Boat and Boat Motor Sales Tax Audits: Texas Enforcement Trends

As a general rule, boats and boat motors are subject to sales and use tax under Texas law. This means that sellers must generally collect sales tax at the time of sale, and if a seller does not, the purchaser must pay an equivalent use tax to the Texas Comptroller’s Office. Noncompliance can trigger audits, interest and penalties, and we have seen the Comptroller’s Office prioritize enforcement in this area in recent years.

We have seen some other notable trends in this area as well. Here are some key boat and boat motor tax considerations for sellers, purchasers, and owners to keep in mind:

Out-of-State Boat and Boat Motor Purchases Are Subject to Tax

Under Texas law, out-of-state purchases of boats and boat motors are subject to tax when the boat or motor is used in Texas. Broadly, there are two possible scenarios:

• If the seller has nexus with the State of Texas (either as a result of physical contacts or having $500,000 or more in annual “total Texas revenue”), the seller must collect and remit sales tax; or,
• If the seller has no nexus with the State of Texas, the purchaser must pay use tax at the time of purchase.

Of course, if an out-of-state seller does not collect sales tax, this does not mean that the purchaser is off the hook. If an out-of-state seller is supposed to collect sales tax on a boat or motor purchase and fails to do so, the purchaser must timely pay the applicable use tax to the Texas Comptroller’s Office.

However, there is an exception that applies when a purchaser pays sales tax to another state. As the Texas Comptroller’s Office makes clear, “[a] buyer can receive credit for tax legally due and paid in another state for a boat or boat motor brought into Texas when titling and registering the boat.” Even so, this is a common issue during the audit process, and targeted purchasers should be prepared to affirmatively demonstrate that they have paid sales tax to another state if they have not paid sales or use tax to the Texas Comptroller.

Temporary Use Permits Are Subject to Strict Limits

Another common issue involves the Texas Comptroller’s Office questioning the validity of temporary use permits. Under Texas law, bringing a boat into the State of Texas does not trigger sales or use tax liability if the purchaser obtains a temporary use permit—which allows for tax-free use for up to 90 days.

Due to the substantial amount of tax that purchasers can owe, it is not unusual for purchasers to attempt to evade tax liability—or at least delay tax liability for as long as possible. In some cases, this will involve obtaining a temporary use permit. But, the Texas Comptroller’s Office is now well aware of this tactic, and it is targeting purchasers who have improperly obtained (or overstayed) temporary use permits with increasing frequency.

Boats and Motors Purchased for Use in Another State Must Be Moved As Required By Law

Instead of securing temporary use permits, some people attempt to avoid Texas sales and use tax liability on boat and motor purchases by claiming they intend to use the boat in another state. As the Texas Comptroller’s Office also makes clear, “[a]n individual can buy a boat or boat motor tax-free” in the following scenarios:

• “[T]he boat or boat motor is removed from this state within 10 days of purchase;” or,
• “[T]he boat or boat motor is placed in a permitted repair facility for repairs or modifications within 10 days of purchase and removed from this state within 20 days of completion of the repairs or modifications.”

These provisions are commonly abused as well, and the Texas Comptroller’s Office is increasingly targeting purchasers who have falsely claimed (or appear to have falsely claimed) that they purchased their boats or boat motors for out-of-state use. If a purchaser cannot affirmatively demonstrate that a boat or motor has timely been moved out-of-state (and not on a temporary basis for the purpose of attempting to evade tax liability), this can create exposure to liability for back taxes, interest, and penalties.

Leases, Rentals, Charters, Repairs and Other Services Are Taxable in Most Cases

Under Texas law, services including leasing, renting, chartering, and repairing boats and boat motors are generally subject to state sales tax. Failure to pay sales tax on these types of boat-related services is also a common issue in Texas sales and use tax audits. Materials and parts used for boat repairs and remodeling are also generally taxable in Texas. While exemptions apply to qualifying sales by boat builders, abuse has also led to increased scrutiny and enhanced enforcement efforts in recent years.

The Texas Comptroller’s Office is Aggressively Pursuing Enforcement When Warranted

Since the State of Texas relies heavily on sales and use tax for revenue, this is a priority enforcement area for the Texas Comptroller’s Office. In addition to conducting audits, the Comptroller’s Office aggressively pursues the collection of unpaid amounts owed. This includes not only unpaid sales and use tax, but also accrued interest and penalties.

The Comptroller’s Office has several means of enforcing taxpayers’ liability. These include account freezes and asset seizures, among others. As a result, when facing Texas sales and use tax audits related to boats and boat motors, individuals and businesses must consider not only their potential liability exposure, but also their risk of facing formal collection actions. In all cases, an informed and strategic approach is key, and targeted individuals and businesses should promptly engage experienced legal counsel to communicate with the Comptroller’s Office on their behalf.

Contact the Experienced Texas Sales and Use Tax Lawyers at Brown PC

If you need more information about the risks of a boat-related Texas sales and use tax audit, we encourage you to contact us promptly. To request a confidential consultation with an experienced Texas sales and use tax lawyer at Brown PC, please call 888-870-0025 or contact us confidentially online today.