State Title or Documented Vessel?

To quote Mel Brooks “It is good to be the king.”

Every state wants to tax vessels which ply its waters for an extended period of time. Consequently, they require that vessels which fit within certain categories must be registered with the state. What this really means is that the king wants his money in the form of taxes. In addition to being registered with the state a vessel may be “documented”.

A recreational vessel which is documented has a certificate of admeasurement stating that the vessel is of at least 5 net tons, U.S. citizens own at least 51% of the vessel, it has a marking certificate (hull number), and the owners have filed an application for a Document with the Coast Guard. Under federal law, a documented vessel may not have a state certificate of title, but can (and often must) be registered in the state in which it is primarily used.

Why is it important whether the vessel is documented or not? Foremost because USCG documentation is necessary to secure a special financial vehicle for maritime lenders, called the Preferred Ships Mortgage. Preferred Ships Mortgages give maritime lenders greater security in the vessel they lend money to purchase, making it a safer investment and (in theory) lowering the interest rate on the loan.

At present, a Preferred Ships Mortgage is only available on USCG documented vessels and only to FDIC approved banks or other federally approved lending institutions. As a consequence, recreational vessel owners frequently document their vessels specifically to qualify for a Preferred Ships Mortgage. While the Recently, states are have begun the Uniform Certificate of Title for Vessels Act (UCOTVA), which should allow state titled vessels to qualify for Preferred Ships Mortgages as well. Virginia was the first state to pass the Act, and it appears many other states are ready to follow suit.

A Document is also required for any vessel that is to engage in commerce. This requirement was enacted to counteract the widespread decline of the US shipbuilding and shipping industries, although there is significant debate as to whether it has encouraged progress toward this goal. Vessels wishing to engage in the coastwise trade (commerce between two US ports without an intervening foreign port), must be documented and registered and meet additional requirements before receiving their Document, including a requirement that US citizens hold a 75% interest in the vessel and that the vessel meet the US build requirements.

Many boaters are confused as to whether they still have to pay state taxes if their vessel is documented with the Coast Guard. The general rule is that, regardless of whether a vessel is documented, it must still comply with state laws and pay applicable state taxes. In most states, documented vessels are not required to register with the state or display state numbers, but must still display a state use sticker and pay state taxes if the vessel is used in a state for a certain amount of time. For example in Maryland, a vessel which spends more than 90 days a year in the state must pay the vessel excise tax unless the owner can prove that the vessel is principally used in another state. Offshore flagging a vessel may allow a buyer to avoid paying state sales tax on the transfer, but will not exempt a vessel from paying applicable vessel excise taxes.

The bottom line is that boaters who keep their boat in the same state for a substantial part of the year, documenting their vessel with the Coast Guard will not get them out of paying state taxes. However, documenting a vessel is necessary for commercial vessels and can be helpful for securing financing for a vessel. Documentation can also be helpful when cruising in foreign countries, and makes it easier to track the chain of title when buying or selling a vessel. If you are interested in documenting your vessel, the appropriate forms are available at the Coast Guard National Vessel Documentation Center online.

Disclaimer: This article is intended as a resource to boaters and does not constitute legal advice. Legal issues involving vessels are complex matters and you should speak to a qualified attorney to discuss your specific concerns.

Todd Lochner practices admiralty law in Annapolis, Maryland. Visit www.boatinglaw.com.