On Friday, November 6, New York State Attorney General Letitia James filed a lawsuit against Sotheby’s alleging that the auction house had facilitated the creation and use of fraudulent New York resale certificates for a client’s art purchases. In light of this announcement and broad anticipation that state authorities will increase investigations and prosecutions of sales and use tax violations in the art market due to the pandemic’s impact on state and local tax revenues, we would like to take this opportunity to provide a few reminders regarding the proper use and acceptance of New York resale certificates.
Dealer, Investor or Collector. If you are using a New York resale certificate, you need strong evidence to support your tax classification as a dealer. Factors that tend to support classification as a dealer (rather than an investor or collector) include earning commissions, regular and frequent sales, maintaining a separate place of business, dealing regularly with customers, and advertising as a dealer. In other words, there must be substance to the underlying business.
Personal Use. New York resale certificates are to be used only by dealers on purchases made exclusively for resale. Any personal use related to ownership would likely make the use of a resale certificate improper. In addition, when inventory that was initially intended exclusively for resale and purchased with resale certificates is then diverted for personal use, including enhancement of one's business brand by displaying the art in one's offices and properties, the diversion becomes a taxable event.
Selling Art from Home. Art displayed in a dealer's home to allow potential buyers to see what the art might look like in a personal setting frequently faces scrutiny by authorities unless appropriate residential lease arrangements are in place. The display of the art in a dealer's residential setting will likely be characterized as having been done for personal use rather than for resale when the art is held for such a period of time as to suggest its long-term appreciation in value.
Accepting a Buyer’s Resale Certificate. New York resale certificates collected by sellers are considered “valid” if they are: accepted in good faith; in the seller’s possession within 90 days of the transaction; and properly completed (all required entries were made). New York defines good faith as “when a seller has no knowledge that the exemption certificate is false or is fraudulently given, and reasonable ordinary due care is exercised in the acceptance of the certificate.” Therefore, it is not enough for sellers merely to accept New York resale certificates; sellers must exercise ordinary due care.