Last updated: August 20. 2014 11:10AM - 96 Views
Justice Paul E. Pfeifer



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Throughout history there have been many epic tales of gallant ships on heroic voyages. This isn’t one of them. Rather, it’s a story about a pleasure boat and a taxing authority.


In 2002, Cheryl and John T. Gallenstein – Kentucky residents – purchased a 44-foot twin-engine boat that they docked at a yacht club in Aurora, Indiana. It was titled in Cheryl’s name. With the assistance of a consultant, Cheryl obtained a certificate of documentation from the U.S. Coast Guard that lists Cincinnati as the hailing port.


The Gallensteins primarily operated in Kentucky and Indiana waters, downriver from Cincinnati, because the water there was cleaner and less crowded. Between 2002 and 2005 they crossed into Ohio waters less than 12 times.


The Gallensteins occasionally cruised upriver with guests to watch Reds or Bengals games from the boat, and to view Cincinnati fireworks. During those trips, Cincinnati police boarded and inspected their boat, reviewed documents, and then permitted them to continue.


John asked the consultant why this was happening. “You’re just being harassed by the Cincinnati police,” she said. She recommended they get an Ohio sticker.


So the Gallensteins applied for an Ohio watercraft registration and indicated that the boat would be principally used in Kentucky and Indiana waters. They received the sticker and a three-year registration certificate in May 2003. Afterward, they experienced no more instances of police boarding.


But in 2005, the Ohio Department of Taxation audited Cheryl. She was asked for verification that she paid sales or use tax for the boat in Ohio or another state. She responded that she didn’t believe Ohio taxes were due, that the boat had never been moored in Ohio, and explained why they had gotten the Ohio registration.


The tax agent informed her that docking and storing the boat in Indiana “would require you to have an Indiana registration and not an Ohio registration. You will be required to cancel your Ohio Watercraft Registration” and provide proof of its cancellation. If she failed to prove cancellation, he said, the state would pursue the use tax due.


Cheryl tried to cancel the Ohio registration without success. She informed the tax agent that the Ohio Department of Natural Resources staff advised her that “the only way to cancel a registration is not to renew the registration upon its expiration.”


The agent replied that Cheryl’s response didn’t satisfy the state’s request for proof of tax paid. Thus, in November 2005, the tax commissioner assessed a use tax of $12,000, a $1,800 penalty, and $1,252.93 in interest for the audit period May 1 to June 30, 2003. Cheryl petitioned for reassessment and requested remission of the penalty and interest, asserting that any use of the boat in Ohio constituted “transient use” as defined by law.


But the commissioner affirmed the tax, penalty and interest, and determined that Cheryl’s use of the boat in Ohio, combined with her declaration of Cincinnati as the boat’s hailing port and the boat’s Ohio registration, “created nexus between the boat and Ohio” and that she didn’t qualify for the transient use exception.


Cheryl appealed to the Board of Tax Appeals (“BTA”), asserting that the commissioner erred by assessing the use tax and by not applying the transient use exception because, she claimed, she “had no substantial nexus with Ohio.” But the BTA affirmed the commissioner’s decision.


After that, Cheryl appealed to us – the Ohio Supreme Court. She argued that her registration in Ohio wasn’t sufficient to create a taxable nexus and that she met all the requirements of the transient use exception.


The tax commissioner argued that Cheryl’s use of the boat in Ohio waters and the Ohio registration made the boat subject to the use tax, which is a tax “on the storage, use, or other consumption in this state of tangible personal property…” But there are exceptions. The transient use exception exempts tangible personal property that was “purchased outside this state for use outside this state and is not required to be registered or licensed under the laws of this state.”


The BTA ultimately concluded that Cheryl had not established that she wasn’t required to register her boat in Ohio.


The law dealing with items that require registration also lists the exemptions from registration. In reviewing this law, we determined that registering a boat in Ohio is not the same as being required to register a boat in Ohio because the law exempts from registration watercraft that have been documented by the Coast Guard as “temporarily transitting.”


But the term “temporarily transitting” does not appear in the Coast Guard federal regulations. When the Ohio legislature enacts a law, a just and reasonable result and a result feasible of execution is intended.


In this case, because the term “temporarily transitting” does not appear in federal regulations governing the Coast Guard’s documentation of vessels, we determined that the BTA unreasonably and unlawfully interpreted the law when it stated that “we find no evidence” that the Coast Guard has documented the boat as “temporarily transitting.”


To require Cheryl to show that her boat has been documented as temporarily transitting by the Coast Guard when the Coast Guard doesn’t even issue temporary transitting endorsements is unreasonable because no one could qualify for this exemption.


Furthermore, despite her best efforts, Cheryl wasn’t able to cancel her Ohio registration as ordered by the tax department. And assessment of a use tax on that basis is also unreasonable.


From 2002 through 2004, Cheryl operated her boat in Ohio waters fewer than a dozen times. We concluded that it was unreasonable to assess more than $15,000 in taxes and penalties on a Kentucky resident who purchased and harbors a boat in Indiana and who chose to register it in Ohio to reduce the chances of police boarding it on the few occasions she operated it in Ohio waters.


Because the BTA acted unreasonably and unlawfully in affirming the tax commissioner’s use tax, we determined – by a four-to-three vote – to reverse its decision.

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