Originally published on Forbes.com Aug 22, 2013
It looks like John Podmajersky will be paying the State of Michigan nearly $100,000 in use tax on his 65 foot yacht, the Laughing Dolphin, based on this decision of the Court of Appeals . Interest and penalties will nearly double that. Mr. Podmajersky appears to be a controversial figure in both yacht racing and the Chicago arts world, but I’m just a tax blogger and the yacht story is interesting enough. There are three states involved in the story, so we will handle it geographically rather than chronologically.
The most important tax principle to remember as you follow along is that sales tax is backed up by use tax. If you don’t pay sales tax when you buy something, the state where you bring it may want to get use tax from you
Rhode Island
The Laughing Dolphin was actually owned by an eponymous Rhode Island company, Laughing Dolphin LLC, of which Mr. Podmajersky was the majority owner. The yacht was purchased in Rhode Island which does not tax the sale of boats. Not for naught is Rhode Island called the Ocean State. The state flag has an anchor in the center. The US Naval War College is in Newport, as are many, many yachts, which fits well with the famous mansions including The Breakers.
So you really can’t blame John Kerry for not home-porting the 76 foot Isabel in one of the ports in the state that he was representing in the US Senate. Avoiding over $400,000 in Massachusetts use tax as this story in the Boston Herald relates was probably incidental. The thing about Massachusetts is that unless you are on one of the major East-West roads, you can’t drive more than 50 miles or so without crossing a state line allowing you, if you are so inclined, to buy your liquor in New Hampshire, do your casino gambling in Connecticut and keep your tax-free yacht in Rhode Island.
At any rate, there was no requirement to pay sales tax on the purchase and if Mr. Podmajersky had intended to use Laughing Dolphin on the ocean, it could have stayed in Newport. Mr. Podmajersky lives in Chicago, though, and Laughing Dolphin was destined for the Great Lakes.
Illinois
Mr. Podmajersky, living in Chicago and all, Illinois thought that it should be able to get use tax on the Laughing Dolphin. His attorney explained why that was not correct, since the Laughing Dolphin spent very little time docked near the Windy City:
The letter provides in relevant part: “It is the taxpayer’s position that the Laughing Dolphin was never used more than 30 accumulated days in any calendar year in Illinois since its purchase in July 2006 and, thus, has never been subject to Illinois use tax.” The letter continues, “at no time was the boat in Illinois for more than 30 days in 2006, 2007 or 2008. As you can see, the Laughing Dolphin spends most of its time in Michigan. Therefore, the taxpayer was not subject to the Illinois Use Tax in 2006 through 2008.”
So the state where he bought the boat does not want to tax it and the state where he lives can’t tax it. Seems like the end of the story except that Illinois did an unkind thing:
The Illinois Department of Revenue forwarded this information to the Michigan Department of Treasury, which then began an inquiry to determine whether the boat was subject to use tax. On October 12, 2009, Treasury issued a bill of taxes due for the 2006 tax year in the amount of $98,557.97, representing $66,000 in tax due, $16,500 in penalties, and $16,057.97 in interest.
Michigan
Mr. Podmajersky’s reasoning as to why the Laughing Dolphin should not be subject to Michigan Use Tax is something of an epic tale of boating woes. It reminds me of a little plaque I saw for sale in a Newport gift shop that defined a boat as a hole in the water surrounded by wood into which one pours an endless stream of money. The essence of his defense is that even though the boat was in Michigan during the relevant period to be subject to use tax, it was not there on purpose:
Petitioners hired a professional captain to transport the boat from Rhode Island to Chicago, traveling through New York and then through the Great Lakes. The boat departed Rhode Island on July 31, 2006. Between August 11 and August 13, the boat stopped in Cleveland, Ohio to pick up Podmajersky and three guests for the remainder of the trip.
According to Podmajersky, a guest traveling on board the boat mistakenly pumped hundreds of gallons of water into the fuel tanks on August 16, 2006, causing a catastrophic breakdown in Lake Michigan and necessitating a tow. A tug boat arrived several hours later and towed the boat to the Irish Boat Shop in Harbor Springs, Michigan.
From there it was one GD thing after another:
On September 3, 2006, after the repairs were complete, Podmajersky took the boat back out onto Lake Michigan. According to Podmajersky, “fter being underway for some time, the vessel service indicators again began to alert us to water in the fuel lines. The vessel engines were not operating properly, and it was clear that the water had not been fully removed from the fuel system.” Further, Podmajersky averred: “The fuel filters on the vessel continued to fill with water and numerous systems indicators represented that water remained a safety hazard for the boat.” “I had to stop the boat every 15 minutes to clear water and algae from the fuel filters.”
The Decision
Mr.Podmajersky ended up bringing the boat back to Michigan for winter storage in 2006. Since that was more than 90 days after purchase, that apparently would not have created liability for use tax, since he was not a Michigan resident. Of course the Laughing Dolphin spent a lot of time in Michigan during the ninety days after purchase, but that was not on purpose. The Appeals Court did not buy the argument:
“Although it may have been a practical necessity to repair the boat in Michigan, that does not change the fact that keeping the boat here for those purposes constitutes storage and use.”
Contrary to petitioners’ argument, nothing in MCL 205.93(1)(a) requires that Treasury establish the taxpayer’s subjective intent for bringing the property into the state. Rather, under MCL 205.93(1)(a) it is presumed that property is acquired for use, storage, or other consumption in Michigan and is therefore subject to taxation if the taxpayer brings the property into the state within 90 days of purchase.
The Moral
When I write a post on a convoluted federal income tax decision, I will often get a comment that things would be so much simpler and efficient if we had some sort of sales tax. There is also a tendency in some circles to maintain that states inevitably handle things better. Although, I don’t doubt that there are people who seek to avoid taxes for principled reasons, I think for the most part, people seek to avoid taxes, because they prefer to keep the money for themselves. Were it not for the carelessness of his guest, Mr. Podmajersky might have been able to avoid sales or use tax entirely on the Laughing Dolphin and who can blame him for trying ?
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