FAQ’s: Exemptions & Exclusions: Vehicles, Vessels, Aircraft and 12 Month Test – Not Purchased for Use in California

If any vehicle, vessel, or aircraft purchased outside of California, first functionally used outside of California, and thereafter brought into California within 12 months from the date of its purchase is presumed to be acquired for storage, use, or other consumption in California and subject to tax if that vehicle, vessel, or aircraft is:

• Purchased by a California resident as defined in section 516 of the California Vehicle Code, or
• A vehicle subject to registration under the California Vehicle Code, or an aircraft or vessel subject to property tax in this state, during the first 12 months of ownership, or
• Used or stored in this state more than one-half of the time during the first 12 months of ownership if purchased by a nonresident of California.

Under any of the conditions described above, it is presumed that use tax will apply. Nevertheless, if a purchaser provides satisfactory documentary evidence showing that the vehicle, vessel, or aircraft was purchased for use outside of California during the first 12 months of ownership, use tax will not apply.

Acceptable evidence may include proof of registration of that vehicle, vessel, or aircraft, with the proper out-of-state authority. This documentation must be submitted to the California Department of Tax and Fee Administration (CDTFA) for review.

A contract is an agreement to do or not to do a certain thing. Therefore, a purchase contract for a vehicle, vessel, or aircraft is an agreement to buy the vehicle, vessel, or aircraft. A binding purchase contract is an enforceable contract for the purchase of a vehicle, vessel, or aircraft.

For these purposes, to determine if a “purchase agreement” is a binding and enforceable purchase contract, there generally must be four elements:

1. The parties must have legal capacity to enter into a contract (e.g., persons under the age of 18, and mentally disabled persons, under the custody of a legal guardian generally do not have such capacity);
2. Mutual asset or agreement between buyer and seller to form a binding contract;
3. Consideration; and
4. The contract generally cannot be for an illegal or unconscionable purpose.

Contract “consideration” requires that each party receive a bargained for exchange and incur a legal detriment. Thus, for example, a contract may be illusory and unenforceable, if only one party is obligated to perform and the contract imposes no definite obligation on the other party.

Vehicle Code section 516 provides in pertinent part that a “resident” means any person, who shows an intent to live or be located in California on more than a temporary basis. Person includes:

• A natural person
• Firm
• Partnership
• Association
• Limited Liability Company, or
• Corporation

Please Note: A California resident also includes a closely held corporation or limited liability company in which 50 percent or more of the shares or membership interests are held by shareholders or members who are residents of California as defined in section 516 of the Vehicle Code.

Vehicle Code section 516 presumes that you are a California resident if you have a presence in California for six months or more in any 12-month period. Factors that may be considered as evidence of residency include, for example:

• The address where you are registered to vote
• The location of your place of employment or business
• Filing a homeowner’s property tax exemption
• Possession of a California driver’s license
• Renting or leasing a home for use as a residence
• A declaration of residency in order to obtain a privilege or benefit not ordinarily extended to nonresidents.

Use tax does not apply to the purchase of an aircraft or vessel brought into this state within the first 12 months of ownership exclusively for the purposes of repair, retrofit, or modification. :

• Any repair, retrofit, or modification to a vessel must be done by a licensed repair facility and,
• Any repair, retrofit, or modification to an aircraft must be done by a repair station certified by the Federal Aviation Administration or a manufacturer’s maintenance facility.

Therefore, the exclusion is inapplicable when a vessel that enters California during the first 12 months of ownership for the purpose of repair, retrofit, or modification performed by any person other than a licensed repair facility, or an aircraft that enters California during the first 12 months of ownership for the purposes of repair, retrofit, or modification performed by any person other than a repair station certified by the Federal Aviation Administration or a manufacturer’s maintenance facility. This exclusion does not apply to vehicles.

• For purposes of this exclusion, a licensed repair facility must hold an appropriate permit issued by CDTFA and must be licensed to do business by the city, county, or city and county in which it is located if the city, county, or city and county so requires.

