Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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585.0000 VEHICLES, VESSELS, AND AIRCRAFT—Regulation 1610

Annotation 585.0198


585.0198 "Sham Transaction"—Transfer of Vessel Outside State. A taxpayer purchased a documented vessel which was physically located in Long Beach, California. The bill of sale provided that title to the vessel would transfer to the purchaser upon delivery "outside the territorial waters of the state." Immediately after delivery of the vessel to the taxpayer in international waters, the taxpayer sold the vessel to his father "outside the territorial waters of the state." The vessel immediately re-entered "the territorial waters of the state." The son claims that no sales or use tax applies to his purchase of the vessel because the sale occurred outside the state and the vessel was not purchased for his use in California. Also, section 6285(a) states that the transfer of a vessel between enumerated family members is exempt from sales and use taxes in certain situations.

In this situation, a determination should be issued to both the son (seller) and the father (purchaser) since, at this point in time, there are insufficient facts to decide with certainty whether the son or the father is responsible for the use tax. The basis for a determination against both parties is that the transaction appears to be a "sham" and the mid-ocean purchase and sale was clearly intended to defeat the imposition of the applicable tax.

If there is evidence that the taxpayer has been paying property taxes, slip rental or upkeep on the vessel, he will be liable for the tax on the basis that the father, as registered owner, is merely a "straw man." On the other hand, if the father is really the owner because he continues to pay taxes, slip rental or upkeep, the Board should assess tax against the father on the basis that the son was merely a "straw man" or an agent to facilitate the father's purchase of the vessel. 7/21/95.