Another Look at the Delaware Freeport

A little over a week ago I posted on the opening of a new Freeport facility in Wilmington, Delaware (click HERE to read the original post). The NY Times has now devoted an article to the new storage facility, and also information on a second facility recently opened by art movers Atelier, and next month a third facility, operated by  Crozier Fine Arts will open.

The article notes as there is now a growing interest in investing in art, so storage in a tax free zone can result in a substantial savings, which could be put into acquiring more art. Delaware is one of 5 states without a states sales tax.  Buy in NYC, follow the correct procedures and ship and store in Delaware and an investor can save the 8.875% New York sales tax.  On a $ million painting, the is $88,750.00 savings.  Now think of art investors buying tens of millions of dollars worth of art.

The NY Times reports

NEWARK, Del. — It may not summon up a sense of international intrigue like Geneva or Luxembourg, but this small city, just off the Interstate and down the road from Wilmington, can now boast that it has joined those more glamorous locales as a tax haven for art collectors.

Fritz Dietl, who for years watched collectors ship artworks from sales in New York to tax-advantageous free ports overseas, has opened his own here in a former foam peanut packing factory beside the train tracks.

He is gradually filling it with plywood crates containing artworks. The warehouse, he says, offers art owners the same benefits as its better known European counterparts: discretion, security and tax savings.

“In the past, they would have shipped it to Switzerland,” he said one morning recently, gesturing at about 20 large crates in a 16,000-square-foot, climate-controlled space.

The artworks packed in the crates were worth in total about $10 million to $15 million, he said. But more would arrive soon, and he was readying another, 20,000-square-foot room next door in the same warehouse.

“Within a month, it will be close to $100 million,” he said. “I am planning to have this full by the end of next year.”

In June, another art storage complex opened in Delaware, a 50,000-square-foot warehouse run by a Philadelphia art storage company, Atelier, that promises to keep the art at a constant 68 degrees. Next month, Crozier Fine Arts, which operates storage spaces in Manhattan, New Jersey and other areas, is scheduled to open a 40,000-square-foot storage space in Delaware.

This state is special because storage spots in most other states cannot offer the same tax advantages as Delaware. It is one of only five states without any sales or use tax, meaning that a Manhattan collector who might owe, say, $887,500 in sales tax on the purchase of a $10 million painting at Sotheby’s in New York, would owe nothing by shipping the art to Delaware directly after purchasing it.

Once there, art can be bought and sold within a storage space without any tax on the transactions for as long as it remains there.

“Delaware has a lot of trust and tax advantages,” said Derek Jones, executive director of Atelier.

As interest in art as an investment — not a wall hanging — grows, the appeal of storing it tax free while it possibly appreciates in value has grown, too, spurring the expansion of free ports in Geneva and elsewhere in Europe and Asia. Owners do not have to pay import or export taxes when they ship to and from those locations. But, as Mr. Dietl points out, they are far away for American collectors, and there is no export tax on shipping an artwork into or around the United States, either.

As a result, Mr. Dietl thinks his new warehouse can replicate the benefits of overseas free ports “100 percent,” and maybe surpass them, because New York owners have to move their art less than 200 miles to Delaware.

He has even called his new facility, which opened last month, the Delaware Freeport. Each week, his truck shuttles along Interstate 95 from Manhattan carrying art for private buyers, museums and other institutions.

“As an investor in art, it just makes a lot of sense to have the advantage of places where you can safely store your artwork without the tax burden,” Mr. Dietl said.

“We just decided to finally give collectors and investors the ability to do this here in the United States.”

Storing art in Delaware is not new. Eighteen years ago, Bayshore here, received a call from a California collector who wanted to store art. Since then, the art portion of its business has grown. Works are locked in rows of private vaults resembling prison cells, defended by cameras, double roofs and two security firms, occupying space “well north of 50,000 square feet,” said Matt Larmore, one of the owners.

Business has skyrocketed in the past three years, he said, though he declined to speculate on why collectors chose to store with him. It’s their business, he said.

Simon Hornby, president of art services for Crozier, said it is clear, though, why it makes sense for art storage companies to look at Delaware as the next hot spot. “It is lower-cost real estate for long-term clients with no tax issues at all,” he said.

Market forces are in many ways responsible for the primacy of tax planning in so many collectors’ minds. With contemporary art prices so high, the benefits of saving on taxes in a place like Delaware are palpable.

Another reason may be a more aggressive attitude by New York authorities toward the proper payment of sales and use taxes on art transactions. Mr. Dietl and Mr. Jones and several lawyers who specialize in advising collectors said that they had seen an uptick in requests from the authorities to review transactions to make sure dealers and owners are fully complying with the tax code.

Diana Wierbicki, a partner at the law firm Withers Bergman, where she leads the global art practice, said recent big sales such as Christie’s spring auctions, when more than $1 billion worth of art changed hands in a week, had likely drawn the state tax office’s closer attention. A billion dollars is enough to draw anyone’s scrutiny.

“It is very active,” she said. “We are seeing them pay more attention.”

In a statement, Geoffrey Gloak, a spokesman for the New York State Department of Taxation and Finance, said, “The N.Y.S. tax department takes tax evasion very seriously and has a rigorous audit program to ensure that all taxpayers pay their fair share of taxes — in relation to art and all other taxable items and enterprises.”

A rush to build in Delaware could create a glut of art storage space.

Evan Beard, who leads the art and finance practice in the United States for Deloitte, a consulting and advisory firm, said the new warehouses in Delaware will have to work hard to distinguish themselves from one another.

“There has been a proliferation of these art storage facilities in the United States,” he said.

Steve Novenstein, chief executive of Uovo, an art storage company in Long Island City and Rockland County, both in New York, said he had no plans for Delaware.

“We understand the benefits of doing it taxwise, but we have not had enough interest from customers in doing something in Delaware,” Mr. Novenstein said.

Still, Mr. Dietl said he was optimistic about his prospects. He came to the United States from Austria in 1988 when he was 25. After he started an art transportation company in 1991, with a fax machine, a rented room at Kennedy Airport and a $60,000 investment from the collector Serge Sabarsky, his company is now one of the largest international art shippers. Mr. Dietl said he thought that gave him the pulse of the art market and the contacts to make a success of art storage.

He is applying for free-trade-zone status in Delaware, which could lend him further advantages, such as extending customs tax benefits to other collectibles like furniture and allowing collectors to authenticate artworks and send them back abroad if they don’t like them, without the art ever crossing the United States border, he said.

And for American art owners, Delaware is so much closer than Geneva.

“There is no need,” Mr. Dietl said, “to ship something with the risk and cost of shipping it overseas.”
Source: The NY Times

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