When a vehicle is first functionally used outside this state, and thereafter enters this state during the first 12 months of ownership, the presumption that the vehicle was purchased for use within this state may be rebutted by establishing that the vehicle was brought into this state within the first 12 months of ownership for the exclusive purpose of warranty or repair service, provided that the vehicle was used or stored in this state for that purpose for 30 days or less.

Supporting documentation must include

• A work order stating the dates that the vehicle is in possession of the warranty or repair facility, and
• A statement by the owner of the vehicle specifying the dates of travel to and from that facility.

Under current law, when a California resident purchases a vehicle, vessel, or aircraft outside of California, first functionally uses it outside this state, and thereafter the vehicle, vessel, or aircraft enters the state during the first 12 months from the date of purchase, it is presumed that the vehicle, vessel, or aircraft was purchased for storage, use, or other consumption in California and that its use is subject to tax.

You may still qualify for the exclusion from use tax if you can provide documentary evidence to support that the entry into the state was solely for the exclusive purpose of repair, retrofit, or modification of a vessel or aircraft, or warranty or repair service for a vehicle.

Under the 12-month test, the law does not presume that a purchase is for use in California unless you bring the vehicle or vessel into California during the first 12 months of ownership. However, when a California resident purchases a vehicle or vessel outside of California and the vehicle or vessel does enter the state during the first 12 months of ownership, it is presumed that the vehicle or vessel was purchased for storage, use, or other consumption in California and, therefore, that its use is subject to tax. Further, the registration of a vehicle or undocumented vessel with the California DMV evidences intent to use the vehicle or vessel in California.

However, a California resident may request a certificate of use tax clearance (CDTFA-111, Certificate of Vehicle, Vessel, Mobilehome, or Commercial Coach Use Tax Clearance) from CDTFA so the registration of the vehicle or undocumented vessel may be completed with the DMV without the payment of use tax at that time.

For more information on requesting forms CDTFA-111, please visit our Tax Guide for Purchasers of Vehicles, Vessels, & Aircraft. At the end of the first 12 months of ownership, the California resident must clearly demonstrate through documentary evidence that the vehicle/vessel in question did not enter the state during this period of time. Without that evidence, it is presumed the vehicle or vessel was purchased for use in California and tax would be owed.

If we determine that a vehicle or vessel registered in California qualifies for an exclusion from use tax based upon the use of the vehicle or vessel in another state, we may give certain information about this use to that state.

Section 6248 provides that California Vehicle Code section 516 will be used to determine if you are a California resident for purposes of the 12-month test. Vehicle Code section 516 provides criteria for determining whether a person is a resident of this state.

These criteria include for example:

• The address where you are registered to vote,
• The location of your place of employment or business,
• Filing a homeowner’s property tax exemption,
• Possession of a California driver’s license,
• Renting or leasing a home for use as a residence, and
• A declaration of residency in order to obtain a privilege or benefit not ordinarily extended to nonresidents.

A California resident also includes a closely held corporation or limited liability company if 50 percent or more of the shares or membership interests are held by shareholders or members who are residents of California. Of course, even if the purchaser is a California resident, the vehicle, vessel, or aircraft must still be brought to California within 12 months after purchase before its use may become subject to use tax.

CDTFA-447, Statement Pursuant to Section 6247 of the California Sales and Use Tax Law, is used by purchasers to certify that a vehicle purchased and delivered to an out-of-state location will not be brought into California during the first 12 months of ownership.

CDTFA-448, Statement of Delivery Outside California, is used by vehicle dealers to document that a vehicle was actually delivered to a purchaser at an out-of-state location.

A dealer may complete the DMV registration of a vehicle on behalf of its California customers. However, if the dealer accepts a CDTFA-447 and CDTFA-448 from a California resident who requests that the dealer register the vehicle in California on behalf of the purchaser, the dealer’s timely and good faith acceptance of the 6247 statement (CDTFA-447) may be questioned and the dealer may be liable for failure to collect use tax from the purchaser if it is subsequently determined that the vehicle was purchased for use in California.

