The Art Market and The Tax Man

KatherineUncategorizedLeave a Comment

This is a very informative and interesting article that focuses on New York tax laws in relation to fine art sales and purchases. However, one need not live or transact business in New York to benefit from some the important tax and use rules spelled out herein. What applies in New York is in fact applicable to many, if not most states.

An important position adopted by The State of New York says that, “even if an art purchaser intends to resell an artwork, exhibiting the work in the home or office in the meantime subjects the purchaser to sales and/or use taxes.” As a result, it is important for art buyers to immediately place their purchases in art storage facilities.

It is important for art buyers to understand that galleries are obligated to collect tax in their home state if a buyer takes possession in that state, or any other state where the gallery has a place of business. Therefore, a New Jersey resident who buys art in New York is required to pay N.Y sales tax if they walk out of the gallery with their purchase. On the other hand, if the gallery ships the art to the buyers resident in N.J, then the gallery is not required to charge sales tax.

As many galleries found out when audited, it is imperative to retain receipts for works shipped out of state. If not, the state will assume that goods were released to the buyer at the point of sale, which will result in a sales tax levy on the gallery. Burden of proof is on the gallery, whom has little to no chance of collecting sales tax from buyers after the fact.

The second part of this article discusses the use of domestic freeports as a viable way to avoid sales and use taxes. They are found in states that do not collect sales tax, and in several countries throughout Europe and abroad. “Domestic freeports can be ideal for a prospective buyer who intends to purchase art solely for investment or resale purposes (pursuant to a commercial resale certificate, for example).”

Finally, at the very end of the article (in the footnotes) the topic of using nonprofit museums to avoid sales tax is discussed. This strategy is used by many active and savvy collectors/dealers, yet many people have no idea this loophole exists. As the article states: “Collectors of notable works of art have also immediately shipped artwork purchased in a state with a high sales and use tax to nonprofit fine art museums in states with no such tax, such as the Portland Art Museum in Oregon, the Hood Museum of Art at Dartmouth College in Hanover, New Hampshire, and the Delaware Art Museum in Wilmington, Delaware. For states that focus on the “first use” of the property for tax purposes, a loan for temporary public exhibition of at least 90 days, or the receiving state’s statutorily required “first use” period, may allow collectors in some instances to purchase art without being required to pay the selling state’s use tax.

In conclusion, it is critical to confer with an experienced art attorney if you are involved in buying art of significant value.


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