Art collectors and dealers alike might want to take advantage of an Oct. 14 event at Greenwich’s Bruce Museum, lest they find themselves liable for paying an unexpected amount of sales tax.
The event, “Fine Lines & Broad Strokes: Tax Implications for Art Collectors,” will feature a multi disciplinary team of attorneys from global law firm Withers Bergman, including Diana Wierbicki, partner and global head of art law practice. The discussion will focus on compliance in the current legal landscape.
Chief among the topics will be the $4.28 million settlement between New York state and Manhattan’s Gagosian Gallery and its California affiliate for two instances of noncompliance with sales tax statutes, announced in July. The state contended that the Gagosian affiliate, Pre-War Art Inc., was obligated to collect and remit sales tax on purchases by New York buyers, which it had not been doing. New York alleged that Pre-War Art had, from 2005 to 2015, sold and shipped some $40 million worth of art to customers in the Empire State without collecting or remitting New York sales tax.
A second and, in Wierbicki’s view, more pertinent concern for most buyers is the authorities’ assertion that purchases by out-of-state buyers who used specialized fine art shippers – those trained in carefully packaging artwork for shipment, as opposed to common carriers like UPS, FedEx and the U.S. Postal Service — to send purchases to their homes were subject to New York state sales tax, which Gagosian was obligated to collect and file with the state.
Under New York law, sales tax must be collected if a possession is transferred to a purchaser or a purchaser’s designee within the state. As an international dealer, Gagosian sold not only to New York residents but also to customers around the country and the world. Gagosian usually released the art to fine art shipping companies for delivery to purchasers at locations outside of New York and did not collect sales tax on those purchases.
“Logistically, how it’s always been done in the art world is that the seller – usually an auction house or gallery – is incentivized to use the cheapest shipping option,” Wierbicki said, with UPS and the like the most common options. “But if the buyer wants to use a white glove, fine art shipper, not only do they pay for that but they also need to pay sales tax, which is the seller’s responsibility to collect and remit.”
“There is one set of tax rules for all, and that includes art dealers and collectors,” New York Attorney General Eric Schneiderman said in announcing the settlement. “Those who fail to pay their fair share can deprive the state of millions of dollars, leaving ordinary New Yorkers to foot the bill. We will continue to remain vigilant in order to ensure that art dealers and collectors fully abide by the state’s tax laws.”
In addition to the monetary fines, Gagosian agreed to establish a shipping division that will handle out-of-state sales and charge New York state and local taxes for art shipped out of state.
“The attorney general has been very public about this, which is worrying a lot of people,” Wierbicki said. “Now is the time to understand that when it comes to out-of-state purchases, you can no longer do what you always did.”
Similar action has not been taken by Connecticut, she noted, which imposes a “use tax” on sellers shipping artworks to destinations outside of the Nutmeg State. Basically the same as sales tax, use tax is levied on purchases made outside one’s state of residence on taxable items that will be used, stored or consumed in one’s state of residence and on which no tax was collected in the state of purchase.
Asked what was driving New York state government’s sudden interest in fine art, Wierbicki said: “New York needs money. You’re always reading stories about record-breaking prices at auctions, which leaves the state wondering, ‘Why aren’t we seeing that included in the taxes we collect?’”