01 May 2017

New York State enacts major change to use tax exemption that affects art collectors

Diana Wierbicki
Partner | US

As we have reported this past year, New York State has been particularly aggressive in their art industry investigations for alleged violations of the state's sales and use tax laws. Last month, New York State expanded the reach of its use tax law in a way that suggests that the state is still targeting art activity. The New York State use tax now applies to non-resident investment entities (such as Delaware investment companies holding art), whereas such entities were previously exempt.

The New York use tax generally applies to the use of personal property within New York. However, under Tax Law §1118(2) there is an exemption from the use tax for personal property which at the time of purchase was purchased by a non-resident individual or entity and subsequently brought into New York. However, under the 2017-2018 New York State Budget, New York State has narrowed this use tax exemption. The exemption no longer applies to use within New York of personal property purchased outside of New York by a non-resident entity, unless such non-resident entity has been “doing business” outside of New York for at least six (6) months prior to the date such non-resident entity brings such personal property into New York. The exemption still applies to property purchased by a non-resident individual.

Given investment entities often do not conduct business activities, this change to the New York Tax Law could have substantial consequences for any investment entity owning personal property, such as art, when such entity brings the property into New York.  For example, under the former statute if a Delaware LLC, used as an investment holding structure, purchased art outside of New York in a state such as Delaware and subsequently brought the art into New York, there was an argument that no New York use tax was due because the Delaware LLC was exempt from use tax. Under the current law, New York use tax will be owed when the Delaware LLC brings that art into New York, because the non-resident exemption no longer applies to investment holding structures.

We recommend that clients who hold personal property, including but not limited to art, cars or furniture in investment entities review their holding structures prior to bringing any of these items into New York to ensure proper compliance with the updated Tax Law.  

Please contact your Withers attorney or call Diana Wierbicki, Global Head of Art Law, if you have any questions. 

Diana Wierbicki Partner | New York

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