State of Rhode Island - Division of Taxation
Ruling Request No. 2017-04
Request for Ruling Regarding the Applicability of R.I. Gen. Laws § 44-18-30(48) to the Sale and Storage, Use, or Other Consumption of a Boat
Taxpayer requested a declaratory ruling ("Ruling Request") to determine whether R.I. Gen. Laws § 44-18-30(48) exempts from sales and use tax: (1) its receipt and ownership of a boat, (2) its lease of the boat to the lessees (“Lessees”), (3) its receipt of payments under the Lease, and (4) its potential sale of the boat to the Lessees.
The facts set forth below are taken from the statement of facts presented in the Ruling Request dated June 5, 2017.
Taxpayer is a not-for-profit corporation with its principal office located outside of Rhode Island but within the United States. Pursuant to a determination letter issued by the Internal Revenue Service in 1983, Taxpayer has been and is classified for federal income tax purposes as a charitable organization under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. Taxpayer and an affiliated group of fifty-five (55) other charitable organizations operate programs for troubled youth and hold property and raise funds to support those activities. The group’s most significant activity is the operation of programs to rehabilitate troubled youth through education, training, counseling, discipline, and productive work and marine, wilderness, and other environmental education and rehabilitation programs through their juvenile justice programs that are offered as an alternative to juvenile incarceration.
As part of its fundraising activities, Taxpayer receives contributions of property, including boats, from donors. One recent such donation involved Taxpayer’s receipt of a fifty-two-foot and six-inch Coast Guard-documented vessel. Taxpayer has received ownership of the vessel in Rhode Island. It is anticipated that Taxpayer will lease the vessel to a husband and wife, the Lessees, who are residents of another state, for a term of three (3) years. A copy of the proposed lease (“Lease”) was submitted with the Ruling Request.
It is anticipated that the vessel will be moved by the Lessees, following the commencement of the Lease, to a state outside of Rhode Island and that the vessel will be berthed out-of-state during the term of the Lease. At the end of the Lease term, the Lessees have the option under the Lease of acquiring the vessel for an agreed price. At the commencement of the Lease, while the vessel is still located in Rhode Island, the Lessees will make various payments to Taxpayer, including a security deposit, a first month’s payment of rent, the prepayment of so-called short term rent, and a fee for an option to purchase the vessel at the conclusion of the Lease. Taxpayer requests a declaratory ruling on its potential Rhode Island Sales & Use Tax obligations in connection with this transaction.
Based on the facts provided, whether (1) receipt and ownership of the vessel, (2) its lease of the vessel to the Lessees, (3) its receipt of payments under the Lease, and (4) its potential sale of the vessel to the Lessees are exempt from the Sales & Use Tax by R.I. Gen. Laws § 44-18-30(48).
Pertinent Local Statutory and Regulatory Law
R.I. Gen. Laws § 44-18-18 imposes a sales tax on all “sales at retail” in Rhode Island. Alternatively, the state imposes a use tax under R.I. Gen. Laws § 44-18-20 “on the storage, use, or other consumption in this state of tangible personal property; prewritten computer software delivered electronically or by load and leave; or services as defined in § 44-18-7.3.” R.I. Gen. Laws § 44-18-8 defines “retail sales” or “sale at retail” as “any sale, lease or rentals of tangible personal property, prewritten computer software delivered electronically or by load and leave, or services as defined in R.I. Gen. Laws § 44-18-7.3 for any purpose other than resale, sublease or subrent in the regular course of business.”
Under R.I. Gen. Laws § 44-18-7(1), the term “sales” means and includes “any transfer of title or possession, exchange, barter, lease, or rental, conditional or otherwise, in any manner or by any means of tangible personal property for a consideration. ‘Transfer of possession’, ‘lease’, or ‘rental’ includes transactions found by the tax administrator to be in lieu of a transfer of title, exchange, or barter.” R.I. Gen. Laws § 44-18-16 defines “tangible personal property” as “personal property which may be seen, weighed, measured, felt, or touched, or which is in any other manner perceptible to the senses. ‘Tangible personal property’ includes electricity, water, gas, steam, and prewritten computer software.” Rule 6 of Regulation 12-62 discusses the sourcing rules for the lease or rental of tangible personal property.
Under R.I. Gen. Laws § 44-18-25, all gross receipts are presumed to be taxable until the taxpayer proves otherwise to the Tax Administrator. R.I. Gen. Laws § 44-18-30(48) is a sales and use tax exemption that states in pertinent part: “Notwithstanding the provisions of this chapter, the tax imposed by §§ 44-18-20 and 44-18-18 shall not apply with respect to the sale and to the storage, use, or other consumption in this state of any new or used boat.” A taxpayer claiming entitlement to a statutory tax exemption has the burden of proving it falls within the terms of the statute. American Hoechst Corp. v. Norberg, 462 A.2d 369(R.I. 1983).
