. The first functional use of the boat as a pleasure-fishing vessel was outside of California territorial waters. The only question the OTA had to decide was whether Battistoni provided sufficient evidence to establish that the boat was located outside of California during at least one-half of the first six months after its first entry into California. The invoices and repair bills from docking the boat in Ensenada provided that evidence.

Therefore, Battistoni did not purchase the boat for use in California. He pocketed the proposed use tax and penalty.

Bob’s Strange Case

I had one of the first cases to be brought before the Board of Equalization (BOE) involving this little regulation. It also involved a boat and a proposed use tax of over $21,000. The case was brought before the sitting BOE. The members of the BOE expressed both shock and surprise that such a regulation existed and the boat owner was making his argument not to pay the assessment. I had all the right documentation as well as witnesses. Like the Battistoni case, the boat was purchased outside of California territorial waters. The vessel broker, buyer, seller, and several passengers were on board to witness the sale. At the time of the sale, the boat’s compass was not functioning; it gave a false reading. This is all the BOE needed to point out that the compass reading showed the location on dry land in the middle of Santa Ana. Despite the documentation and witness testimony, the BOE ruled that sale took place in the middle of Santa Ana! The BOE ruled against the boat owner. I wanted to appeal but my client gave up the ghost and paid the assessment. Sometimes there is not enough justice to go around.

Conclusion

This obscure tiny regulation, nestled within thousands of pages of tax regulations, is not known to many people. It can apply to any personal property big or small such as a boat, car, airplane, or as the motto of the now defunct Union War Surplus Store in San Pedro…even to a battleship.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

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