Recently, there have been several cases that reflect the complex, and often pricey, applications of sales and use tax law to very expensive works of art. Whether purchased as an investment or not, artwork is tangible personal property and, as such, is generally subject to sales and use tax. However, several New York cases and one federal case illustrate the possible consequences of attempting to avoid sales and use tax on purchases of costly artwork. While paying taxes may be painful, there are legitimate ways to find sales and use tax exemptions for artwork.
Within the last few years, New York state has brought several enforcement actions against art purchasers who allegedly attempted to avoid sales and use taxes on their art purchases. In one case, Gagosian Gallery, Inc. paid a $4.2 million settlement after the New York Attorney General alleged that it failed to collect sales and use taxes on sales of artwork that were delivered using a contract carrier, rather than a common carrier, as reported by Gerald B. Silverman in the Daily Tax Report (subscription required). A contract carrier is considered the agent of a purchaser, and as such, delivery to the purchaser is considered to take place when the carrier takes possession of the property. Under these circumstances, sales and use tax is sourced to the location where the carrier takes possession of the art, rather than where the art is delivered, as would be the case with a common carrier.
Another case brought by the New York Attorney General, resulting in a $7 million settlement, alleged that an art collector used the sale for resale exemption to purchase expensive artwork but then used the artwork for his personal enjoyment.
A federal case for tax evasion against another art collector, Morris Zukerman, included a charge that Zukerman evaded over $4.5 million of New York sales and use taxes on Old Masters paintings. The United States Attorney alleged that Zukerman had the art shipped by galleries to his corporate addresses in Delaware and New Jersey but then immediately upon arrival, “sometimes within minutes[,]” had the art delivered to his New York residence. The art collector was sentenced to 70 months in prison because of these and other tax evasion charges.
While the above cases demonstrate unsuccessful ways in which art collectors have attempted to avoid sales and use taxes, some states offer legitimate tax exemptions for artwork purchases. Specifically, California allows exemptions for artwork that is purchased for donation and actually delivered by a retailer to a government entity or nonprofit organization. Additionally, Florida allows a sales and use tax exemption for works of art sold to or used by educational institutions, as well as art that was purchased or imported exclusively for the purpose of being loaned to and made available for display by any educational institution for at least 10 years. As long the educational institution has title to the work of art, possession may remain with the donor or purchaser. Rhode Island also has a sales and use tax exemption for limited, one-of-a-kind art created by artists who live in-state.
On high-dollar purchases such as precious paintings, there will always be people seeking to minimize their sales and use tax liability. Moreover, as long as there are creative tax planners, there will definitely be an art to tax planning!
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How should states tax precious art?
For more information about state tax issues, sign up for a free trial on Bloomberg BNA’s Premier State Tax Library.
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