Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 570.0590


570.0590 Functional Use. A vessel was built and delivered to the purchaser outside California for the stated purpose of racing in the "Around Alone" solo sailing race around the world. One week after it was purchased, the vessel was sailed into California where it made various appearances at boat shows and other events, participated in both crewed and solo races and was used to conduct "classroom seminars" over the next 10 months. These activities were conducted in order to obtain funds for equipping the vessel and to attract race sponsors. The vessel then departed California and, to date, has not returned to this state.

The purchaser asserts that the first functional use of the vessel occurred when the vessel raced solo for the first time from the East Coast of the United States in the "Around Alone" race after departing this state. The purchaser makes this assertion because the vessel was created specifically to be sailed around the world by one person in the "Around Alone" solo sailing race and is not suitable for recreational sailing or coastal yacht racing. Therefore, the purchaser contends that no California sales or use tax is owed because no functional use was made of the vessel in this state.

Sales and Use Tax Regulation 1620(b)(3) specifies that "functional use" means use for the purposes for which the property was designed. The functional use of a racing sailboat is to sail. When the vessel was delivered to the purchaser outside California and it subsequently was sailed from the out-of-state location into this state, the first functional use of the vessel occurred outside California. Although the first functional use of the vessel occurred outside California, the vessel entered this state within 90 days of its purchase and was used in California more than one-half of the time during the six-month period following its entry into this state. [See note below.] Therefore, although the vessel was first functionally used outside California, it was also used in this state in such a way that it is considered to have been purchased for use in this state. Therefore, the purchase of the vessel is subject to use tax. 3/6/03. (2004–1). (Am. 2006–1; Am. 2008–1).

(Note: For the period October 2, 2004 through June 30, 2007, under certain conditions any vehicle, vessel, or aircraft purchased outside of California and brought into the state within 12 months from the date of its purchase is presumed to be acquired for storage, use, or other consumption in California and subject to use tax.) (Regulation 1620(b)(5).)