08 Apr Art Collectors, Pay Your Taxes
States are targeting those who avoid sales and use taxes
States are cracking down on art collectors who aren’t paying taxes owed on their purchases.
States don’t release details about investigations into evasion of taxes on art purchases. But according to lawyers representing defendants in such cases, state attorneys general and revenue departments around the country have stepped up their investigations and prosecutions for failure to pay sales and use taxes on art purchases.
Thomas C. Danziger, a New York City art lawyer, says investigators in New York and other states monitor art sales through data mining that includes examinations of declared items coming through U.S. Customs, regular audits of major art galleries, reviewing news about art buying in the media, searches of interstate shipping logs and sharing of information with other states. The state attorney general’s office wouldn’t confirm this information.
San Diego tax attorney Sam Brotman says that the increased focus by state officials isn’t just on uncollected taxes on purchases of art. “They also are tracking sales of other big-ticket items such as boats, luxury cars, airplanes and jewelry.” But artworks have become a point of particular concern, he says, especially in California and New York, which are the two largest art markets.
Some prosecutors also have gone after gallery owners who they say have colluded with collectors to evade the required taxes. Charges also have been filed against art dealers who fraudulently claimed that their purchases were exclusively for resale, a legitimate exemption, when in fact the artworks were for their personal enjoyment.
Some finance professionals argue that many transgressions aren’t intentional, but rather the result of a lack of clarity in the tax laws.
“The rules aren’t clear, and there is a huge matrix of complexity people get trapped in,” says David Lifson, a tax accountant with New York-based firm Crowe Horwath LLP. For example, most people wrongly assume that the vendor pays the sales tax, says Mr. Lifson. But it is the buyer who is required to pay the sales tax, at the time of purchase, unless the piece is being shipped to another state. In that case, a use tax is charged by the destination state. Use taxes typically are equal to the sales tax in each state.
In New York City, the sales tax is 8.875%. Thus, if a $1 million painting was purchased in New York City and was put in the buyer’s New York home, it would entail a sales tax of $88,750. If it were shipped to a buyer’s home in Connecticut, where the sales tax is 6.35%, it would result in no tax charged by New York, but a Connecticut use tax of $63,500.
To avoid legal problems, lawyers and other experts who advise art collectors recommend keeping good records: the price paid for an artwork; where it was shipped to; and where it has been stored or displayed.
Purchasers of art destined for another state also must be very careful about how the piece is shipped to avoid owing local sales tax. In New York state, the gallery or other seller has to arrange the shipping directly and use a “common carrier,” such as UPS, Federal Express or the U.S. Postal Service. If the buyer takes the item and brings it to the shipper, he or she technically has taken possession of it in New York state and owes the sales tax, says New York lawyer Amelia Brankov.
Collectors in California can avoid that state’s sales and use taxes if the artwork is shipped directly to another state and displayed there for more than 90 days, says Mr. Brotman, the San Diego attorney. Moreover, he notes, if the artwork is shipped directly to Oregon, which has no sales or use tax, and displayed there for more than 90 days, the buyer can avoid taxes altogether. Several art museums in Oregon have participated in this kind of arrangement before the pieces are ultimately shipped back to the purchaser’s home in California.
Most other states, including New York, don’t allow this. If someone who purchased artwork in another state moves it to a residence in New York, even after a period of years, that person will still owe a New York use tax, although the taxpayer would receive credit for the sales or use tax already paid and only would owe the difference between the two.
Private art collectors and investors also have sent their purchases directly to fine-art storage facilities in Delaware, such as Crozier Fine Arts and Delaware Freeport, where the purchases are tax exempt. The collectors forego paying either sales or use tax until they choose to ship the artworks to their homes, says Fritz Dietl, founder and president of Delaware Freeport. For some, “their homes already are full of art, so they might as well store new works where it is tax-exempt,” Mr. Dietl explains. For others, he claims, the issue is deferring taxes until some more propitious time. “Maybe, they buy something at Miami and have it sent to us, figuring that they’ll have more money in a year or two to pay the tax. They can play with that sales-tax money now.”
SOURCE: Wall Street Journal 9-11-2017