When a California resident purchases a vehicle, vessel, or aircraft outside of California, first functionally uses it outside this state, and the vehicle, vessel, or aircraft thereafter enters the state during the first 12 months of ownership, the law presumes that the purchase was for use in California and subject to tax. Nevertheless, use tax generally will not apply if

1. The vehicle, vessel, or aircraft is first functionally used outside California, and
2. One-half or more of the miles traveled by the vehicle, or the nautical miles traveled by the vessel, or the flight time traveled by the aircraft during the six-month period immediately following entry into California are commercial miles or flight time traveled in interstate or foreign commerce.

The term “commercial” applies to business uses and excludes personal use (Regulation 1620 (b)(5)(C)).

Alternatively, if the conditions for the above exclusion from use tax are not satisfied, there is also an exemption from use tax for property used in interstate and foreign commerce prior to entering California.

Use tax generally will not apply to the use of a vehicle, vessel, or aircraft that was first used in interstate or foreign commerce prior to entering this state, and is thereafter continuously used in interstate or foreign commerce both within and without California, and not exclusively in California (Regulation 1620 (b)(2)(B)1). Additional information regarding interstate and foreign commerce is available in our Tax Guide for Purchasers of Vehicles, Vessels, & Aircraft.

The Department of Motor Vehicles (DMV) and the Department of Housing and Community Development (DHCD) are required to collect use tax upon registration by new owners of vehicles, undocumented vessels, and mobile homes. In order for these agencies to complete registration without collection of use tax, they require a clearance certificate issued by CDTFA. To apply for the use tax clearance certificate (CDTFA-111), use CDTFA’s online services and select Request Use Tax Clearance for Registration with DMV/HCD under the Limited Access Functions. Or you may submit application form CDTFA-106, Vehicle/Vessel Use Tax Clearance Request. The application must include all the identifying information, the claimed reason for exemption, and must be signed by the purchaser. Copies of any documentation verifying the exempt nature of the transaction should be included, as well as a copy of the current title. Family transfers require documentation showing the relationship between buyer and seller (or transferor and transferee). Trust transfers require copies of the trust title page, signature page, and property description pages, etc.

If you cannot submit your request online, you may mail, fax, or deliver the application to your local CDTFA office or mail to:

Consumer Use Tax Section MIC:37
California Department of Tax and Fee Administration
PO Box 942879
Sacramento, CA 94279-0037

Please note: Some field offices are not equipped to provide this service. Please call in advance to confirm service is available. If your clearance request is approved, you will receive a CDTFA -111, Certificate of Use Tax Clearance. Upon presentation of the CDTFA -111 at DMV or DHCD, you will be allowed to complete registration without payment of use tax. However, this will not relieve you of your use tax liability if use tax is later determined to be due.

Additional information for requesting a use tax clearance can be found in publication 52, Vehicles & Vessels: Use Tax.

As described in publication 52, Vehicles & Vessels: Use Tax, the following is a list of exemptions and exclusions from the use tax that may apply:

Commercial Deep Sea Fishing

Not all fishing vessels are used in an exempt manner. The vessel must be used in commercial deep sea fishing activities outside the three mile territorial waters of California, by persons regularly engaged in commercial deep sea fishing, and the principal use of the watercraft must occur outside the territorial waters of this state. If your annual income from commercial deep sea fishing activities is less than $20,000, it is presumed that you are not regularly engaged in commercial deep sea fishing and the exemption is therefore inapplicable, unless you can establish to the contrary.

Documentation required includes:

• Twelve months of “fish tickets” identifying the species and location caught,
• Loran and/or GPS readings,
• Complete tax returns,
• Profit and loss statements,
• California Department of Fish and Game fishing licenses and boat registration,
• Photographs of the vessel showing rigging, and
• Other types of documentation as described on the commercial deep sea fishing questionnaire sent to you upon filing for exemption with CDTFA.

