Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2011
 

Sales and Use Tax Annotations


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600.0000 WATERCRAFT—Regulation 1594

600.0000 WATERCRAFT—Regulation 1594

See Vehicles, Vessels, and Aircraft.

(a) IN GENERAL

600.0008 Barge. Generally, a clamshell barge cannot qualify for the watercraft exemption because it is not used for the transportation of property or persons for hire. 5/13/68.

600.0012 Barge Used as Ferry Dock. A barge, approximately 112' by 52' in size which will be used as a ferry dock and a passenger loading platform for ferry boat services, does not qualify for the watercraft exemption since it will be used principally in intrastate commerce. 3/20/90.

600.0016 Cargo Spreaders. Cargo spreaders which are a component and integral part of the cargo handling equipment permanently affixed to a ship are component parts of the ship for purposes of the watercraft exemption. If the spreaders are instead attached to and used in conjunction with shoreside cargo handling equipment they are not component parts of the ship. 4/4/77.

600.0017 Floating Dry Dock. Although section 6356 contains an unqualified exemption from sales tax for vessels of more than 1,000 tons sold in this state by the builder, it does not contain a comparable exemption from use tax. A floating dry dock built in Japan and delivered to the buyer in San Diego is tangible personal property which qualifies as a vessel, and its use in California is subject to use tax. 7/18/84.

600.0040 Freight Containers. The watercraft exemption in section 6368 is not applicable to the sale of freight containers, which are designed for land movement as well as for storage in vessels for movement at sea. 11/26/58.

600.0047 Inflatable Life Rafts. For purposes of the watercraft exemption, inflatable life rafts are watercraft and the survival kits sealed therein are component parts of the watercraft. 6/21/67.

600.0055 Marine Cargo Containers—Repairing. Marine cargo containers do not constitute watercraft within the meaning of section 6368 and 6368.1. Therefore, the application of the sales or use tax to the repair of the marine cargo containers in California is governed by Regulation 1546, Installing, Repairing, Reconditioning in General. 3/28/90.

600.0063 Transfer of Vessel to Obtain Dungeness Crab Permit. In a transaction between private parties, a vessel was sold for the purpose of obtaining the Dungeness crab vessel permit and transferring it to a vessel owned by the purchaser. The vessel itself was in a scrap yard and considered as having no value. The purchaser paid $12,000.00 for the vessel and the associated permit.

According to Fish and Game Code section 8280.3(a)(1), the Dungeness crab permit owner must be the record owner of both vessels in order to transfer the permit from one vessel to another. The purchaser bought the vessel for its own sake. He/she had to own the vessel, and the title to it, in order to transfer the crab permit to another vessel owned by him/her. Although the purchaser's interest was in obtaining the permit itself, he/she in fact obtained title to the vessel for $12,000.00. The purchase of the vessel is subject to tax. 10/23/00. (2001–2).


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(b) USE IN INTERSTATE OR FOREIGN COMMERCE

600.0070 Component Parts of Vessel. Sales tax does not apply to purchases of parts that will become a component part of a vessel engaged as a passenger cruise line in the Far East. Although the vessel does not make a port of call in the United States, the vessel is engaged in foreign commerce for purposes of the exemption provided for in section 6368. 7/28/83.

600.0080 High Seas. The fact that vessels travel in part on the high seas in the course of their journeys to and from California ports, does not exempt them under section 6368 from California use tax as being used in interstate or foreign commerce. 2/16/54.

600.0100 Kelp. Since watercraft used in harvesting kelp is not engaged in interstate and foreign commerce involving the transportation of persons or property for hire or used in commercial deep sea fishing operations, the sale of repair parts and other items used in the operation of such watercraft is subject to tax. 8/31/50. (Am. 2000–1).

600.0102 Lease to Clean Up Oil Spills. Spilt oil is not cargo when it covers the water after being leaked by a platform or when it is leaked by a tanker. Accordingly, a vessel leased to clean up oil spills is not importing cargo (oil) obtained from such oil spills and is not used in interstate or foreign commerce. 5/23/92.

600.0105 Lifting of Vessels. A derrick barge lifts vessels that are principally used in interstate and foreign commerce in and out of dry dock. This lifting of vessels by the derrick barge is not a use which would qualify the derrick barge to an exemption under Regulation 1594(a)(1). Therefore, tax applies to the sales price of the barge and the materials to renovate or maintain it. 2/17/93.

600.0115 Route Partially in Another State. The watercraft exemption for watercraft used in interstate or foreign commerce applies even though all transportation begins and ends in California if a portion of the route is in the waters of another state. 4/9/87.


