Boat Purchase and Sale – Risk of Loss

One of the things that we are all taught in Law School, is that when considering a purchase/sale contract, one should think about when the risk that the goods are destroyed transfers from the seller to the buyer.  Usually this also implicates the moment at which the insurance of the buyer and seller comes into play.  Most boat transactions either have no contract (so the default rules apply) or they are governed by a contract prepared by the broker.  Usually this leads to the same result — the seller must cover the boat until the sale is completed — then its on the buyer if the thing burns up or sinks.   With the broker contract there is one other factor — the broker’s liability is usually waived and attorneys’ fees imposed for bringing him or her into a case.

I recently received a call from a purchaser with an incredibly hard-luck story.   He paid cash for a (luckily!) relatively modest Luhrs so his family could enjoy the summer.   The contract was prepared by the broker -and protected the broker especially.  At the time of the transfer of the money (the boat was to be physically delivered 5 days later) the buyer executed the insurance application which was immediately faxed by the boat broker to an insurance broker referred by the boat broker.  This took place on a Friday afternoon, with the boat to be picked up on the following Wednesday.

On Tuesday, things began to happen rapidly.  First, the insurance broker called to say that the application was not correctly filled out, and that it needed to be resubmitted.  Second, the marina called to say that the boat had sunk half way up the engines overnight (they’d called the seller first).  Third, the buyer resubmitted the insurance application (rejected, sunk!); tried to stop the broker from paying out the funds (rejected – paid to lienholding bank); and the seller and the seller’s insurance refused to have anything to do with the boat.  Uh oh.  The buyer wisely had the boat secured and the engines pickled.

I wish I could say that I had a magic answer for this family.  But I didn’t.  The total purchase price was about $26,000.  The repairs would probably cost $5-10,000.   For me to become seriously involved would immediately eat into any money available for the repair, with no realistic promise that I could put the family in a better situation than if they simply put the money into the repair.  Their issues were exceptionally complicated — including 1) whether they were the owners of the boat (probably not, as physical delivery had not occurred – see Purchase); 2) whether the seller and the seller’s insurance remained responsible (probably so, but forcing the issue would be costly); 3) whether the submitted application for insurance was sufficient to bind coverage, even if there were technical issues (probably enough to put the insurance broker on the hook – but again, expensive to enforce); and 4) whether the boat broker was liable for releasing the money, preparing a faulty insurance application, or on some other theory (probably yes, but with the risk of paying attorneys’ fees if unsuccessful).

These events served to highlight several issues for me.  First and always — evaluate the question of risk of loss and look for avoidable issues should things go wrong.  Second — many boat cases have papers transferred by mail in one manner; funds held in trust and delivered in a different way; and the physical boat transferring in yet a third location or time.   In cases like this, planning for insurance to be bound and clarifying the parties’ obligations in the gray areas are crucial elements of a purchase and sale.


Boat Purchase and Sale – Tax Planning

Most people contact us about boat tax after they receive a letter (or worse, an assessment) from a tax authority looking for payment.  That is a good time to get in touch — but that is not the best time.  The best time to act on boat tax is during the planning stage for the purchase — either before a contract is signed, or at least at the point that an addendum can be used to establish the taxable jurisdiction for the initial purchase, and so that experienced maritime counsel can assess any other issues that might arise.

A good plan for boat tax should always start with being sure that the initial transfer takes place in a favorable location.  This analysis is often complicated by the fact that the owner may live in one state, the seller in another, and boat and broker may be in a yet a third (or fourth) jurisdiction.  So how does one go about answering this question?  The crucial fact to determine is when and where the contract of sale is complete.  For planning purposes, this is also a fact within the control of the buyer and seller.

In most states, laws concerning the sale of goods (including boats) are guided by the Uniform Commercial Code (UCC), which is a model code that seeks to make laws on the sale of goods as uniform as possible in all 50 states.  All fifty states have incorporated at least some parts of the UCC into their commercial code.  While the UCC does not address or control sales tax, in many states it will define the “sale” and that will give a strong indication about where the sale takes place.  In those states which have adopted the UCC’s definition of when a sale occurs, the buyer and seller have several ways in which they can dictate where the sale takes place, and thus where taxes must be paid.

Rule 1: The location called for in the contract controls.