For more information, refer to publication 40, Watercraft Industry and Regulation 1594, Watercraft.

Interstate and Foreign Commerce

Purchases of property that are both first functionally used outside the state of California and are used continuously in interstate or foreign commerce (both within and outside California), and not exclusively in California, are exempt from the use tax.

For example, a purchase of a ferry boat to transport passengers between Los Angeles and Catalina Island (two California ports) does not qualify for the exemption, even though the vessel may travel through international waters to arrive at its destination.

However, the purchase of an aircraft regularly used in transporting passengers from Mexico to Canada may be exempt, even if it stops at various airports in California to pick up additional passengers. For more information refer to Regulation 1620, Interstate and Foreign Commerce.

Alternatively, under the 12-month test, vehicles, vessels, and aircraft first functionally used outside California will not be regarded as purchased for use in this state if the vehicle, vessel, or aircraft is brought into California within 12 months after its purchase and one-half or more of the miles traveled by the vehicle, or nautical miles traveled by the vessel, or flight time traveled by the aircraft during the six-month period immediately following its entry into this state are miles/nautical miles/flight time in interstate or foreign commerce.

If you intend to claim an exemption for Interstate and Foreign Commerce, you do not have to wait to register. Please visit our Online Services webpage and select the option to File a Return or Claim an Exemption for a Vehicle, Vessel, Aircraft, or Mobile Home under Limited Access Functions. We will contact you at the end of your test period to request documentation to support your exemption claim.

Please note: In order to ensure you have adequate documentation to support your exemption claim, you should retain copies of these records for a minimum of 8 years.

Family Transfers

The Sales and Use Tax Law provides an exemption from the use tax when the person selling a vehicle, vessel, or aircraft is related to the purchaser as either:

• Parent
• Grandparent
• Grandchild
• Child
• Spouse
• Brother or sister, if both are under age of 18 and related by blood or adoption.

This exemption does not apply if the seller is engaged in the business of selling the type of property for which an exemption is claimed. (For example, a car or boat dealer.) Additionally, the exemption does not extend to sales to stepparents or stepchildren if a natural parent or child is not involved in the sale nor does it apply to transactions between ex-spouses after a decree of divorce.

To qualify for the exemption, the relationship between buyer and seller must be verified by marriage license, birth or adoption certificate, or any other documentation that is official and/or verifiable and confirms the qualifying relationship. (Revenue and Taxation Code section 6285.)

For information on transfers as part of a divorce decree or settlement, please refer to Involuntary Transfers.

Property Received as a Gift

Changing the ownership of a vehicle, vessel, or aircraft may or may not cause a taxable sale or purchase. If the donor did not pay tax on a purchase of a vehicle, vessel, or aircraft because it was purchased for resale, the donor owes use tax on the purchase because making the gift is regarded as a taxable use of the vehicle, vessel, or aircraft.

On the other hand, if the donor paid tax on the purchase of a vehicle, vessel, or aircraft, and there is no consideration given to obtain the property, making the gift is regarded as a nontaxable use of the vehicle, vessel, or aircraft.

Consideration can take many forms such as;

• Cash,
• A loan,
• A trade, or
• Assumption or cancellation of a debt.

In order to qualify under this provision, it must be established that the property was transferred from the donor to the recipient with no requirement on the recipient’s part to compensate the donor in any way. A signed, notarized statement from the donor is usually required.

Please note: The donor must have the legal authority to transfer the vehicle, vessel, or aircraft.

Transfers Into and Out of Corporations

A transfer of property into a commencing corporation solely in exchange for first issue stock is not subject to tax. The corporation must acknowledge receipt of the property and verify that the only consideration given is stock in the company. If the corporation assumes any liabilities as consideration for the transfer, tax will apply to the transfer.

