By Tom Andrews, CPA
The Yachting Industry has long remained under the radar with regards to the Internal Revenue Service. While most industries have manuals and guide books that help navigate them through some of the more complicated aspects of their respective industries, the luxury yacht world has little guidance to fall back on. This is not to say that yachts and their crew members are exempt from complying with United States income and payroll tax law, it just seems that most other industries have had issues directly addressed by the IRS through directives or court cases that helps make sense of it all. Every once in a while you will hear of the occasional yacht owner who has endured an audit because they were improperly deducting their vessel or the crewmember who gets a letter from the IRS because they did not file their income taxes for the past twenty years but as an overall industry you really don’t hear much.
In 2010 the Internal Revenue Service issued a directive regarding foreign taxpayers engaged in activities related to the exploitation of natural resources on the Outer Continental Shelf in the Gulf of Mexico. While this directive has been out for several years the repercussions have been felt more recently. It is agreed that working on the OCS (Outer Continental Shelf) is not the same as a crewmember working on a luxury yacht in the United States however the similarities are enough to warrant the attention of anyone working on or operating a foreign flagged vessel in United States territorial waters. The vessels subject to this directive are foreign flagged, in many cases the owners of these vessels are nonresidents and the crew affected are nonresident crew members.
The IRS directive addressed whether or not the wages of nonresident crewmembers were subject to United States income tax withholding and FICA tax withholding. The directive also provided guidance on foreign taxpayers engaged in activities on the OCS. The IRS acknowledged that these foreign operators may be faced with a significant challenge especially when they are not familiar with the rules nevertheless the directive has made it clear that even if a nonresident has no legal immigration status in the United States they are still considered to have provided services that may be subject to withholding at the graduated income tax rate or the flat 30% backup withholding rate that would apply to some nonresidents working inside US territorial waters.
While I am not an expert with regards to immigration and maritime law I can say with certainty that there are payroll tax implications for luxury vessels cruising in US territorial waters. There are many opinions on how tax law, immigration law and maritime law converge, this directive has carved through all three of these components making the intersection a bit clearer. This directive serves as a reminder that while the luxury yacht industry has not attracted the same attention as the OCS the compliance should still be a top priority for any operator.