Publication 40, Watercraft Industry
Tax-Exempt Watercraft

In general, sales or use tax applies to the sale or purchase of tangible personal property (items) in California. Sales of property covered by specific exemptions are not subject to tax—including certain watercraft. This includes sales exempt from tax based on their principal or functional use, and their qualifying component parts. This section, which contains information useful to watercraft sellers, brokers, purchasers, and operators, explains the watercraft principal or functional use exemptions. Sellers and buyers can find specific information on how these exemptions apply to sales in the section Sales and Purchases of Watercraft and the section Sales of Watercraft Parts, Materials, and Supplies.

For more information, please see Regulation 1594, Watercraft.

Exemptions

The sale, use, or lease of a watercraft vessel and its qualifying component parts is exempt from tax if:

The vessel’s principal use is transporting passengers or property for hire in interstate or foreign commerce;
The vessel’s principal use is commercial deep-sea fishing conducted outside California’s territorial waters; or
The vessel’s functional use is transporting people or property for hire to certain vessels or certain offshore drilling platforms.

To determine the principal use of a watercraft, we usually look at the way the craft is used during its first 12 months of operation following purchase or lease. The principal use is generally considered to be the operation that constitutes more than 50 percent of the vessel’s activity during that period (unless specified otherwise for a particular exemption). The functional use is generally considered to be the operation that constitutes at least 80 percent of the vessel’s activity during that period. In addition, we may use other measurements, including minimum gross income standards, to determine whether a vessel qualifies for a particular watercraft exemption. The specific requirements for each type of use exemption are described below.

Vessels used in interstate and foreign commerce—principal use

Sales and leases of vessels and their qualifying component parts, used principally in interstate or foreign commerce, are exempt from tax. For this exemption, interstate or foreign commerce is defined as transportation of passengers or property for hire from this state to another state or foreign country, or from another state or foreign country to California. To demonstrate that a vessel is used for hired transportation services, it usually must generate a minimum amount of income from such activity (see Additional gross income requirement—interstate and foreign commerce). To qualify for the interstate and foreign tax exemption, a watercraft must be used:

Exclusively in interstate or foreign commerce; or
In a combination of interstate or foreign commerce and commerce between ports in the state (intrastate commerce), provided the vessel’s principal use—more than 50 percent of its activity—is for interstate or foreign commerce.

Sailing in part on the high seas while traveling to and from California ports does not, by itself, qualify a vessel for the exemption. Furthermore, vessels used exclusively to transport their owners’ property do not qualify for this exemption.

Tugboats and Barges

Under certain conditions, tugboats and barges may qualify for the interstate and foreign commerce exemption. Their principal use must be:

Transporting cargoes moving in interstate or foreign commerce; or
Towing, or helping to move, vessels used principally to transport passengers or cargoes in interstate or foreign commerce.

Please note: Tugboats and barges used to transport ships’ stores, ships’ crews, repair parts, and similar cargoes to and from a vessel are not eligible for the exemption.

Additional gross income requirement—interstate and foreign commerce

To demonstrate the vessel for hire is used to transport people or property, a watercraft must usually generate a certain amount of gross income from this activity during its first 12 months of operation. For boats sold or leased after January 1, 1987, the annual gross receipts from such transportation services must be greater than 10 percent of the cost of the watercraft to the purchaser or lessor, or $25,000, whichever is less (all gross receipts from hired transportation of passengers or property may be included).

If the gross income from a vessel you own or lease is less than the required amount, we will presume that it is not used to transport people or property for hire, unless you can clearly establish otherwise. Only watercraft used for hired transportation services qualify for the interstate and foreign commerce principal use exemption.

Commercial deep-sea fishing boats—principal use

Sales and leases of watercraft principally used in commercial deep-sea fishing operations outside the territorial waters of this state, are exempt from tax. Operators of such vessels must be regularly engaged in commercial deep-sea fishing, as demonstrated by their gross income from fishing activity. Sales of qualifying component parts for exempt vessels are also exempt from tax.