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600.0120 Tugboat and Barge Operations.

1. Water-taxi used in transportation of pilots, longshoremen and ship crews from a point on shore to a vessel engaged in interstate or foreign commerce while operating on navigable water or vice versa.

Watercraft used for these purposes are not used in interstate or foreign commerce and are not, therefore, within the exempt category except in the case of watercraft transporting so-called harbor pilots to or from vessels, these pilots actually navigating or aiding in the navigation of the vessels in the completion or commencement of their voyages from or to a point outside this state.

2. Tugboats engaged in towing or assisting vessels principally used for the transportation of passengers or cargoes in interstate or foreign commerce.

This use, if in aid of the actual movement of vessels carrying cargo or passengers, qualifies the tugboats for the exemption.

3. Tugboats and barges engaged in the delivery of bunker fuel to vessels principally used for the transportation of passengers or cargoes in interstate or foreign commerce.

This use does not qualify the tugboats and barges for the exemption. The delivery of bunker fuel from a point in this state to vessels in this state is not a use in interstate or foreign commerce even if the vessels are engaged in interstate or foreign commerce.

4. Tugboats and barges engaged in transporting cargoes moving in interstate or foreign commerce.

This use qualifies the tugboats and barges for the exemption.

5. Tugboats and barges engaged in the delivery of ships' stores to vessels principally used for the transportation of passengers or cargoes in interstate or foreign commerce.

This use does not qualify the tugboats and barges for the exemption. As in the case of bunker fuel, the delivery of ships' stores from a point in this state to vessels in this state is not a use in interstate or foreign commerce.

6. All lifting, handling, assisting, loading and unloading cargo or property to or from vessels in interstate or foreign commerce.

This is a use qualifying the watercraft for exemption to the extent that the property involved constitutes cargo.

If the property carried is other than cargo, e.g., fuel, ships' stores, etc., the transportation of such property is not a use in interstate or foreign commerce.

7. All testing of booms, davits, lifeboats or other services rendered to certificate or otherwise assist vessels in interstate or foreign commerce to conform to maritime regulations.

This is not an exempt use of the watercraft, as it does not involve transportation in interstate or foreign commerce.

8. All aid, assistance, or salvage of distressed, stranded or sunken vessels in interstate or foreign commerce or commercial deep sea fishing boats. To the extent that watercraft are used in aiding a vessel to continue its movement to a point in this state from a point outside this state or vice versa, or the cargo of such vessel, the use is an exempt use in interstate or foreign commerce.

9. All services rendered to vessels in interstate or foreign commerce at dockside or in the stream, such as:

(1) Remove or replace and/or handle radar mast and antenna.

(2) Remove or replace and/or handle deck gear and equipment.

(3) Remove or replace and/or handle tail shafts, propellers and rudders.

(4) Remove, replace and/or handle any and all engine room equipment and machinery.

None of these services constitute a use in interstate or foreign commerce of watercraft transporting the workers or materials to or from the vessels.

The basic distinction running through all of the above answers is whether or not the use is in the transportation of either the vessel or its cargo or passengers in interstate or foreign commerce. The transportation of fuel, ships' stores, repair parts, and the like, to and from vessels is not a use in interstate or foreign commerce. We believe that these distinctions between what is considered a use in interstate and foreign commerce and a use other than in interstate or foreign commerce are in accordance with the law as determined by decisions of both Federal and State courts. 3/3/55.


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600.0123 Vessel Used to Catch Live Bait. A vessel is used to catch live bait. The bait is used in the operation of a commercial passenger fishing vessel and is also sold to the general public. The use of the vessel constitutes a "commercial" use as provided in section 6368. The sale of the vessel will qualify for the watercraft exemption if it is used in a manner meeting all of the other requirements of the statute. 8/14/92.

600.0123.125 Vessel Used to Clean Oil Spills. A California taxpayer is purchasing a 48 foot vessel from an out-of-state retailer which is scheduled to be delivered to taxpayer in California. The vessel will be moored in a California port in stand-by condition ready for quick response to assist in oil spill cleanup. The taxpayer believes the vessel will be involved in interstate commerce because it will be used in aiding vessels delivering Alaskan crude oil into California. The vessel will be hired by subscription member companies for oil spill response.

Although a vessel that carries oil from Alaska to California is involved in interstate commerce when the spill occurs, the oil loses its character as property being transported for hire in interstate commerce when it is lost from the vessel at sea. The taxpayer is hired to clean up the oil spill, not for hire in interstate commerce. Thus, the taxpayer's use of the vessel does not satisfy the requirements for the watercraft exemption and is subject to use tax. 11/5/96.

