The Dangerous Myth of the Three-Twelve Closing

Dec 20, 2016 MARK BUHLER DAVID R. MAASS

Many yacht brokers and even some maritime lawyers have used
so-called three-twelve closings, ostensibly to avoid liability for
Florida sales tax while preserving a yacht’s duty-paid or nonexported
status. In theory, a three-twelve closing occurs outside
Florida waters, but within the U.S. customs territory, that is,
within the band of waters located between three “geographic
miles” and twelve “nautical miles” from shore. There are at
least three problems with the three-twelve closing theory. First,
along much of Florida’s Atlantic Coast, state waters frequently
extend more than three geographic miles from shore, while on
Florida’s Gulf Coast state waters extend three leagues (or nine
nautical miles) from shore. Second, the U.S. customs territory
extends only three nautical miles from shore, not twelve nautical
miles. And third, merely transferring title in a yacht outside
the U.S. customs territory does not necessarily constitute an
“exportation” of the yacht, and thus may not result in the loss of
duty-paid or non-exported status.

In the United States, most coastal states claim a seaward
boundary three geographic miles from their respective Atlantic
or Pacific shore, and/or three marine leagues (nine nautical
miles) from their Gulf of Mexico shore. The Submerged Lands
Act, a federal law passed in 1953, reflects this system of
boundaries. The Florida Constitution, however, provides that
Florida state waters extend three leagues (nine nautical miles)
from shore on the Gulf Coast, and three geographic miles from
shore, or to the western edge of the Gulf Stream, whichever
distance is greater, on the Atlantic Coast.


It may seem bizarre for a state boundary to be moveable,
since the location of the western edge of the Gulf Stream
moves, but at least one Florida appellate court has upheld this
constitutionally described boundary. In Benson v. Norwegian
Cruise Line Ltd., 859 So. 2d 1213 (Fla. 3d DCA 2003), the Third
District Court of Appeal, in Miami, applied Florida law to an
alleged act of medical malpractice that occurred on a cruise
ship almost twelve nautical miles from shore, where the edge
of the Gulf Stream was fourteen nautical miles from shore on
the pertinent date. Similarly, under state law, Florida’s power
to impose sales tax extends to the western edge of the Gulf
Stream, in many cases considerably more than three geographic
miles from shore.


Unlike state waters, the U.S. customs territory extends only
three nautical miles from shore. On December 27, 1988,
President Ronald Reagan signed a proclamation extending the
U.S. territorial seas to twelve nautical miles for international
purposes, as allowed under international law. But that
proclamation, by its terms, did not affect any existing state or
federal law. Although the twelve-mile limit applies for certain
international purposes, U.S. Customs has repeatedly ruled that
the U.S. customs territory extends only three nautical miles from
shore. As a result, closings that take place anywhere more than
three nautical miles offshore occur outside of the U.S. customs
territory.

Does this mean that yachts delivered more than three nautical
miles offshore are being “exported” from the United States
and lose their duty-paid status? Not necessarily. The customs
regulations define “exportation” as “a severance of goods from
the mass of things belonging to this country with the intention
of uniting them to the mass of things belonging to some foreign
country.” 19 C.F.R. § 101.1. The regulation articulates two
essential elements of “exportation”: (i) a severance of goods from
the mass of things belonging to the United States, and (ii) an
intention to unite them to the mass of things belonging to some
foreign country. Both elements must exist before there is an
“exportation” for customs purposes. The delivery of a yacht outside
the U.S. customs territory may constitute a severance of the yacht
from the mass of things in this country, which may satisfy the first
element of the definition of exportation. But it does not satisfy
the second element unless the circumstances demonstrate an
intention to unite the yacht to the mass of things belonging to
another country.


For example, if a yacht departs from a U.S. port, a closing occurs
outside of the U.S. customs territory, and the yacht returns to
the same U.S. port without being entered or offered for sale or
charter in any foreign country, Customs will probably conclude,
absent contrary indications, that there was no intention to unite
the yacht to the mass of things in another country, and thus no
“exportation,” and no loss of duty-paid or non-exported status.
On the other hand, if the sale closes outside the U.S. customs
territory and the yacht proceeds to a foreign country, or the buyer
immediately offers the yacht for sale or charter in a foreign
country, it would be much more difficult for the buyer to prove that
the buyer did not intend to unite the yacht to the mass of things in
that foreign country.


The upshot for buyers is that, if the goal is to avoid Florida sales
tax while preserving a yacht’s duty-paid status, there is no
particular need, from a Customs duty perspective, to close less
than twelve nautical miles from shore. For purposes of preserving
a yacht’s duty-paid or non-exported status, the key is to refrain
from doing anything that suggests an intention to unite the yacht
to the mass of goods belonging to another country. The yacht
should therefore return to a U.S. port immediately after closing
and should not be offered for sale or charter in any other country.
The most critical thing to remember, however, is that to avoid
liability for Florida sales tax, the closing should be more than nine
nautical miles offshore, if in the Gulf of Mexico, or if in the Atlantic,
more than three geographic miles off the coast, or seaward of the
western edge of the Gulf Stream, whichever distance is greater.
Mark Buhler is the principal of Buhler Law Firm P.A., and
focuses his practice on yacht transactions. He is Board Certified
in Admiralty & Maritime Law by The Florida Bar. Mark can be
reached at mark.buhler@earthlink.net and 407.681.7000. David
R. Maass is an associate at Alley, Maass, Rogers & Lindsay, P.A.,
in Palm Beach, Florida, where he focuses his practice on yacht
transactions. David can be reached at david.maass@amrl.com and
561.659.1770. This article is intended for general informational
purposes only and does not constitute legal advice.