Principal use outside state’s territorial waters

The territorial waters of the state include waters which are:

Within three English nautical miles of the coastline; or
Within three English nautical miles seaward of a line drawn between the headlands of all bays and harbors along and adjacent to the coast; or
The outermost waters within three English nautical miles of all islands which are a part of the state.

We consider the total time a vessel is used in actual fishing operations during the first 12 months beginning with its first activity after sale or lease to determine the boat’s eligibility for the exemption. If you are a boat owner or lessee, you should keep adequate records to document:

Time spent traveling to and from the fishing grounds.
Time the boat is used within the state’s territorial waters.
Time the boat is used outside the territorial waters of the state.

If the time you conducted fishing operations outside the state’s territorial waters exceeds the time operated within them, your boat would meet the basic principal use standard for the commercial deep-sea fishing exemption. We do not consider the time the vessel is idle or stored in the state during the initial 12-month period in this determination.

Fishing party and sportfishing boats

Fishing party and sportfishing boats having the necessary commercial fishing licenses and permits to take charter or fishing parties for hire may also qualify for this exemption. The following requirements apply:

The principal use of the watercraft—commercial deep-sea fishing—takes place outside California’s territorial waters;
The fishing is commercial in nature;
The boat’s purchaser can satisfactorily demonstrate that profit is the primary motive for the fishing activity.

Additional gross income requirement—commercial deep-sea fishing

Individuals operating watercraft sold on or after July 29, 1991, must generally satisfy a gross income requirement to qualify for this exemption. The boat owner or lessee’s gross receipts from commercial deep-sea fishing operations must total at least $20,000 in a selected 12-month period. (The 12-month period we select for examination of your gross fishing income will depend on whether you were deep-sea fishing commercially at the time you purchased the vessel.)

Fish receipts from both inside and outside the state’s territorial waters may be used. (For boats sold during the period January 1, 1980, through July 28, 1991, the gross income requirement was $5,000 per year.)

If fish receipts from a boat you own or lease are less than the specified minimum amount, we will presume that you are not actively engaged in commercial deep-sea fishing—unless you can clearly demonstrate otherwise—and the purchase or lease of your watercraft will be subject to tax.

For information on additional evidence we may require to establish your deep-sea fishing boat exemption, see Purchasing a watercraft with an exemption certificate.

Watercraft used to transport passengers and cargo to vessels or oil platforms outside state territorial waters—functional use

Sales and leases of watercraft functionally used to transport people or property to vessels or offshore drilling platforms outside the state’s territorial waters are exempt from tax. The vessel must be used for this purpose at least 80 percent of the time during its first 12 months of actual operation after purchase or lease. Sales of qualifying component parts of these vessels are not subject to tax.

Marine Invasive Species Fee (formerly the Ballast Water Management Fee)

The Marine Invasive Species Program, which is administered by the State Lands Commission, was established to reduce the introduction and spread of nonindigenous aquatic species into the state waters of California. This program is funded by a fee for each qualifying voyage. We work with the California Marine Exchanges to identify daily arrivals of vessels into California ports and use the information to:

Determine if any vessels made voyages that are subject to the fee.
Establish account numbers for the owner/operator of vessels that are subject to the fee.
Mail notices of amounts due to owners/operators of vessels.

For further information about the Marine Invasive Species Fee, please contact Special Taxes and Fees at:

Program and Compliance Bureau MIC:57
California Department of Tax and Fee Administration PO Box 942879, Sacramento, CA 94279-0088
Telephone: 1-800-400-7115 (TTY:711)
When calling, please select the option for Special Taxes and Fees.

For information regarding ballast water management and testing, or for copies of State Lands Commission regulations, please visit the State Lands Commission or contact them by telephone at 1-916-574-1900.

Vessels purchased or delivered out of state—not intended for use in California

If you purchase a vessel and take delivery out of state, it may not be subject to tax. For more information, please see publication 52, Vehicles and Vessels: Use Tax.

Revision July 2026

Publication 40, Watercraft Industry Tax-Exempt Watercraft