Florida Tax Attorney Blog

A recent article published by Soundings Trade Only Today, a news source for marine industry professionals, touted the success of Florida's $18,000 sales and use tax cap on boats purchased or brought into Florida. According to the article, Florida generated some $13.4 million in direct sales tax revenue from sales of tax-capped boats during 2011.

According to a joint study conducted by the Florida Yacht Brokers Association (FYBA) and the Marine Industries Association of South Florida, the marine sales tax cap, which was enacted in 2010, has impacted the maritime industry in two significant respects. First, the average sale price for post- sales tax cap transactions was about $907,000. This figure represents nearly twice the average pre- sales tax cap. Second, out-of-state closings (presumptively to avoid sales tax) dropped from 21.5 percent to 12.8 percent.

In light of the success of the marine sales tax cap, a spokesman for FYBA stated that "setting a reasonable tax basis for high dollar purchases provides an incentive for more boats to be purchased, provisioned and kept plying the waters of Florida." Of course, this is a basic principle of tax policy in general. Unfortunately, however, this fundamental principle seems to have been forgotten in this new "occupy Wall Street" era of proposed "millionaire's taxes."
Aside from the inherently unresolvable policy issues associated with a millionaire's tax (e.g., class warfare, enhancing the social gap while only minimally closing the economic gap between the rich and the poor), raising taxes leads to decreased spending. While this may be less true with respect to inelastic items such as food, housing, and transportation, it cannot be debated with respect to more elastic luxury items . By contrast, reducing taxes stimulates the economy by boosting spending.

On the surface, one might be unsympathetic to the plight of the white-collar tax payer who is required to reduce his or her discretionary spending on luxury items such as boats, traveling, dining out, etc. But in the end, it all comes back to the middle-class because it is the middle class who will inevitably bear the incidence of a millionaire's tax. It is the middle-class who work in the shipyards where the boats are manufactured and the boat dealerships and brokerage houses where the boats are sold. It is the middle class who work and operate the upscale restaurants in which the wealthy dine. It is the middle class who repair and sell the Bentleys, Mercedes, and Porsches which the wealthy drive. The list goes on and on.

Moral of the Story: Love them or hate them, the spending habits of the wealthy keep many Americans employed. So don't kill the goose that lays the golden egg.

The Florida maritime sales tax cap is compelling evidence of the longstanding and well-established principle that reasonable levels of taxation stimulate economic growth. With that being said, other areas of government - both local and federal - would be well-advised to follow the Florida maritime industry's lead.

Pursuant to I.R.C. § 861(a)(3), "[c]ompensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if the labor or services are performed by a nonresident alien individual in connection with the individual's temporary presence in the United States as a regular member of the crew of a foreign vessel engaged in transportation between the United States and a foreign country or a possession of the United States."

Consequently, nonresident crew members working onboard a foreign flagged yacht may not be subject to the withholding requirements found in I.R.C. §§ 3402 or 1441, so long as that yacht is engaged in transportation between the U.S. and a foreign country or U.S. possession. In this regard, it should be noted that U.S. territories (e.g., Puerto Rico, U.S. Virgin Islands) and their territorial waters are not considered to be part of the U.S. for purposes of I.R.C. § 861.

In the wake of the recent congressional debt-reduction deal, there has been a lot of talk about a luxury tax as a means of generating additional revenue. But with the yachting industry based primarily out of South Florida, a luxury tax would be detrimental to Florida's already ailing economy.

Proponents of a luxury tax argue that if taxes must be increased, it should be in the form of a luxury tax because a luxury tax would target the wealthy (who, according to them, should pay more taxes than less wealthy Americans who receive the same government services). Proponents further tout the "fairness" of a luxury tax, contending that taxpayers can avoid a luxury tax by abstaining from the purchase and consumption of luxury items, such as yachts, jets, and expensive automobiles.

But "fairness" was the cornerstone of the luxury tax enacted in 1991 under the Bush Administration. Proponents of that tax contended that the 10% tax on luxury items was a proficient means of raising revenue insofar as wealthy Americans who purchase luxury items would bear the tax without financially affecting lower- and middle-class Americans.

But while the Bush Administration might have had noble intentions, the practical effect of the luxury tax of the early 1990s was to destroy jobs, spike unemployment, and dismantle the previously well-established American shipbuilding industry.

Indeed, Viking Yachts, which was the largest American shipbuilder at that time, was forced to fire more than 81% of its workforce and discontinue production operations at one of its two U.S. manufacturing facilities within eight months of the luxury tax taking effect. In addition, more than 33% of American-based yacht building companies abated production altogether during the first year of Bush's luxury tax regime.

Continue reading "LUXURY TAX WOULD DESTROY SOUTH FLORIDA YACHTING INDUSTRY" »