If a corporation gives property, such as a depreciated vehicle, to an employee as payment of wages or compensatory bonus and a W-2 form, Statement of Wages Earned, is required to be issued, tax would apply on the monetary value given to the property in lieu of cash. If the transfer is a gift (other than a gift of property withdrawn from the corporation’s resale inventory), no use tax would apply.

To qualify, a copy of the Articles of Incorporation and Minutes of the Meeting of the Corporation detailing the transfer is required.

When a corporation is dissolved and distributes assets to stockholders, no tax applies, provided the assets are distributed in accordance with the stockholders’ ownership in the corporation and the assets were not inventory being held for resale. A copy of the Certificate of Election to Wind Up and Dissolve describing the disbursement of the corporate assets is required to support an exemption.

For more information, refer to Regulation 1595, Occasional Sales—Sale of a Business—Business Reorganization.

Transfers Into Revocable Trusts

A transfer of property into a revocable trust is exempt from tax provided all the following apply:

• The seller has unrestricted power to revoke the trust; and
• The transfer does not result in any change in the beneficial ownership of the property; and
  • The trust provides that upon revocation of the trust the property reverts back to the seller, and
  • The only consideration given, if any, is the assumption by the trust of an existing loan and the tangible personal property being transferred is the sole collateral for that loan.

Involuntary Transfers

Use tax may not apply if title to the property changes pursuant to involuntary transfers that are due to circumstances beyond the taxpayer’s control. Some examples are;

• Repossession by a legal owner,
• Inheritance from a decedent’s estate,
• Recovery of stolen property after settlement from an insurance company, and
• A divorce decree transferring community property to a spouse as his or her separate property.

Confirming documentation is required, depending on the nature of the transaction.

Purchases from the United States Government

While sales to the U.S. government and its agencies or instrumentalities are generally exempt from sales and use tax, not all purchases from the U.S. government are exempt from use tax. Only under certain conditions are purchases from the U.S. government exempt from use tax. The following types of transactions may qualify for exemption:

• Generally, the storage, use, or other consumption in this state of property purchased from any unincorporated agency or instrumentality of the United States, other than property reported to the Surplus Property Board of the United States, or any agency succeeding to the functions of that board. (Revenue and Taxation Code section 6402.)
• A sale by a U.S. Marshal pursuant to orders of a federal court.
• A sale in accordance with certain United States Code sections. A letter should be provided identifying the applicable United States Code sections under which the property is sold.

Please note: Sales made under Title 40, United States Code section 484, or Internal Revenue Code section 6335 are not exempt use tax purchases. For more information on purchases from the United States government, please refer to Publication 52, Vehicles and Vessels: Use Tax.

Purchases by American Indians

Purchases of property by American Indians are exempt under the following conditions:

• The purchaser must be of American Indian descent and must be entitled to receive services as an Indian from the United States Department of Interior.
• The purchaser must reside on a reservation or rancheria.
• The property must be delivered and title transferred on a reservation or rancheria.
• The item must be used on a reservation or rancheria at least 50 percent of the time during the first 12 months after delivery.

To qualify for the above exemption, documentation such as a signed letter by the tribal council and dealer delivery statements signed by both the seller and purchaser verifying the above criteria must be submitted to CDTFA. For more information, refer to Regulation 1616, Federal Areas.

Purchases for Resale

Purchases of property for resale are not subject to tax provided the purchaser makes no use of the property except demonstration and display in the course of offering the property for sale in the regular course of business.

You may provide a copy of your valid seller’s permit, county business license, dated advertisements in newspapers and trade magazines, logs of engine hours or miles verifying the demonstration, and any other documentation which shows efforts made to sell the property to substantiate that the property was in fact purchased and held for purposes of resale in the regular course of business. If any personal use is made, the use tax is due.