Taxpayer argues that R.I. Gen. Laws § 44-18-30(48) exempts the ownership and sale of the vessel from Rhode Island sales and use tax. Additionally, Taxpayer asserts that any payments that Taxpayer receives in connection with the sale of the vessel, such as the option payment, are not subject to tax. Taxpayer states that although Regulation SU 12-62 does not address the treatment of payments made for the lease or rental of a boat, R.I. Gen. Laws § 44-18-7(1) defines the term “sale” to include a “lease or rental”. Therefore, since the lease of the vessel is a “sale,” the transaction is tax-exempt under R.I. Gen. Laws § 44-18-30(48).
First, Taxpayer states that it received ownership of the boat or vessel in Rhode Island. A boat or vessel falls within the definition of tangible personal property under R.I. Gen. Laws § 44-18-16. Since Taxpayer’s initial receipt of the boat was the storage, use, or other consumption of tangible personal property in Rhode Island, the transaction is exempted from Rhode Island sales and use tax by the language of R.I. Gen. Laws § 44-18-30(48).
Second, the leasing of the vessel from Taxpayer to the Lessees is also exempt under R.I. Gen. Laws § 44-18-30(48). As noted earlier, R.I. Gen. Laws § 44-18-7(1) includes a lease or rental in its definition of “sales”. The sale and storage, use, or other consumption of new and used boats is not subject to Rhode Island sales and use tax.
Third, the payments under the Lease are not subject to Rhode Island sales and use tax. Rule 6(b) of Regulation 12-62 provides the sourcing rules for the lease or rental of tangible personal property. The first lease payment would be sourced to the location where receipt by the purchaser occurred. Receipt of the vessel by the Lessees here appears to occur in Rhode Island. After the three-year Lease term begins, the Lessees intend to berth the boat out-of-state during the duration of the Lease. Since the initial payments under the Lease are part of a “sale” under R.I. Gen. Laws § 44-18-30(48), they are exempt from Rhode Island sales and use tax.
Subsequent periodic lease payments after the first payment would be sourced to the primary location of the property during each period covered by the payment. Per Rule 6(b) of Regulation 12-62, “[t]he primary location of the property shall be the address for the property provided by the lessee that is available to the lessor from its records maintained in the ordinary course of business, when use of this address does not constitute bad faith.” In this case, that address would be an out-of-state location within the United States. As subsequent lease payments will be sourced to another jurisdiction where the vessel is being stored, used, or otherwise consumed, this agency has no opinion as to how that other state may treat the subsequent lease payments or the storage, use, or other consumption of the vessel under the other state’s sales tax laws. If there is no lease of the vessel in Rhode Island or any storage, use, or other consumption of the vessel in Rhode Island, then Rhode Island sales and use tax does not apply. Even if the lease or storage, use, or other consumption of the boat occurred in Rhode Island, R.I. Gen. Laws § 44-18-30(48) would exempt the recurring Lease payments from Rhode Island sales and use tax.
Finally, the sale of the vessel in Rhode Island would be nontaxable under R.I. Gen. Laws § 44-18-30(48). In the Lease, the option to purchase the vessel contains an option period that would begin six (6) months prior to the expiration of the Lease term and end at the term’s end. In other words, the Lessees could only purchase the boat during the final six (6) months of the Lease term. If the sale does not occur in Rhode Island (i.e., the Lessees do not receive the boat in Rhode Island), no Rhode Island sales or use tax would be due. Even if the sale occurred in Rhode Island, R.I. Gen. Laws § 44-18-30(48) exempts the sale of boats from sales and use tax. However, this exemption does not apply to the sale of spare parts or any other tangible personal property acquired for the vessel.
Based on the facts provided, Taxpayer’s (1) receipt and ownership of the vessel, (2) its lease of the vessel to the Lessees, (3) its receipt of payments under the Lease, and (4) its potential sale of the vessel to the Lessees are not subject to the Rhode Island Sales & Use Tax because these transactions are exempted by R.I. Gen. Laws § 44-18-30(48).
This ruling is limited to the facts stated herein and may be relied upon by the Taxpayer and shall be valid unless expressly revoked because (1) the applicable statutory provisions of law are amended in a manner that requires a different result; (2) the underlying facts described herein materially change; or (3) a decision on point has been issued by the Rhode Island or Federal courts.
Neena S. Savage
August 8, 2017