600.0124 Watercraft Used in Foreign Commerce. A shipping line acquired a vessel from a foreign affiliate and refurbished it to comply with United States Coast Guard standards. After the vessel was refurbished, it was to be registered and documented under the United States flag and then be time chartered to the United States Navy. The vessel will operate in what is called the Combined Services Management Service. It will provide transportation and storage of general breakbulk cargo, vehicles, ammunition, etc., for the Department of Defense from the west coast of the United States to far east ports.

The purchase of the vessel and the parts becoming a component part of the vessel in the course of refurbishing the vessel qualifies for exemption under section 6368 as a watercraft for use in interstate and foreign commerce involving the transportation of property for hire.

Likewise, the time charter agreement is not subject to tax. It is a service contract, not a contract for the lease of the vessel. Even if this was a bare boat charter (a lease of tangible personal property), it would remain without tax consequence since the vessel constitutes mobile transportation equipment (section 6023) and a lease of mobile transportation equipment is not a sale. 6/8/88.


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(c) COMMERCIAL DEEP SEA FISHING OPERATIONS

"Principal use" in, see (d) below.

600.0125 Abalone Fishing in California Waters. In order to claim the exemption provided in section 6368, the principal use of commercial fishing vessels must be outside the territorial limits of the state. Abalone fishing by a commercial fisherman in the shallow waters within 3 miles of the shoreline of California and its off shore islands is not within the express meaning of section 6368. 6/10/76.

600.0130 Fees from Sport Fishing. Fees from sport fishing are included within the meaning of gross receipts from commercial fishing operations in determining whether the presumption contained in section 6368(b) is applicable. 3/17/80.

600.0140 Overhauling Before Use. If the only storage and use of a vessel in California is for the purpose of overhauling it before use in commercial deep sea operations outside the territorial waters of the state, such storage or use is not subject to tax. The fact that the vessel is documented ("registered" for foreign trade or "enrolled" for domestic commerce) is merely evidence that it may be used for their foreign or domestic traffic. 11/15/57.

600.0160. Party Boats. Since fishing party boat operators are engaged in commercial fishing operations when they take out fishing parties for hire, they are entitled to claim the exemption provided in section 6368, if the boats are actually used for such purpose more than 50 percent of the time outside the territorial waters of the state. 10/26/59.

600.0180 Sportfishing Boats. Sales of sportfishing boats or tangible personal property becoming a component part of sportfishing boats for which a commercial fishing license is required are exempt from sales tax to the same extent as comparable sales involving commercial deep-sea fishing vessels. Similarly, the principal use of the sportfishing boat must occur outside the territorial waters of the state. 10/31/58.

600.0202 Territorial Waters—Inland Lakes. Section 6368 and Regulation 1594 were intended to apply only to commercial deep sea fishing in the ocean which, in the case of persons claiming this exemption, would generally be off the western coast of California. "Territorial waters" and "deep sea fishing" are not used in reference to freshwater inland lakes. "Territorial waters" is a term which has evolved in international law, in a context of various degrees of control of ocean waters close to a country's coast.

Accordingly, a watercraft engaged in commercial fishing in a fresh water inland lake such as Lake Tahoe is not used for commercial deep sea fishing outside the territorial waters of this state within the meaning of section 6368. 3/13/96.

600.0205 Travel Time. An individual dives for sea urchins and also does some coral diving. The majority of the fishing is done within the three miles of the California coast but some fishing is done outside the territorial waters of this state.

Since the individual does engage in deep sea fishing operations outside the territorial waters of this state, it is appropriate to include the travel time in determining whether the principal use test is met for the watercraft exemption. 11/2/87.


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(d) "PRINCIPAL USE" TEST

600.0240 Deep Sea Fishing. "Principal use" refers to actual operations, so, for exemption, operations must involve fishing outside territorial waters of this state over 50 percent of time spent in total operation. 1/31/51.

600.0260 Deep Sea Fishing. The total time spent outside the terriorial waters of this state is deducted from the total time spent in all of the actual fishing operations, including the sailing time to and from the fishing grounds. If the time spent outside the territorial waters is greater than the time spent within the territorial waters, it is principally used outside the territorial waters of the state. The time the watercraft may be in storage or idle in the state should not be considered in determining the place of principal use. 3/16/51.