Purchases for Use Outside California

Sales tax generally applies to the purchase of a vessel in California from a vessel dealer. As an exception, sales tax generally does not apply to the purchase in California of a vessel over eight feet in length that is not propelled solely by oars or paddles, provided the seller is a private party who is not engaged in the business of selling vessels California. Instead, the purchaser is generally liable to pay the use tax to the state.

Nevertheless, in such a use tax transaction, the purchaser is not required to pay California use tax if the only use of the property purchased in California is to remove it from the state and it will be used solely thereafter outside this state. No other use can be made of the property. Visit Regulation 1620, subdivision (b)(9).

• For example, if the vessel is thereafter used in California for purposes other than transporting it outside the state for use thereafter solely outside the state, use tax applies.
• For example, you purchase a boat from a private party in San Diego and immediately leave for your vacation home in Astoria, Oregon. Along the way, you stop at Marina Del Rey, have dinner, and have a boat decal added. The next day you fish in the Channel Islands. Later, you stop to visit friends in San Francisco and take them for a ride in your boat. The exclusion from use tax is inapplicable because you did not simply remove the boat from the state.

Delays for emergency repairs made to the vessel must be verified as functionally necessary for the vessel to continue its departure from the state.

You must provide supporting documentation such as fuel, repair, mooring, or lodging receipts to verify the property’s departure from California, plus documentation showing that the vessel did not return to California during the applicable test period.

Common Carrier

Generally, tax does not apply to the sale of an aircraft to any person who will use the aircraft as a common carrier of persons or property under authority of the laws of this state, of the United States, or of any foreign government.

To qualify, the purchaser or lessee must use the aircraft as a common carrier for more than 50 percent of the operational use during the first 12 consecutive months beginning with first operational use. Unless you can show otherwise, it is generally presumed that you are not using the aircraft as a common carrier unless your yearly gross receipts from such operations exceed 20 percent of the purchase price of the aircraft, or $50,000, whichever is less. (Revenue and Taxation Code sections 6366 and 6366.1)

To qualify for exemption, the following list of documents must generally be submitted to CDTFA for review:

• Copies of the operator’s Federal Aviation Administration (FAA) certification.
• FAA registration documents.
• A list of operator’s certified pilots.
• Evidence of insurance coverage (a complete copy of the policy).
• A complete copy of the aircraft flight logs from the date of delivery and the next succeeding twelve months of operational use.
• A summary that describes each flight during the first twelve months of operation.
• A complete copy of the aircraft or engine maintenance logs.
• A complete copy of the sales contract which verifies the purchase price, date, and delivery location of the aircraft.
• A complete copy of the lease agreement if the aircraft is leased.
• A copy of all lease payment invoices made to the lessor (owner) by the lessee (operator).
• Copies of operator’s customer revenue billings showing the amount charged on all charter flights.

If the first 12 months have not yet expired by the due date of the use tax return, we recommend that you submit copies of documentation currently available. Action on your account will be suspended until the 12-month period has expired. You may submit the remaining required documentation at that time. For more information, refer to Regulation 1593, Aircraft and Aircraft Parts.

Transfer of a Vehicle to Lessee by Lessor for Purposes of Resale (10-day Presumption)

Generally, when a lessee elects the option to purchase the leased property at the expiration of the lease, tax applies to the sale of the property when the option is exercised. Nevertheless, if the lessee transfers title and registration for a vehicle to a third party within 10 days from the date the lessee acquired title from the lessor at the expiration or termination of a lease it is presumed that the transfer of the vehicle to the lessee was a sale to the lessee for purposes of resale. The presumption may be rebutted by establishing that the lessee made a taxable use of the vehicle prior to the time that the vehicle was resold to the third party.

On the other hand, if, instead of reselling the vehicle within 10 days, the lessee makes a gift of the vehicle to a third party, the lessee owes tax based on the amount required to be paid by the lessee upon exercising the option to purchase the vehicle. The gift of the vehicle is considered a taxable use by the lessee. For more information, please refer to Regulation 1610(d)(2).