The UCC provides “Title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties.”  Md. Code Ann., Com. Law § 2-401.  The most important thing in working out the logistics of anything having to do with a contract for the sale of goods — including where it takes place– is the language of the contract itself.

If the parties specify where and when the sale will take place, that usually determines where the boat is taxable.  Obviously, there are limits to this, one can’t say the transaction takes place on the moon, if the boat and everyone associated with it is in New Jersey.  Simply stating that a contract will be completed somewhere does not automatically make it so.  However, if the seller is in Pennsylvania and the buyer is in Maryland, and the contract states that the sale is to be completed in Pennsylvania upon the seller sending the boat or title documents to the buyer, then the sale took place in Pennsylvania.  Likewise, if the contract says that the sale will be complete upon the buyer receiving the boat or title documents  in Maryland, then the sale will be deemed to have occurred in Maryland.  If the boat is moved to Delaware for the closing, the sale takes place in Delaware.   This rule is the one that can be best used by counsel to assure an orderly result.

Rule 2: If there isn’t an express agreement, the sale happens where the boat is delivered.  

“Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even though a document of title is to be delivered at a different time or place.” Md. Code Ann., Com. Law § 2-401.

If the contract does not specify where the sale is going to happen, then the location of the sale is generally determined by whether the location where the boat is delivered, nothwithstanding the delivery of title documents elsewhere.  If the seller is responsible for delivery, then the sale occurs wherever the boat is delivered to the buyer.  If the buyer is responsible for delivery, then the sale happens where the boat is transferred to the buyer or to a shipping company at the direction of the buyer.  So, if the boat is built in North Carolina for a buyer located in Maryland, and the buyer goes to North Carolina to get the boat — the sale takes place in North Carolina.  If the contract calls for the dealer to deliver the boat to Maryland, however — the sale probably takes place in Maryland.

Rule 3: If the boat is staying put, the sale happens where the last key paper is delivered.

Unless otherwise explicitly agreed where delivery is to be made without moving the goods, (a) If the seller is to deliver a tangible document of title, title passes at the time when and the place where he delivers such documents and if the seller is to deliver an electronic document of title, title passes when the seller delivers the document; or (b) If the goods are at the time of contracting already identified and no documents of title are to be delivered, title passes at the time and place of contracting.  Md. Code Ann., Com. Law § 2-401 (West)

If the boat is not being moved as part of the purchase contract, then the sale will happen when the seller gives the buyer the title documents — which generally does not happen until after payment is made (there are exceptions!).  The location is easy to determine if the seller and buyer are in the same location, and the buyer physically hands the seller the title documents.  If the seller is either mailing or electronically transferring the title documents, the law is a bit less clear.  The parties can still stipulate in the contract whether the sale is complete upon sending or receiving of the title documents, and the contract will control the location.  If the parties have not stipulated when the sale is complete, then it is like the sale happens where the buyer receives the contract, but Maryland has not addressed that directly.

It is also noteworthy that a Coast Guard Document (and the Bill of Sale that must be filed to transfer a documented vessel) are not considered to be title documents, at least by most Courts.  This means that a boat that has a state title may be treated differently from a boat that is Coast Guard Documented.

Final Thoughts

For most boats, the State of transfer will be plain the exact timing of the sale will not matter too much.  For a high value boat, however, selecting the State of transfer may be an easy way to avoid or defer a payment that can reach hundreds of thousands of dollars.  To be sure that things are done right, the contract should call for a specific state and for the sale to take place only at a specified moment, and the contract language should reflect the real-world actions of the parties.  If the contract does not specify, then care must be taken to have the boat (or the documents) change hands in the correct jurisdiction.  On a final note — I have never done a formal poll, but I imagine that most boat tax administrators believe that the boat’s location at the time of sale is the most important (or only!) fact concerning taxability.  For this reason, notwithstanding what the law says, I always pay close attention to where the boat is at time of closing.  Good luck, and feel free to shoot us an email if you have a question.

Vessel Purchase and Advice

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For the past decade the attorneys at Baylaw, LLC have provided expert legal advice to yacht buyers throughout the world.  Purchase issues can range from tax advice, to contract drafting, offshore and inshore flagging, and advice on the purchase of or through an LLC.   We have represented hundreds of owners with boats ranging from runabouts to yachts costing millions of dollars.  We can provide rapid and accurate advice to purchasers and sellers.

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