600.0265 Fishing Activities. Fishing activities within the three mile offshore limits of state waters, including the three miles surrounding island territories of this state, do not qualify as being outside the territorial waters of this state regardless of the distance or time it takes to reach these fishing grounds. Thus, a vessel making a trip of 60 miles to fish in waters of island territories of this state is not being used in territorial waters outside this state. The time spent journeying to the island does not qualify as "operational use" outside this state. 2/21/86.

600.0280 Use at Time of Sale. The principal use to which a watercraft is put, not the particular use in which it is engaged at the time of sale, determines taxability of the sale of a component part thereof. 2/16/51.

(e) COMPONENT PARTS OF WATERCRAFT

600.0300 Ballast. A high density mud ballast installed and sealed permanently in the ballast tanks of a vessel, to remain in place 20 years or more except for temporary removal for repairs or inspection of vessel, becomes a component part of watercraft within the meaning of section 6368. 4/20/65.

600.0320 Brine Inhibitor, used in freezing coils as part of refrigeration plant in systems affixed to structure of watercraft, and not requiring replenishment except to maintain proper freezing qualities, becomes component part thereof. 7/11/51.

600.0340 Cleansing Materials. A product used in the process of performing repairs to the structural part of a vessel, i.e., cleaning and gas-freeing of fuel tanks in preparation for burning and welding operations, is a consumable item not becoming a component part of the vessel, and hence is taxable. 3/25/55.


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600.0345 Component Parts for Tugboats. A company operates tugboats and barges inside and outside California. Many of the tugboats that are currently performing nonexempt work were principally engaged in interstate commerce (assisting ships) during their first year of operation. The company purchases tangible personal property which becomes a component part of the tugboats after the company begins using the tugboats for nonexempt work.

Whether the sale of property becoming a component part of watercraft is exempt depends upon the principal use of the watercraft after the sale of the component part. Even though the purchase of the tugboats had originally been exempt, the purchase of component parts are taxable if, within twelve months following the purchase of the component parts, the tugboats are not used principally in interstate or foreign commerce in the transportation for hire of persons or property. 3/12/92.

600.0350 Computer Software on Floppy Discs. Floppy discs, containing software necessary to drive computer hardware that is bolted to a vessel, qualify for the exemption provided by Regulation 1594 as a "component part" of a watercraft. To be considered a "component part" of a watercraft, the property must be an integral part of the watercraft, affixed or attached thereto in a substantial manner when in use. Floppy discs are placed into a computer disc drive for temporary use, then removed from the disc drive when they are no longer needed. Although the floppy discs are not permanently attached to the hardware, they are affixed to the hardware in a substantial manner when in use and, thus, are component parts of a watercraft. 7/10/96; 12/5/01. (Am. 2002–3).

600.0360 Covers, such as searchlight covers, are not exempt component parts. 9/25/51.

600.0375 Data Processing Equipment as Part of Watercraft. A data processing machine that is leased by a ship owner to assist in the record keeping in connection with feeding, housing and serving passengers being carried for hire in foreign commerce, and which is substantially attached to the ship by various anchoring and attachment devices and is connected to the ship's power system, is a component part exempt from tax. 9/13/76.

600.0378 Diesel Fuel. Diesel fuel is not considered a component part of a vessel. It is clearly a consumable supply and, thus, does not qualify for the exemption provided under section 6368. 12/14/82.

600.0380 Direction Finders, automatic pilots, marine depth sounders, affixed in substantial manner when in use, exempt. 11/21/50.

600.0400 Filters affixed to engines become a component part of the watercraft. 3/17/50.

600.0420 Fire Pumps. Hand operated fire pumps, mounted on plywood bases for use on fishing vessels are items of portable equipment rather than component parts of the vessel and, hence not within the watercraft exemption. 7/27/53.


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600.0430 Fishing Nets within "watercraft" exemption. Lampara fishing nets, purse seine nets and dragnets used in conjunction with watercraft in commercial deep-sea fishing operations outside the territorial waters of California are not taxable. Lampara nets, like purse seine nets, are attached to the boat by means of a cable held by turns on a winch drum. The winch is secured to the deck and is a permanent part of the boat's structure. Purse seine nets have been exempt from tax under section 6368. Based on similarity to purse seine nets, dragnets have been considered exempt from tax. The construction, attachment and use of Lampara nets do not differ materially from purse seine nets or dragnets, and are therefore also considered to fall within the "Watercraft" exemption. 12/2/74.

600.0440 Fishing Tackle. Sales of fishing tackle, such as nets, lines and fish hooks are not exempt, but sales of lag screws, nails and hooks used for repairing an exempt fishing boat are exempt. 6/18/57.

