Yacht owners will cruise international waters to save a bundle

Jack Darcy of Redmond paid cash for a $2.2 million yacht through a Lake Union dealership last April, but he didn't pay a dime in Washington sales taxes.

Instead, the retired corporate executive saved $200,000 by signing papers to buy his snazzy new 73-foot yacht three miles off Washington's coast, in international waters.

Many boat owners will go to great lengths to avoid state sales taxes. California yacht buyers have used Darcy's method so often the state of California recently tightened a tax loophole that encouraged it -- though the loophole wasn't eliminated entirely. Laws in Rhode Island and Missouri specifically exempt owners of big boats from sales taxes.

Darcy's escape from Washington taxes was planned and choreographed with a lawyer, said the 72-year old computer-chip millionaire and six-time grandfather.

The boat was taken from Seattle to a location in the Pacific Ocean beyond the Strait of Juan de Fuca. Once it was verifiably out of state, Darcy's hired captain took a photograph of Darcy signing transfer papers with seller Lex Mitchell of Lake Union's Emerald Pacific Yachts. Visible behind them was the vessel's electronic chart showing their exact longitude and latitude. They held a copy of that day's Seattle Post-Intelligencer to prove the date, Mitchell said.

All this was done to assure the Washington State Department of Revenue -- should it ever ask -- that the deal occurred outside taxable jurisdiction.

"Jack is nothing if not smart," said Mitchell.

There is a downside.


		Phil H. Webber / P-I
	Yacht captain Ross Lyon, left, and salesman Lex Mitchell were on hand when Jack Darcy closed the deal on his yacht, the Kinship, three miles off the Washington coast. Signing the papers in international waters saved Darcy $200,000.

For all his trouble, the retired CEO -- who moved to Washington 10 years ago because he said "it is a nice place to live" -- is banned from motoring his own state's waters. The 72-year-old divorced wanderer must never be seen by revenue agents aboard his boat the Kinship in these parts. Screw up and he'll pay $200,000 for what is known as a "use tax."

But the Kinship did return to Seattle recently, sporting on its stern the name of its adopted home port: Juneau, Alaska. Darcy came home, too, but separately.

Hired yacht captain Ross Lyon sailed the Kinship into Lake Union in September, without Darcy aboard, after Darcy had spent several months cruising in British Columbia and Alaska. Darcy carefully explained the visit, speaking by telephone from his Redmond home. He said he had leased the Taiwan-built boat back to Emerald Pacific so the seller could exhibit it at a floating boat show.

Mitchell was aboard the expatriate boat at the show, showing potential buyers of sister ships its mahogany floors, expensive flat-screen TVs, lush bedrooms and gleaming bathrooms. Darcy stayed away, attending to business at home.

When the Kinship sailed off on Sept. 29, Darcy waited until it reached Victoria, B.C., to board, as his lawyer advised. Today, he's somewhere off Mexico or Southern California.

Offshore signings -- as the Kinship ceremony is commonly called -- are a rarity in Washington but common in California. Before California state law changed last month, resident boat owners needed only to keep their craft away from California for 90 days after purchase. Then they could sail home and never pay a sales tax. Most went to Mexico and were dubbed the 90-day yacht club.

The loophole also applied to airplanes. When California Gov. Arnold Schwarzenegger was an actor, back in 1990, he saved $900,000 on the purchase of a $12 million business jet by keeping it out of state the appropriate time.

Now Schwarzenegger has approved a new law, promoted by Democrats, that says the sales tax can still be avoided but your purchase must stay out of state for a year rather than 90 days. California yacht sellers are upset. Before the law changed, as many as 90 percent of buyers paying more than $200,000 in California signed for their boats offshore, said Cris Wenther, a La Jolla, Calif., tax attorney who developed the procedure used by Darcy.

"An unbelievable number of yacht transactions" occurred shortly before midnight Oct. 1 when the California law went into affect, said Wenther, who also represents clients in Washington. Because of a loophole in the new law, last-minute buyers signed contracts for boats that won't be delivered until 2006, but will still be grandfathered in California under the old 90-day-yacht-club law, Wenther said.

Bill King, who sells yachts in California and Washington, said he expects under the new law that sales in California will drop by ten to 20 percent, though another yacht seller in San Diego said he hasn't felt any effect yet.

King, the president of Crows Nest-Compass Point Marine Group, hopes Washington can take advantage of California's new requirement.

King and others hope for a 365-day yacht club that favors Washington. They hope Californians will buy boats here, linger in Puget Sound for six months -- the maximum time non-resident boaters can stay without paying a Washington use tax -- and then motor or sail to British Columbia where non-residents can stay another six months.

Some would like Washington's Legislature to extend the maximum stay to a year.

Why would Californians linger a year in Washington when Mexico and Oregon are closer?

Mexico is too hot in the summer, and the weather is brutal on deckwork, said boat owners and sellers. Staying a year would be a problem.

"People don't want to go to Ensenada (Mexico) for a year," said semi-retired Silicon Valley financial executive James J. Heffernan, a one-time member of the 90-day-yacht-club. "The insurance companies won't insure you for a year down there. The bad season. If portrayed properly, (a new law extending visiting time) should help the Washington area. That is such a great place to buy a yacht."

