Oh! The Lengths People Go (to Avoid Sales Tax) – Wacky Tax Wednesdays

Port Townsend, Washington, is a picturesque historic port on the Olympic Peninsula. It's all but surrounded by water and positioned to enjoy unobstructed views of Mount Baker and Mount Rainier. On clear nights, you can see the lights of Victoria, British Columbia. In this part of the country, the border between the United States and Canada runs through the middle of the Strait of Juan de Fuca — the setting of this wacky tax tale.

Our story begins with a California yacht broker delivering a yacht to a point three miles off the coast of Port Townsend, near or at coordinates N 48° 13’ 36” W 122° 3’ 12.” The yacht broker, taxpayer in this case, failed to submit sales tax on the transaction to the Washington State Department of Revenue — something the DOR Audit Division noticed.

The coordinates matter. According to the broker, the transfer of the yacht “occurred further than three miles from the Washington State coastline and is therefore outside Washington’s territory and exempt from the retail sales tax.”

In the findings of fact outlined in Washington Tax Determination #331, the new yacht was harbored for eight days in Seattle’s Elliot Bay and was then moved by the Taxpayer’s commissioning team to a marina in Anacortes. Once the vessel was moored in Anacortes, the following transpired:

“Buyer chartered a separate vessel in Port Townsend, Washington and traveled three hours to latitude N 48° 13’ 36” and longitude W 122° 53’ 12”,where the Buyer boarded the [yacht], which was separately delivered to those coordinates from Anacortes by Taxpayer.”

Port Townsend has a well-regarded maritime industry. Its Wooden Boat Festival will mark its 38th anniversary next month and its Boat Yard can handle vessels up to 150 feet long and weighing up to 330 tons. Why then, was the new yacht not delivered to Port Townsend in the first place? The route from Seattle to Anacortes passes right by Port Townsend. And if a water transfer was necessary, why not anchor the yacht in Port Townsend Bay?

Sales tax

It appears the yacht broker was trying to avoid paying sales tax.

The Taxpayer insists that “the transfer occurred further than three miles from the Washington State coastline… outside Washington’s territory.” Therefore, he argues, the transaction is exempt from retail sales tax. To shore up his argument, he presents this defense:

“At the most fundamental, however, it is important to note that absent an express declaration by Congress or ruling of the Supreme Court, the waters beyond the three-mile line are presumptively outside the territory of the state…. Washington’s territorial claims to the Strait of Juan de Fuca primarily rest of the description of the state’s boundaries codified in the state constitution…”

The Appeals Division of the DOR disagrees, and supports its stance with citations from the Washington State Constitution, a United Supreme Court ruling, and the Submerged Lands Act of 1953. According to these sources, the international boundary is indeed “midchannel” in the strait.

The yacht broker is therefore liable for sales tax and B&O tax on the transaction, plus interest.

And perhaps an international boundary dispute has been avoided.

photo credit: davisarthur10 via photopin cc