600.0448 Forklifts. Forklift trucks used to load and unload cargo on and off a vessel designed to have cargo admitted only through a stern ramp are not component parts of the watercraft, notwithstanding their essential nature to the operation of the vessel and the fact that while the vessel is en route the forklifts are lashed securely to the inner hull by heavy chains. Pursuant to Regulation 1594, to be a component part of watercraft, the item must be ". . . an integral part of the watercraft, affixed or attached thereto in a substantial manner when in use." (Emphasis added.) Forklifts obviously fail this test. 11/5/85.

600.0492 Lashing Gear. Wire rope, turnbuckles, shackles and clips qualify as a component parts and exempt from tax when principally used as lashing gear which is affixed to watercraft or an affixed part thereof and used in an exempt operation of the watercraft. Gear which is principally used to lash cargo to itself, to other cargo, or to dunnage not affixed to the vessel would not qualify because the gear would not be affixed to the watercraft. The fact that the equipment is used to lash cargo rather than running gear of the watercraft does not derogate from the exempt status if the watercraft qualifies for the watercraft exemption, nor is the wire rope subject to tax merely because it may be discarded at the end of the voyage. 1/9/80.

600.0500 Launching Ways or trestles installed upon a vessel which carries cargo for hire on the high seas, and which become a part of the vessel upon installation for the purpose of handling special cargoes, are component parts exempt from tax. 6/14/54.

600.0520 Life Boat Radio. If an item such as a portable life boat radio is securely affixed or attached to a life boat while in use, it qualifies as a component part of watercraft even though in a general way it may be described as portable because it is kept in some suitable storage area on the ship to be removed therefrom in case of emergency and is easily movable for that purpose. 9/4/57.

600.0540 Life Rafts. Life Rafts which are affixed or attached to the structure of a watercraft become an integral part of the vessel and qualify for the watercraft exemption. 2/13/68.

600.0560 Light Globes. Light globes are not component parts of a watercraft. However, lights and lanterns that are affixed or attached to the watercraft in a substantial manner when in use are component parts of the watercraft. Flashlights, battle lanterns, oil lamps, portable electric lights, and other lights used intermittently at various locations are not exempt under Regulation 1594. 5/25/50.


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600.0563 Live Bait Haulers. Live bait haulers are engaged in the business of catching live bait to be sold to sportsfishing boat operators and others. This activity constitutes commercial fishing operations since the hauler is engaged in these operations for a profit. Whether sales of the watercraft so engaged are exempt from tax under sec. 6368 depends on whether all the requirements of this statute and Regulation 1594 are met. 8/14/92.

600.0580 Lumber Dunnage. Lumber used in the erection of platforms, self-shorings and blocking on vessels for the purpose of increasing cargo capacity and prevention of cargo shifting, is not exempt under the watercraft exemption. 2/5/57.

600.0581 Lumber Dunnage. Lumber used in blocking and bracing vehicles and equipment, sheathing ammunition and building false decks, building acid boxes on decks, and building wooden catwalks over and across cargo on deck, does not become a component part of the watercraft when it is only shored and tied together, is never attached to the ship, and is generally removed at the end of the voyage. Tax applies to the sale or use of such lumber as provided in Regulation 1630, Packers, Loaders, and Shippers. 8/1/73.

600.0600 Manila or Wire Rope used as running gear, lashing or rigging equipment is component part of vessel and sale is exempt. 7/31/50.

600.0620 Paint Thinner, sold to steamship operators, does not become component part of watercraft inasmuch as thinner evaporates in the drying process. 5/19/52.

600.0640. Paint Used to Repair Vessel. The sale of paint to be applied to watercraft is exempt under section 6368 regardless of the fact that the paint is applied by contractors who would be regarded as consumers of the paint.

The law provides that the sale of property becoming a component part of certain watercraft is exempt. The fact that a painting contractor could not execute a so-called watercraft certificate does not deprive the transaction of its exempt status. While the certificate is adapted for use by the operator of watercraft, it could readily be modified for use by a painting contractor. 5/21/52.

600.0660 Refrigerant Gas, where bought by operators of watercraft for purpose of replacing refrigerants in systems affixed to structure of watercraft becomes component part of watercraft. 2/6/51.

600.0680 Spare Parts for Engines or other items themselves component parts of watercraft constitute "component parts." Fuel oil is not a component part of watercraft. 1/10/50.


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600.0700 Zinc Electrodes, used in water cooling system affixed to watercraft become component part of watercraft. 2/16/51.