Whether or not you’re a fan of hip-hop, it’s hard not to be just a little intrigued by the news over the past few weeks about the controversial Martin Shkreli’s reported $2 million purchase of legendary rap group Wu-Tang Clan’s one-of-a-kind double album, Once Upon a Time in Shaolin. The extraordinary purchase might give new meaning to the Wu-Tang hit track, C.R.E.A.M., “Cash Rules Everything Around Me.”

You might recall Mr. Shkreli brought the ruckus when he increased the price of his (now former) pharmaceutical company’s anti-parasitic drug by 5,000 percent last year—from $13.50 to $750 per pill, touching off a firestorm of outrage that culminated in BBC News questioning whether he was the “most hated man in America.” More recently, Mr. Shkreli has run into legal troubles that had rumors floating around that the FBI would seize the exclusive Wu-Tang offering.

All of this is interesting—maybe. But what, you ask, does the notorious Martin Shkreli and a hip-hop group counting among its members a man named “Ghostface Killah,” have to do with sales tax?

Of Hip Hop and Auction Sales

Well, the $2 million deal brokered through online auction house, Paddle8, raised questions around our proverbial water cooler about the sales tax implications of the historic sale. Not many details about the transaction have been made public. We know that potential bidders were invited to sample an excerpt of the 31-track album at New York’s MoMA, allowed in to the event apparently only after a body search that would make the TSA envious. But, we don’t really know the location of the transfer of ownership, although New York sounds like a good bet. The songs on the album were recorded in Morocco, it seems. Wu-Tang Clan is New York City-based, and it looks like Mr. Shkreli resided in Manhattan at the time the purchase was finalized. Paddle8, the auctioneer, has offices in New York, Los Angeles, and London.

In most states, the auctioneer is liable for the sales tax when selling his or her own property. In some states, the auctioneer is liable for tax on sales of its own property and that which it sells on behalf of others. In a state like Tennessee, an auction sale is taxable to the principal-owner where his or her identity is known.

Like the majority of states, New York and California treat auction sales as taxable transactions. In California, anyone in the business of making retail sales at auction of property that is owned either by the auctioneer or another person, is subject to tax measured by the gross receipts from auction sales. New York considers auctioneers to be vendors making sales of tangible personal property, and thus, subject to sales tax. Looking to other states, North Dakota deems an auctioneer to be the owner of all property of which it takes possession for the purpose of selling; the auctioneer is then required to pay any sales tax due. In Maine, an auctioneer is required to collect and report sales tax regardless of who owns the property being sold. To the states, it seems the sale, even of the most expensive album in history by a venerated rap group to a colorful young businessman, may be simply a typical auction sale subject to sales tax.

The Wu’s Brokered Deal?

But what if the deal is characterized as a one-time sale by Wu-Tang using a broker? RZA, the group’s leader, describes the album as a “single-sale collector’s item.” In a state like Iowa, as an example, a sale made by an auctioneer on behalf of a principal who is not in the business of selling on a regular basis, would be exempt from tax as a casual sale. Indiana also exempts sales by an auction company that qualify as casual sales. Kansas exempts isolated or occasional sales made at auctions under certain circumstances, including that the item is not purchased for resale. Similarly, in West Virginia, auction sales that qualify as isolated transactions are entitled to an exemption.

We don’t yet know if New York or California, or any other jurisdiction, has collected tax on the sale of this unique album housed in its ornate hand-carved box, and touted by one of its artists as a ”collectible piece of artwork.” Was it a taxable auction sale? Was it an exempt casual sale? Should an issue over sales tax ever arise over this deal, taxing authorities may be wise to prepare themselves for Wu-Tang’s Inspectah Deck, well-known for “shacklin the masses with drastic rap tactics.” Protect ya neck.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What are the significant sales tax issues related to auction sales and casual, isolated, or occasional sales?

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By René Y. Blocker