Tuesday, June 20, 2006

Christy Mihos- Avoider or Evader?

Well the big political news here recently is that Christy Mihos, self-described friend of the taxpayer, avoided the payment of some $23,000 in Massachusetts sales tax by having a corporation formed in Rhode Island for the singular purpose of purchasing his motor yacht in that state (which has no sales tax on same), and keeping the boat berthed there for six months before bringing it to his private compound at Great Island in Yarmouth:

"Mihos appears to have taken advantage of a provision that says a boat owner may be exempt from the Massachusetts sales tax if the boat remains out of state for the first six months after the sale. Mihos said the boat remained in Rhode Island for more than six months after he purchased it in January 1999. He said he then brought it to his home in the gated community where he lives on Great Island, across Hyannis Harbor from the Kennedy compound."

Mihos supporters and sympathizers around the Massachusetts blogosphere have rallied to his defense, saying that he is merely using the legal exemptionsof the tax laws to lawfully avoid the payment of a sales tax. But is that what he has done?

The Globe story references "a provision [of Massachusetts law, presumably] that says a boat owner may be exempt from the Massachusetts sales tax if the boat remains out of state for the first six months after the sale." There is no such provision of law. Let's examine:

Chapter 64I governs the imposition of the "use tax" imposed upon personal property located in the Commonwealth.

Chapter 64I Section 3 states that "Every person storing, using or otherwise consuming in the commonwealth tangible personal property or services purchased from a vendor shall be liable for the tax imposed by this chapter."

Chapter 64I section 8 states as follows:

"(f) It shall be presumed that tangible personal property shipped or brought to the commonwealth by the purchaser was purchased from a retailer for storage, use or other consumption in the commonwealth, provided that such property was shipped or brought into the commonwealth within six months after its purchase."

This is the provision of law upon which Mihos (and presumably like-minded tax-avoiders) rely -- but it is hardly an "exemption" that entitles them to avoid the tax. The language states simply that the property is presumed to be purchased for use in the Commonwealth (hence subject to the tax) if it was brought into the state within six months. All that is accomplished by keeping the property out-of-state for six months is the avoidance of the presumption that the property is taxable. It may indeed still be taxable, and there is no regulation, tax advisory or letter ruling issued by the Department of Revenue that says otherwise.

830 CMR 64H.6.7 (Out-of-State Sales and Deliveries) provides the following guidance:

(b) Use Tax.
3. Property stored in Massachusetts. If property purchased outside Massachusetts is brought into Massachusetts the use tax will apply, unless the property was brought here solely to be kept or retained for the purposes of subsequent transportation outside Massachusetts. M.G.L. c. 64I, s. 1.

In 1986, the Massachusett Supreme Judicial Court issued the controlling decision in Towle v. Commissioner of Rev., 397 Mass. 599 (1986). The facts in that case are identical to Mihos', but for the period of time the taxpayer there waited before moving the boat into Masachusetts waters. The SJC's decision states as follows:

"The taxpayer did not demonstrate any right to an exemption from the use tax, nor did he overcome the effect of the statutory presumption making the use tax applicable to property brought into Massachusetts within six months of purchase. G.L. c. 64I, § 8( f). Evidence before the board indicated that the taxpayer purchased the sailboat in Connecticut and did not pay sales tax to any jurisdiction. Within the first two months of purchasing the sailboat, the taxpayer brought the sailboat into Massachusetts and proceeded to store or use the sailboat within Massachusetts for the next several months. The taxpayer's argument that he is a nonresident and that he did not use the sailboat exclusively, or even primarily, in Massachusetts does not rebut the statutory presumption that the sailboat is subject to the use tax. The use tax statute makes no exception for nonresidents and does not exempt property not used or stored primarily or exclusively in Massachusetts. Presumably, the commissioner was not persuaded by the taxpayer's evidence that, in bringing the sailboat into Massachusetts, his intention was to transport the sailboat outside Massachusetts at a future date “for use thereafter solely outside the commonwealth.” During the time the sailboat was stored in Massachusetts, the taxpayer used the sailboat in the Commonwealth and did not take any action indicative of an intent to transport the sailboat elsewhere for use solely outside the Commonwealth. In fact, the taxpayer moved the sailboat outside the Commonwealth only after the use tax was assessed on the sailboat. Therefore, the taxpayer's arguments based on the statute fail." (emphasis supplied)

Clearly, the SJC decision rests strongly on the fact that the taxpayer brought the boat into Massachusetts two months after purchase. But it notes that the 6 month period is a "statutory rpesumption," nothing more or less.

The operative question in examining whether the use tax applies to the property is what the taxpayer's purpose was in bring the property into Massachusetts. Since Mihos is not a resident of Rhode Island, owns a (spectacular) home on Great Island on the Cape, uses West Yarmouth as the yacht's "hailing port" on its Coast Guard registration, and in fact keeps the boat at his home during the summer months, it is more than fair to assume that his intention in bringing the boat to Massachusetts was to use it here, primarily.

If I were the Commissioner of Revenue here, I would notify Mihos that the tax was due, and make him pay the tax, interest and penalties -- which is the prerequisite to him being entitled to challenge the application of the use tax and seek an abatement.

As Will Rogers said, "The income tax has made more liars out of the American people than golf has. Even when you make a tax form out on the level, you don't know when it's through if you are a crook or a martyr. "

Rogers' quote may apply to Mihos, it may not. I have a hard time believing, however, that a fair-minded man exercising intellectual honesty would legitimately conclude that his scheme passed the smell test.

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