States target art collectors who don’t pay taxes

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States are cracking down on art collectors who don’t pay the taxes due on their purchases.

States do not disclose details of investigations into tax evasion on art purchases. But according to attorneys representing defendants in such cases, state attorneys general and the nation’s tax departments have stepped up their investigations and prosecutions into nonpayment of sales and use of taxes on art purchases.

Thomas C. Danziger, a New York art attorney, said investigators in New York and other states are monitoring art sales through data mining that includes reviews of reported items passing through US customs, regular audits of major art galleries, news about buying art in the media, searches of interstate shipping logs, and sharing information with other states. The state attorney general’s office has not confirmed this information.

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San Diego tax attorney Sam Brotman says the increased attention from state officials is not limited to uncollected taxes on art purchases. “They also track sales of other big-ticket items such as boats, luxury cars, planes and jewelry.” But artworks have become a particular concern, he says, especially in California and New York, which are the two biggest markets for art.

Some prosecutors have also prosecuted gallery owners who they claim colluded with collectors to evade required taxes. Charges have also been brought against art dealers who fraudulently claimed that their purchases were exclusively for resale, a legitimate exemption, when in fact the artworks were for personal enjoyment.

Some financial professionals argue that many transgressions are not intentional, but rather the result of a lack of clarity in tax laws.

“The rules aren’t clear and there’s a huge matrix of complexity that people get trapped in,” says David Lifson, tax accountant at New York firm Crowe Horwath LLP. For example, most people incorrectly assume that the seller pays sales tax, Lifson says. But it is the buyer who is responsible for paying the sales tax, at the time of purchase, unless the part is shipped to another state. In this case, a use tax is levied by the destination State. Use taxes are generally equal to sales tax in each state.

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In New York, the sales tax is 8.875%. So, if a million dollar painting were purchased in New York and placed in the buyer’s New York home, it would incur a sales tax of $88,750. If shipped to a buyer’s home in Connecticut, where sales tax is 6.35%, it would incur no tax charged by New York, but a Connecticut use tax of $63,500 .

To avoid legal problems, lawyers and other experts who advise art collectors recommend keeping good records: the price paid for an artwork; where it was shipped; and where it has been stored or displayed.

Buyers of artwork destined for another state should also be very careful about how the artwork is shipped to avoid incurring local sales tax. In New York State, the gallery or other seller must arrange shipping directly and use a “common carrier”, such as UPS, UPS,
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Federal Express FDX,
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or the US Postal Service. If the buyer picks up the item and brings it to the sender, they have technically taken possession of it in New York state and owe sales tax, says New York attorney Amelia Brankov.

California collectors can avoid that state’s sales and use taxes if the artwork is shipped directly to another state and displayed there for more than 90 days, says Brotman, the San Diego attorney. Additionally, he notes, if the artwork is shipped directly to Oregon, which has no sales or use tax, and is displayed there for more than 90 days, the buyer can completely avoid the taxes. Several art museums in Oregon participated in this type of arrangement before the pieces were eventually returned to the buyer’s home in California.

Most other states, including New York, do not allow this. If someone who purchased a work of art in another state moves it to a residence in New York, even after a few years, that person will still owe New York use tax, although the taxpayer would receive a credit for sales or use tax already paid and should only be the difference between the two.

Private art collectors and investors have also sent their purchases directly to Delaware art storage facilities, such as Crozier Fine Arts and Delaware Freeport, where purchases are tax exempt. Collectors waive paying sales or use tax until they choose to ship the artwork home, says Fritz Dietl, founder and president of Delaware Freeport. For some, “their homes are already overflowing with artwork, so might as well store new work where it’s tax-exempt,” says Dietl. For others, he argues, the problem is deferring taxes until a better time. “Maybe they buy something in Miami and have it sent to us, thinking they’ll have more money in a year or two to pay the tax. They can now play with sales tax money.

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