AvMar begins withholding U.S. taxes from foreign crew

Originally Published in “The Triton” 09/27/2011.

Ft. Lauderdale-based AvMar Payroll Services, one of the industry’s largest yacht crew payroll companies, has begun withholding U.S. income taxes from foreign crew while working on vessels in the United States.

The practice runs in the face of long-standing traditions of non-resident yacht crew not paying tax on their yacht income, and some worry it could open yacht crew to a whole host of problems.

“I’m concerned about this on two levels: immigration and hiring,” said the non-U.S. captain of a 130-foot Cayman Islands-flagged yacht based year-round in Florida. This captain, who asked not to be named, processes payroll for his crew of eight non-U.S. crew through AvMar and is worried.

“The boat spends eight months in the U.S.,” he said. “I was told by AvMar that the crew had to prove they were not in the United States more than six months. That will raise immigration issues. And I’m concerned that hiring future crew will be tough when I tell them that 15-20 percent of your income will be in taxes. They’ll just go to another boat so my labor pool has just shrunk.”

The method of paying yacht crew varies depending on the yacht, the owner, the individual crew member and the payroll process used. Many captains choose to operate as independent contractors, legally giving their employer a way to not withhold tax, with the presumption being that the contractor’s company will withhold and pay taxes to the appropriate taxing authority.

However, many common yachting countries don’t require their residents to pay taxes on income they earn in other countries, so yacht crew from the UK, France and Australia enjoy tax-free income while working in the Caribbean, Mediterranean and United States.

And that’s legal, at least from their country’s perspective.

But it’s not legal in the United States, according to tax attorney Glen Stankee, an international tax partner with Akerman Senterfitt, the largest law firm in Florida and the legal opinion behind AvMar’s recent methodology.

“If you are here [in the United States] more than 183 days, you are treated like a U.S. resident for tax purposes,” Stankee said.

There are two exemptions to that. One, if the non-resident is in the U.S. less than 90 days and earns less than $3,000 during that time. The other, the so-called treaty exemption, lets non-residents avoid U.S. taxes on income earned in the U.S. provided the non-resident files and pays taxes in their home country.

But since most of those home countries don’t require worldwide income to be reported and taxed, few yacht crew do this, making this exemption not applicable to yacht crew, Stankee said.

“The treaty is not designed to let people avoid taxes all together, just who gets to collect it,” he said.

And the popular practice of creating a business and becoming an independent contractor won’t relieve a crew member from this tax burden.

“In most circumstances, they don’t qualify as independent contractors [because] the owner will have control over their functions,” Stankee said.

Additionally, if a captain or crew member has worked with an owner for several years and their corporation has no other clients, the argument could be made that they are, for tax purposes, an employee.

Such crew claiming independent contractor status might not get in legal trouble with the IRS, but they likely would be held liable for unpaid taxes — probably at a reduced rate — and compliance going forward, Stankee said.

“That’s a risk most people are willing to run,” he said. “The problem is, crew members don’t really want to be independent contractors. If they are, they can’t get onboard benefits such as health insurance. They want to be an employee, and they want to be exempt from U.S. tax.”

AvMar now relies on Stankee’s interpretation of U.S. tax law to justify withholding employment taxes from non-American yacht crew while they work in U.S. waters.

“For the longest time, we have never been able to get a solid opinion on non-residents; then we found Glen Stankee,” said Tom Andrews, a certified public accountant and partner with AvMar.

“Many vessels don’t withhold at all from non-residents,” he said. “Crew can be in U.S. waters less than 183 days and not pay withholding tax, but to qualify, you have to be a resident filer in their country. We withhold the taxes while they are in U.S. waters, and for those who need non-resident tax returns, we do it for free.

“Some crew have been completely resistant,” he said. “Others are completely onboard. They know they need to pay taxes somewhere, or they want to file for a green card someday so they want some tax-paying history started.

“When you break up the taxes paid compared to the annual salary, it’s less than 10 percent,” he said. “We lost a boat just recently because the crew were so upset about it. But for the most part, once we sit with the owner’s attorney, we’ve been getting a positive response. Our job is to make sure the yacht owner is in compliance. So this is the conservative approach.”

Other companies that provide yacht crew payroll services have not taken this legal position of withholding taxes.

“AvMar are tax advisers; we do payroll processing,” said Rupert Connor, president of Luxury Yacht Group, which offers management, placement and brokerage services as well as payroll.

“I’m not going to be the tax police. We do offer a lot of payroll services, and our clients and their tax advisers are happy with the way we do it. Just because a boat is in Ft. Lauderdale doesn’t mean you have to tax foreign crew.”

AvMar’s new move has upset some captains, who wonder why AvMar will withhold taxes but other payroll services companies do not.

“The whole thing is just confusing,” the captain of that 130-foot yacht said. “Why is one company doing it, and not others? If this is the law, is everyone else breaking the law? I have investments in this country so it’s much more complicated than just paying income tax.”

To add a little more confusion, Stankee noted that even though the independent contractor approach isn’t “bullet-proof”, it might work in the short term.

“My client is the employer,” Stankee said. “If he didn’t withhold, he could be held liable. Crew don’t want to work for him under those conditions, so they can do an independent contractor. We can structure it in a way to make it a close call. The IRS might not buy it, but they will only require compliance going forward. That’s the way a lot of these are ultimately resolved. The employee incurs the risk and the employer is covered.”

But he also noted that there hasn’t been a whole lot of enforcement.

“IRS enforcement on these rules of yacht owners on foreign-flagged vessels have not been substantial,” Stankee said. “They haven’t been actively digging.”

Stankee is confident of his position that yacht owners must withhold U.S. income taxes on non-resident crew while in U.S. waters.

“The law is black and white,” he said. “There’s no reasonable debate about it. There’s been a widespread history of non-compliance in this industry. Crew think, ‘If I’ve gotten away with it for 25 years, I must be doing it right.’ That’s not the case at all.”

Not everyone is so confident.

“Tax law is not black and white,” Connor said. “Crew should be aware that if they are in the United States more than six months, they will have residency issues and they will have tax issues, and that the U.S. government can tax their income they earn while here. … They should get tax advice.”

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