There are few financial decisions these days that do not involve taxes. Buying, owning and selling art all generate significant tax liabilities that art collectors, particularly art investors, need to be aware of. In this first article of a three-part series on art and taxes, let’s take a look at how sales taxes can affect a collector’s purchase.
Understanding Custom Duties
Fritz Dietl of Dietl International, a well-known art transporter, recently opened a storage space in Newark, Delaware. It has attracted more attention over the past weeks than a regular storage facility would. Why? Because Dietl aims to replicate the benefits of existing free ports in Europe and Asia. In a free port, usually a warehouse complex in an airport or seaport, goods can be stored duty-free before re-export, thereby avoiding the customs duties of the country in which the free port is located. The Geneva free port in Switzerland is well-known around the world--many collectors have been storing their art there for years.
Sales And Use Tax
An art shipment within the U.S. does not incur custom duties, but the art buyer may be liable for sales tax on the purchase of an artwork. New York State, for example, collects 8.875% on the sale of goods and certain services, including art. Although galleries are responsible for collecting the sales tax, it is customary to add it to the invoice, making the purchaser responsible for paying it.
RELATED: Art And Taxes, Part II: Selling Art: Capital Gains
Two exceptions to the rule exist: a dealer-to-dealer sale in which the buyer has a retail certificate; and an out-of-state sale when the work is being shipped to the buyer outside of New York State. Delaware is one of the five U.S. states that does not collect sales or use tax. Therefore by shipping the work to a Delaware storage facility, the purchaser can defer the sales (or use tax) on a purchase.
New York State
Furthermore, the New York State tax authorities have recently been actively investigating whether galleries are properly collecting and remitting sales tax. They have clarified their position on the shipment of art to out-of-state buyers. For a purchase by an out-of-state purchaser, no sales tax is due if the gallery organizes and pays for delivery, whether by common carrier (i.e. a carrier like Fedex) or special carrier (an art transport company). If the purchaser, and not the gallery, organizes the delivery, there is no sales tax due if a common carrier is used. If the purchaser hires a special carrier, however, then sales tax is due.
Sales and use taxes may be applicable to the purchase of art, so it’s important to consult an attorney or tax advisor about each specific situation. Read more about the free port in this New York Times article by Graham Bowley and about the New York State sales tax in this bulletin by the art lawyers of Frankfurt Kurnit Klein + Selz.