Sailing away from paying taxes
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2004/11/25/...
Eric Nalder
November 25, 2004
Seattle -- Jack Darcy Of Redmond, Wash., paid cash for a $2.2 million yacht through a Lake Union dealership last April, but he didn't pay a dime in
Washington sales tax.
Instead, Darcy, a computer-chip executive who retired to Washington from California, saved $200,000 by signing papers to buy his new 73-foot yacht
three miles off the coast, in international waters.
California yacht buyers have used Darcy's method so often that the state of California recently tightened a tax law that encouraged it -- but the
loophole wasn't eliminated entirely. Washington yacht dealers, in fact, hope to profit from the change.
Darcy's escape from Washington taxes was planned and choreographed with a lawyer, the 72-year-old millionaire said.
The Taiwan-built yacht, the Kinship, was taken from Seattle to a location in the Pacific Ocean beyond the Strait of Juan de Fuca. Once it was
verifiably in international waters, Darcy's hired captain took a photograph of Darcy signing transfer papers with the seller, Lex Mitchell of Emerald
Pacific Yachts.
Visible behind them was the vessel's electronic chart showing their exact longitude and latitude. They held a copy of that day's Seattle Post-
Intelligencer to prove the date, Mitchell said.
All this was done to assure the Washington state Department of Revenue -- should it ever ask -- that the deal occurred outside taxable jurisdiction.
"Jack is nothing if not smart," Mitchell said.
There is a downside.
For all his trouble, the former CEO can't cruise the Kinship in his own state. If revenue agents find him aboard the Kinship in Washington waters,
they can collect $200,000 in use tax.
California tax law, however, is more forgiving.
Offshore signings are a rarity in Washington but common in California. Until last month, Californians needed only to buy their craft out of state and
keep it out of California for 90 days. Then they could sail home and never pay sales tax. Most buyers went to Mexico to join what was called the
90-day yacht club.
The loophole also applied to airplanes. When California Gov. Arnold Schwarzenegger was an actor, back in 1990, he saved $900,000 on the purchase of a
$12 million business jet by keeping it out of state the appropriate time.
This year, however, Schwarzenegger signed a law promoted by Democrats that extends the required out-of-state stay to a year.
California yacht sellers are upset. Before the law changed, as many as 90 percent of buyers paying more than $200,000 for boats signed for them
offshore, said Cris Wenther of La Jolla (San Diego County), a tax lawyer who developed the procedure used by Darcy.
"An unbelievable number of yacht transactions" occurred shortly before midnight Oct. 1, when the new law took effect, Wenther said. Because of a
loophole in the new law, last-minute buyers qualified for the 90-day rule even for boats that won't be delivered until 2006.
Yacht sellers in Washington hope a new 365-day yacht club will benefit them. They hope Californians will buy boats in Washington and keep them in
Puget Sound for six months, then motor or sail to British Columbia for six months more before going home to California.
After six months, Washington levies a use tax on nonresidents. Some dealers would like the Legislature to make the maximum stay one year.
Why would Californians linger a year in Washington when Mexico and Oregon are closer?
Mexico is too hot in summer, and the weather is brutal on deck work, said boat owners and sellers. Staying a year would be a problem.
"People don't want to go to Ensenada for a year," said James Herrnan, a semi-retired financial executive from Los Gatos and one-time member of the 90-
day yacht club. "The insurance companies won't insure you for a year down there."
If Washington extended its maximum stay, he said, it would help the area. "That is such a great place to buy a yacht."
Even San Diego buyers who live in weather identical to nearby Mexico's might prefer Puget Sound for its great boating, said Dan Peter, owner of
Cabrillo Yacht Sales in San Diego.
Oregon is far less inviting, Heffernan said, because the boating waters there are either "boring" (the Columbia River) or treacherous (crossing the
bars on the Pacific Coast).
Heffernan said he's what Washington needs. He bought his 78-foot yacht, the Andiamo, in Seattle for $3.5 million in the spring of 2001. Then, to avoid
paying a $300,000 use tax in California, he kept his boat in Washington for the summer, flying up to cruise. In September he sailed home.
He vows that if he buys another yacht he'll do the same, and he'd love to stay a year if the Washington Legislature allowed it.
Extending the visitor limit to accommodate a 365-day yacht club from California would have perils. For one, the California law expires on July 30,
2006, and if California yacht sellers have their way, it won't be extended.
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