The capital of the global art market, artwork sales in New York often impose hefty taxes on the purchaser – unless one of the several clever loopholes are employed. Amid allegations that several prominent galleries and collectors were employing tax evasion schemes that weren’t entirely up to snuff, New York Attorney General Eric Schneiderman announced he would initiate investigations concerning potential tax fraud issues surrounding purchased artworks in New York. Since then, countless subpoenas have been issued, requiring art dealers to fork up hard evidence that sales tax was not appropriate in certain art world transactions. Many allege that the law permits certain exemptions for sales on artworks – but are these loopholes necessarily legal? Are they always substantiated by law? Or can collectors find themselves in deep trouble for misconstruing the taxes owed on the artworks they purchase in New York?
New York Laws Governing Sales Tax on Artwork Sales
“Sales tax” and “use tax” are both taxes that art businesses are required to collect on behalf of the tax collector. While laws vary from state to state, in New York all art sales are subject to a sales and use tax when the work is sold, unless an exemption applies. Exemptions can include:
- The purchaser bought the artwork with the sole intention to re-sell the work.
- The purchaser will ship his artwork to another state, in which case the tax laws of that state would govern the use of the work.
In the case of either exception, it’s up to the art to prove that those exemptions truly apply.
Recently, rumors have been swirling that it’s become common practice in New York sales to allege that these conditions exist because they might exist in a distant future. After all, most collectors purchase their artworks with the intent to sell it for a profit later. And it’s not so unfathomable to imagine a scenario in which a dealer attempts to cinch a sale by offering a tax break to the buyer. However, that it’s done frequently doesn’t make the practice acceptable, and art dealers especially must tread carefully when understanding the tax rules that will govern the sales since the burden of proof will ultimately fall upon them.
Understanding that there are gray areas governing art sales and tax law is important if dealers wish to remain in the clear. In order to avoid any tax fraud allegations, dealers should be aware of all the plausible scenarios that can occur, and understand the kind of proof required so they can avoid any chance of investigation later.
The Outright Sale: Collector Buys to Hang at Home
When a purchaser buys a work of art for the sole purpose of his use and enjoyment, an art dealer is obligated to charge a sales tax on the piece. In New York, that would amount to additional 8.875 percent on the piece. While that may seem like a hefty price to pay – particularly on million-dollar artworks – it’s not all bad news. As with any long-term investment, a purchaser who waits for a considerable amount of time before selling their investment can be exempt from hefty taxes via a long-term capital gains exemption. In New York, this can be as little as a year.
As an art dealer, you might think that a year doesn’t seem like much, and therefore you suggest that the buyer should instead claim that his intention is for re-sale. That would be a major no-no as it would call into question the use portion of sales tax law governing artworks sold in New York.
How an Artwork is Used Can Constitute a Tax Issue
Let’s say you’re a prominent art collector who often engages in the practice of purchasing and selling works of art. An art dealer you work with frequently advises you won’t have to pay sales tax if you’re planning on selling the work, which you are – at a future date. Until you do, you’d like to hang the work in your living room. Unfortunately, under New York law, that would leave you exposed to tax fraud allegations.
Under New York law, any kind of use would imply that sales tax must be paid. The same is true even if you’re a dealer, who hangs the works at your home in order to make a sale. For example, a well-known Gagosian gallery director was recently asked to pay reparations on alleged tax evasion for artworks she sold out of her home because she hung the works there. While she could argue that she was using the home as her personal gallery space, it’s more likely she had the fortune of selling the works because a guest or a visitor spotted it. Since her intentions are unclear, New York would impose a sales tax on the piece.
In general, art dealers should advise their clients that a future intended use to sell a work doesn’t exclude them from having to pay taxes on the work.
I Bought in New York, But I’m Shipping to Portland
The sales tax exemption to artwork purchases exists for buyers who intend to enjoy their artworks in other states. Likewise, the buyer will be governed by whatever sales tax laws exist in that state – for example, if you ship a work from one state immediately to another state, then you pay use tax at the rate dictated by the state to which the work was shipped.
As an art dealer, you must be diligent in documenting the sale and subsequent delivery of the work, since the burden of proof will fall on you. Items shipped out of state must have complete, clear, and convincing delivery documentation to show the goods were not received by the purchaser in New York State. These documents must be produced in good faith based on all the circumstances surrounding the shipment.
In some states, sales and use taxes don’t exist, and recently, some art experts have been advising that purchasing a work and having it sent immediately to a museum for a year or so will keep the owner from having to pay the sales tax. These are precisely the kinds of transactions that New York regulators are looking to sniff out and punish since its a means to avoid paying taxes on an artwork you purchased. However, that doesn’t necessarily mean that a maneuver like that is illegal, especially because the buyer if they choose to move the piece back into New York, will be subject to the use tax. After all, the move doesn’t get a buyer off the hook, since they will inevitably be subject to the use tax once they transfer the artwork back into the state.
Words of Advice
Art dealers need to be aware that ignorance is not a defense when it comes to tax evasion, and therefore it’s a much better idea to ask your clients some very specific and detailed questions surrounding their plans for their artworks. Missteps when it comes to paying taxes on art can have serious consequences. If it can be proven you committed fraud – intentional or otherwise – the penalty is twice the amount of the unpaid taxes plus interest at 14.5% and potential jail time. The best thing to do when unsure? Art dealers should consult tax attorneys and have a tax plan in place for artwork sales.