23 March 2018
New York State authorities have made it clear that they are aggressively investigating instances of tax avoidance/evasion in many areas within the art world. Earlier this week, NYS announced settlements related to the alleged misuse of resale certificates in significant purchases of art. As a provider of legal advice to many clients within the art world, we would like to take this opportunity to both relay the news of these investigations and provide best practices as to the use of resale certificates. As a firm, we currently represent many clients in investigations and audits conducted by the NYS Office of the Attorney General and the NYS Department of Taxation and Finance and to us, it is clear that such investigations are on the rise. Most recently, the focus is on the improper use of resale certificates in art transactions. This past Tuesday, New York's Attorney General Eric Schneiderman announced that the companies of a prominent real estate developer and art gallery sales executive agreed to settle New York State's claims alleging that they misused their dealer resale certificates and were thus liable for unpaid sales and use taxes on their purchases. The Attorney General released the following statement: “We are committed to rooting out tax abuses wherever we find them, especially in the art world, where the difference can be hundreds of thousands — if not millions — of dollars in lost tax revenue per sale. When art collectors don't pay their fair share, law abiding New Yorkers should not be stuck footing the bill.”
The settlements combined totaled $7.2 million.
Dealer Best Practices – 5 Tips:
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.
Timeframe for Resale.
One of the factors reviewed by NYS when determining whether a purchaser is a reseller and whether a purchase is made for resale is the amount of time it takes for artwork to be resold, whether the inquiry is on a particular piece or in the aggregate. However, the longer a work is owned, the more it looks like investment property instead of inventory for resale.
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 governmental scrutiny. In order for a purchase to be exempt, it must be used exclusively for resale and personal use can (and generally does) disqualify it.
Dealer or Investor.
If you are using a resale certificate, you need strong evidence to support your tax classification as a dealer. Factors that tend to show that a taxpayer is a dealer rather than an investor 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.
Penalties and Planning.
In addition to the liability for any tax and interest due on the purchase of art an individual or entity who misuses a resale certificate may also be liable for an additional penalty equal to 100% of the tax due, a $50 penalty for each fraudulent resale certificate issued and possible criminal prosecution. Additionally, if the failure to pay New York sales tax is attributable to fraud, there can be a penalty of two times the amount of the tax due, plus interest on such unpaid tax at the rate of fourteen and one-half percent (14.5%) per year. As a result, planning your approach for trading in art from the beginning (or now) is a necessity.