NY State, Art Shipments and Tax Collections

In the past it was called empty boxes, the practice of shipping or faux shipping fine art out of NY State in order to avoid paying sales tax.  Barron's is now New York, with a state sales tax/first use rate of 8.875% is now getting serious again about collecting taxes from art collectors. According to the article, it appears if you purchase a work in Europe and have it shipped to New York, you are responsible for paying NY sales tax on the work.

The Barron's article also notes it is getting easier for NY tax authorities to track through customs and tax returns to find unreported and unpaid taxes. There may be an ongoing investigation, but it was not confirmed by NY authorities.

Barron's reports

After more than a decade’s lull, the opaque world of buying and selling art is once again under scrutiny, particularly in New York state, where local law enforcement and tax authorities are busy investigating whether collectors have been paying their taxes, requesting sales and shipping records and sending out hefty invoices in the process.

A lawyer tells us he “was shocked” when he recently received a “seven-figure” tax bill, after he arranged several years ago to have a multimillion-dollar painting sent to New York from Europe, solely for a client’s viewing. While the work was ultimately shipped out-of-state upon its sale, and thereby not subject to New York taxes, “the shipper used my name as the contact person on the invoice.” The lawyer was able to resolve the matter only after presenting Albany with sufficient documentation proving he was just an intermediary.

Not everyone was so lucky. The authorities are casting a wide net. “I’m getting panicked phone calls from people who are not even my clients,” says David Lifson, a partner with art-world expertise at New York accounting firm Crowe Horwath. “I’m seeing letters about people who have moved to New York,” he says, and “letters where the inventory is in transit among dealers and owners. There are many people on this list who bought art in Europe and had it shipped in or through New York.”

New York City imposes an 8.875% tax on the sale or “first use” of personal property. That means that if a $10 million work is bought at a Paris gallery and then shipped to the collector’s Manhattan residence, it is eligible for a VAT refund in Paris but subject to an $887,500 tax in New York. There are some loopholes that can be taken advantage of, but the authorities now have electronic access to customs records and tax returns that are turning up leads on behind-the-scenes transactions. While the investigation triggers aren’t public, Lifson says the three most obvious are dollar amounts, repeat transactions, and New York addresses. In this current climate, he says, “anything that costs a lot of money is going to be suspect.”

Such a wide-scale New York inquiry into potential tax fraud among art collectors last happened more than a decade ago. Given the various rules about who is the responsible for collecting the tax, not to mention past lax enforcement, the process remains hazy to many collectors. But “ignorance of the law is not a defense,” Lifson notes, particularly now that the law is being enforced. Michael Plummer, a principal in the art advisory company Artvest Partners, insists that “anyone with half a brain and experience tries to be absolutely meticulous about sales tax. Anyone who isn’t, is just inviting trouble.”

Francis Bacons Three Studies of Lucian Freud sold for $142 million in New York and was briefly exhibited in Oregon, where there is no sales tax, before getting shipped to the new owners taxable state, Nevada. Experts say that is one legal way to avoid paying a local sales tax.

Still, the savvy collector knows how to legally take advantage of exemptions, which most commonly come into play when the work is purchased by a dealer for resale and held as inventory; is delivered out-of-state; or its “first use” occurs outside of New York. As Penta previously reported, many simply stockpile their works in tax-haven freeports in Geneva, Singapore, Luxembourg, and Delaware. Thomas C. Danziger, a New York lawyer specializing in art, says, by working the system, you can have up to 15 months after purchasing a work to pay your New York tax. By shipping the work to a freeport, this delay can be extended indefinitely, providing a “potentially valuable tax benefit.” But when you bring the work back into New York, be prepared to pay up.

You can also tap a “first use” loophole, which allows a buyer of art living in a tax-assessing state to temporarily exhibit the work in a tax-free one before shipping it home, thereby legally dodging local taxes. Francis Bacon’s Three Studies of Lucian Freud ended up at the tiny Portland Museum of Art in Oregon for 15 weeks following its epic $142 million sale in 2013 at Christie’s in New York. Some think that move might have saved the buyer, Elaine Wynn, millions of dollars in Nevada taxes. But also be aware that nabbed tax-dodgers can be charged a penalty of up to 30% on the price of the art in question, besides owing the overdue sales tax.

New York state’s tax department won’t confirm whether an investigation is under way, but e-mailed Penta that the “NYS Tax Department takes tax compliance very seriously. Our rigorous audit program works to ensure that taxpayers pay their fair share of taxes when it comes to pieces of art and other taxable products and services.”

Penta’s call: Expect the aggressive enforcement to continue indefinitely. It’s an inexpensive way for New York State to raise revenue, and its return on effort could potentially be large.

Source: Barron's