Even San Diego buyers who live in weather identical to nearby Mexico's might prefer Puget Sound for its great boating, said Dan Peter, owner of Cabrillo Yacht Sales in San Diego.

Oregon is far less inviting, Heffernan said, because the boating waters there are either "boring" (i.e. the Columbia River) or treacherous (i.e. crossing the bars on the Pacific Coast).

And the maritime craftsmen in Washington and British Columbia are superb, Heffernan added.

A Puget Sound 365-day yacht club would be a "huge opportunity for the marine industry in Washington," said Mitchell of Emerald Pacific Yachts.

What a fascinating "chess game between California and Washington" it would create, said Molly Holden, executive director of the Northwest Yacht Brokers Association.

Heffernan -- who was located by the P-I through a Coast Guard database -- said he's what Washington needs. He bought his 78-foot yacht, the Andiamo, in Seattle for $3.5 million in the spring of 2001. Then to avoid paying a $300,000 use tax in California, the Los Gatos businessman kept his boat in Washington for the summer. He would fly up to cruise, he said. Finally in September he sailed home.

He vows that if he buys another yacht he'll do the same, and he'd love to stay a year if the Washington Legislature would allow it.

Washington set the limit for visitor permits at six months -- in any given year -- in 1997, extending what was then allowed to accommodate Canadians. Whatcom County marinas wanted the state to permit British Columbia boats to stay longer, said outgoing state Sen. Jim Horn, a Mercer Island Republican who co-sponsored the bill.

A database of visitor permits provided by the Washington State Department of Licensing showed only 53 permits between September 2003 and October 2004, with the boats ranging from 22 to 78 feet in length. What might explain the small number is the fact that out-of-state boats can stay in Washington with no permit for 60 days, and then the owner is eligible for two consecutive 60-day permits at $25 each.

Not all boats were identifiable, but among those identified were 10 visiting from Oregon, seven from California, five from Nevada and the remainder scattered across nine states as far away as Florida.

Extending the visitor limit to accommodate a 365-day yacht club from California would have perils. For one, the California law will automatically go away on July 30, 2006, and if California yacht sellers have their way it won't be extended. For another, Peter and other yacht sellers are already designing methods to get around the new law.

Extending the permit time to a year would be good for Washington marinas, equipment sellers and marine tradesmen, but not for local boaters who already have trouble finding room in clogged local marinas, said Horn, who has long been irritated by out-of-state boaters staying undetected without permits.

He is also aware of the competition up north.

British Columbia allows boaters to stay a year, though part of that is a result of a loophole. Boaters can stay in British Columbia for six months on a visitor's permit and another six months on a permit to have work done on the boat -- even work that takes up only a small part of the stay. Washington's extended work permit requires proof that it is exclusively for work done on a boat.

Marinas in Sidney, B.C., are packed with boats with Washington and California place names on their stern.

"I think there is obviously some who are here who don't want to pay sales tax," said Mark Dickinson, president of Van Isle Marina in Sidney. "Legislators should know that they go where the taxes aren't."

An important arm of Washington's boat lobby is the Northwest Marine Trade Association, a coalition of manufacturers, marinas, suppliers, repair yards and dock builders.

For a year they've been discussing "impediments" to visiting boats, especially big boats whose owners spend a lot of money, said NMTA lobbyist Cliff Webster. No legislation has been proposed.

Their best friend in the Legislature is Horn, whose departure after being defeated by Democrat Brian Weinstein this month is a major blow, Webster said. Also dismaying to some in the organization is a switchover in Senate leadership from Republican to Democratic.

NMTA spent 68 percent of its $96,500 in campaign contributions statewide during the past four years on Republican candidates, mostly in the Legislature, according to state Public Disclosure Commission data.

Aside from $5,000 the organization has given to state Lands Commissioner Doug Sutherland -- in part because he opposed an environmental move to limit live-aboard boats in marinas -- the organization has given most to legislators on key committees like highways and transportation. Horn was the highways and transportation chairman. The $1,350 donated to him during the 2004 election doesn't tell the whole story.

Horn is an avid boater. He and his wife own a 47-foot Bayliner, the Carpe Diem II, which is docked on Lake Union. Horn lived on the boat when he was at the Legislature in Olympia. Horn and former NMTA lobbyist Jack Swanberg were longtime friends before Horn was in the Legislature. They owned nearly identical boats and in a previous profession as a boat seller, Swanberg peddled a boat to Horn. Swanberg was also a former Bayliner executive.

Horn has tried to reduce annual registration taxes on boats -- which are now set at a half of 1 percent of the boat's value per year. He got a portion of the state's gasoline tax dedicated to expenditures for recreational boating. He also introduced legislation that got mixed reviews in industry, like one bill that would have required marinas to tell the state about out-of-state boats not properly permitted.

"Sen. Horn has been a supporter of the marine industry for years," said Swanberg, who favors extending visitor permit time in Washington. "I can't believe that he was defeated."

P-I investigative reporter Eric Nalder can be reached at 206-448-8011 or ericnalder@seattlepi.com P-I investigative reporter Phuong Cat Le and news researcher Marsha Milroy contributed to this report.

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