In a per curiam (not authored by a specific justice) decision, the Supreme Court of Ohio today held that the Ohio Board of Tax Appeals (BTA) acted unreasonably and unlawfully when it affirmed the tax commissioner’s imposition of use tax, penalty, and interest of more than $15,000 against a Kentucky resident who occasionally operated her boat in Ohio waters.

Cheryl Gallenstein and her husband bought a 44-foot Sea Ray Sundancer boat in June 2002. They purchased it in Indiana, docked it there, and did not register it in either Kentucky or Indiana. She obtained a certificate of documentation from the U.S. Coast Guard listing her as the owner, noting that the boat’s use is recreational, and listing Cincinnati as the hailing port because the Gallensteins thought that port would be recognized if they cruised to Florida on vacation.

According to the court, the evidence showed that they “primarily operated their boat in Kentucky and Indiana waters, downriver from Cincinnati, because the water there was cleaner and less crowded…. Between June 2002 and the end of the 2004 boating season, they crossed into Ohio waters between five and ten times when operating the boat. In 2005, they operated the boat in the Ohio River once or twice but, it is not apparent from the record whether they operated it in Ohio waters during that year.” During trips upriver to Cincinnati, local police frequently would board and inspect the boat and allow the Gallensteins to continue boating after reviewing the vessel’s documentation. A boating consultant suggested that these boardings would likely end if they registered the boat in Ohio. Following this advice, Gallenstein registered the boat in Ohio, indicating that it would be principally used in Kentucky and Indiana waters. In 2003, the Ohio Department of Natural Resources (ODNR) Division of Watercraft issued a sticker and three-year registration.

In 2005, the Ohio Department of Taxation audited Gallenstein, asking for verification that she had paid sales or use tax for the boat in Ohio or in another state. Gallenstein responded that she did not
believe that Ohio taxes were due, and informed a tax agent that her boat carried an Ohio watercraft registration to avoid being boarded by Cincinnati police. This tax agent informed her that she should register the boat in the state where she principally uses it and directed her to cancel the Ohio registration. Gallenstein attempted to do so, but ODNR advised her that there is no way to cancel a boat registration other than allowing it to expire. She informed the tax agent of ODNR’s response and her intent to not renew the registration. The tax agent replied that her response did not satisfy the state’s request for proof of tax paid.

The tax commissioner assessed a $12,000 use tax, and imposed an $1,800 penalty and $1,252.93 in pre-assessment interest. Gallenstein petitioned for reassessment and requested remission of the penalty and interest. The tax commissioner denied this request because her use of the boat in Ohio, combined with her declaration of Cincinnati as its hailing port and her registration of the boat in Ohio, “‘created a nexus between the boat and Ohio,’” making it subject to the use tax, and she had not established that the transient use exception applied.

Gallenstein appealed to the BTA. Relying on its own precedent, the BTA determined that the term transient use “‘“connotes a use of a short or temporary duration”’” and that a period of 60 days “‘would seem to be an appropriate and reasonable guideline’” for determining whether an owner’s use of a boat in Ohio had been transient. It determined that the record “‘clearly establishes’” that Gallenstein resided in Kentucky and was a nonresident of Ohio. It rejected the tax commissioner’s contention that Gallenstein was not a tourist or vacationer because of the proximity of her husband’s Ohio business and stated that “‘the total number of days in Ohio’s waters since the boat’s purchase in June 2002 was less than sixty days.’” Nonetheless, the BTA determined that Gallenstein did not satisfy the transient use exception because her boat was required to be registered pursuant to R.C. 1547.531 as it did not satisfy an exemption from watercraft registration contained in R.C. 1547.531(B)(3) for those boats who are temporarily transitting, not principal users of Ohio waters, and not used in Ohio waters for more than 60 days. It therefore affirmed the tax commissioner’s decision. Gallenstein then appealed to the Ohio Supreme Court.

In a 4-3 decision, the Supreme Court of Ohio reversed the decision of the BTA. In its opinion, the court explained that, pursuant to R.C. 5741.02(C)(4), the tax does not apply to the “[t]ransient use of tangible personal property in this state by a nonresident tourist or vacationer, or a nonbusiness use within this state by a nonresident of this state, if the property so used 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 court recognized the BTA’s conclusion that Gallenstein met part of R.C. 5741.02(C)(4)’s test, but determined that Gallenstein satisfied the statute because she established her boat was not required to be registered or licensed under the laws of this state and therefore she satisfied the (B)(3) exemption. It noted that R.C. 1547.531(B)(3) exempts watercraft from registration “that have been documented by the United States coast guard or its successor as temporarily transitting, whose principal use is not on the waters in this state, and that have not been used within this state for more than sixty days.” However, according to the court, despite this exemption provision, “the term ‘temporarily transitting’ does not appear in federal regulations governing the United States Coast Guard’s documentation of vessels.”

The court wrote: “In this case, because the term ‘temporarily transitting’ does not appear in federal regulations governing the United States Coast Guard’s documentation of vessels, the BTA unreasonably and unlawfully interpreted R.C. 1547.531(B)(3)…. To require Gallenstein to show that her boat has been documented as temporarily transitting by the United States Coast Guard when it does not appear that the United States Coast Guard issues a temporary transitting endorsement is unreasonable because no one could qualify for this exemption.”

And, it stated: “Despite her best efforts, Gallenstein was not able to cancel her Ohio registration as ordered by the tax department, and assessment of a use tax on that basis is also unreasonable. The fact remains that from 2002 through 2004, Gallenstein operated her boat in Ohio waters fewer than a dozen times, and her principal use was not on the waters of this state. It is unreasonable and unlawful to assess a $12,000 use tax, an $1,800 penalty, and $1,252.93 in pre-assessment interest on a Kentucky resident who purchased a boat in Indiana and who harbors it there and who chose to register that boat in Ohio to reduce the chances of police boarding it on the few occasions she operated it in Ohio waters.”

The majority opinion was joined by Justices Paul E. Pfeifer, Terrence O’Donnell, Sharon L. Kennedy, and William M. O’Neill.

Justice Judith Ann Lanzinger entered a dissent joined by Chief Justice Maureen O’Connor. In her dissent, Justice Lanzinger determined that Gallenstein did not sufficiently prove that she was entitled to the transient use exception.

She noted that Gallenstein’s boat was registered in Ohio from 2003 to 2006. No matter how frequently an owner operates a boat in Ohio, the operation cannot qualify as transient use while the boat is registered in this state, she reasoned.

“In other words, the notion of ‘transient use’ is incompatible with the holding of an active Ohio registration,” Justice Lanzinger wrote. “Gallenstein’s registration of the Sea Ray prevents her use of the boat in Ohio from being labeled as ‘transient,’ and she accordingly fails to satisfy the first requirement of the transient-user exception.”

In addition, she contended that Gallenstein did not demonstrate that her boat was not required to be registered.

“The majority emphasizes that the United States Coast Guard does not issue any documentation that endorses watercraft as ‘temporarily transitting,’” Justice Lanzinger wrote. “And it concludes that because Gallenstein could not qualify for this exemption, she was not required to register her boat in Ohio. Nevertheless, the inability to meet the documentation portion of the exemption merely means the exemption itself does not apply. It does not invalidate R.C. 1547.531’s clear requirement that no person shall operate watercraft in Ohio waters unless the watercraft has proper registration. … R.C. 1547.531 clearly requires that watercraft used in Ohio must carry valid registration.”

Justice Judith L. French also dissented, stating that she would affirm the decision of the Board of Tax Appeals.

2012-1971. Gallenstein v. Testa, Slip Opinion No. 2014-Ohio-98.

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