Art Basel in Hong Kong atmosphere, 2014.

Art Basel in Hong Kong, 2014.

The New York Country use tax is a bit like your CPA'south dearest life: difficult to embrace, and generally of involvement only to other accountants.

That'due south a shame (as to the utilise taxation, that is). This little understood statute actually has important financial ramifications for any serious fine art collector, but separating fact from ofttimes fictional or incomplete "expert" advice in this surface area is no easy task.

For anyone inclined to ignore-or feign ignorance of- the utilise taxation, Dennis Kozlowski's half-dozen and a half-twelvemonth prison term for taxation evasion should serve as a cautionary tale, notwithstanding his surprisingly chipper recent interview in The New York Times (encounter New York DA Launches Secret Art Sales Revenue enhancement Investigation). And equally artnet News reported recently, the Manhattan Commune Attorney embarked on a new sales tax investigation and several New York City art galleries have been asked to provide information nearly their books. In past columns we advised art dealers on what to do if the DA knocks on your door (encounter Emergency Communication for Dealers Facing a Sales Tax Investigation and Manhattan DA Launches Secret Sales Revenue enhancement Investigation).

Now, in an effort to unravel the sexy secrets of the use tax, we have put together some questions regarding this statute that many collectors have long had, but might have been likewise afraid —or too embarrassed—to ask.

THE FACTS Nigh Utilize TAX

Q: What the heck is the use tax anyhow?

A: It'south a tax imposed on taxable appurtenances or services used in New York when sales taxation hasn't been collected. Essentially, information technology's a close cousin of the sales revenue enhancement, simply instead of paying information technology through the seller at the time of buy of a work of art, it is payable directly to the Tax Department when yous file your annual income tax return.

Q: What'south the amount of the utilize revenue enhancement?

A: In New York State, the amount of the use tax is the same equally the amount of the sales revenue enhancement.

Q: So if I pay New York sales tax on the buy of a painting, I don't owe employ revenue enhancement on that piece of work?

A: Correct.

Q: What'southward a applied case of the difference betwixt the sales tax and the use tax?

A: If a New York Metropolis resident buys a painting at a Chelsea gallery and ships it to her downtown loft she must pay 8.875% New York City and Land sales tax at the time of purchase. If instead she ships the painting directly to her Connecticut weekend home, she doesn't pay New York sales taxation simply must pay half-dozen.35% Connecticut use tax on the purchase.

Q: Wait a second. My neighbour was audited on just this type of transaction and paid a big fine. Isn't in that location an understanding between New York and Connecticut requiring New York residents to pay Connecticut sales taxation on goods shipped to their second homes there?

A:   Nope. There was a sales and utilise tax "accord" between Connecticut and New York, but information technology was terminated a few years ago.

Q: Does the same apply to New Bailiwick of jersey?

A: Yep. That accord was also terminated. You would pay New Jersey use tax, not New York sales tax, on goods shipped directly there.

Q: What if I already paid sales taxation on a purchase in some other land? Do I also take to pay a utilize tax when I bring the work home to New York?

A: Perchance non, since you may be entitled to a reciprocal credit for sales or apply tax paid to another country. First, make certain that what yous paid is actually labeled as sales tax (as opposed to, say, a surcharge of some kind). Second, your accountant should determine whether New York permits a reciprocal credit for the state where yous paid sales tax; if so, you lot should exist entitled to offset the taxes yous paid. If the total revenue enhancement paid in the other state exceeds the total utilise tax due in New York, no New York utilize tax is due, but —not surprisingly— any excess corporeality won't exist refunded. If the tax paid is lower, you still owe the balance to New York State in use tax. And if a reciprocal credit is not allowed you will likely have to pay the full New York use tax.

Q: How about if I buy a work at Maastricht or another strange location and pay VAT, customs duties or other taxes before import?   Exercise I get any credit against New York'southward utilize tax?

A: Not in this lifetime. Take you seen Albany's budget?

Q: I've started buying prints through online auctions — null fancy, between $2,000-$5,000 each. I'm already confused about how sales and apply tax applies (or doesn't) to online sales. What's the bargain?

A: Every bit with off-line purchases, if you lot didn't pay sales tax, and the particular is shipped to you in New York Country, you have to pay the corresponding utilise tax. The cost of shipping and handling must be added to the price when computing use taxation.

Q: I only bought a Dali lithograph at an art fair in New Mexico, and the dealer told me that if I brought information technology dorsum to New York there would be no use tax payable here. Is this correct? Is in that location a special exception for fine art off-white purchases?

A: This is non correct. At that place is no utilize tax exception for art fair purchases — and nosotros would recommend that you triple-check the authenticity of the Dali before wiring funds.

Q: My college roommate'south sister married a Goldman Sachs banker, and has been living large in Europe for the past ten years. When they move back to New York, will they owe sales or use tax (or neither) on artwork purchased while living abroad?

A: If they were residents of, say, London, use taxation would not exist due on purchases made prior to their moving back to New York. The ane exception would be if they had kept an apartment in New York during their overseas residency (not unlikely, if he is a Goldman banker). Assuming the fine art was shipped directly to their European home, they won't owe sales tax on their purchases (that would be collected at the time of purchase), just would owe use taxation on works brought into New York.

Q: You're kidding me, correct

A: Sadly, no. The small bright spot is that if they accept used an detail out of state for more than 6 months prior to bringing it into New York, use tax is charged on the lesser of the purchase price or electric current market place value of the goods at the time they bring them into New York. This may or may not be helpful in the context of a purchase of artwork.

Crowds at Art Basel in Miami Beach.Photo: © Art Basel.

Crowds at Art Basel in Miami Beach.
Photo: © Art Basel.

HOW Volition THE Government EVER KNOW?

Q: How would New York State peradventure know whether my friends bought a painting years agone while living in London?

A: That's between your friends and their censor. And their CPA. And possibly their criminal defense counsel.

Q: That makes no sense. At that place must be some expiration of the time period in which purchases made outside of New York are subject to use revenue enhancement.

A: No, in that location is no expiration in the statute. According to Gary Castle, Chair of the Anchin Art Specialty Group, "If New York sales taxation hasn't been collected on a taxable item or service, and the item or service is used in New York, you must report and pay use tax directly to the Tax Section – no matter how long ago the purchase was made."

Q: Only at that place must be some engagement beyond which goods bought outside New York and brought into the state are not field of study to the use taxation, right?

A: You simply asked us that question. The answer is withal "no."  Notwithstanding, some accountants and revenue enhancement lawyers take the position that goods such as artwork purchased more than two years prior to importation into New York are "grandfathered" in and are not field of study to tax. Unfortunately, there is nothing in the tax law that supports this position.

Q: Damn.

A: That's not a question.

Q: My trainer wants to sell me a Basquiat drawing he got direct from the artist (long story). Would that sale, between two individual individuals, be field of study to sales or utilise tax?

A: Aye. If your trainer is outside New York, and thus not required to collect the sales tax, you are responsible for reporting and paying utilise revenue enhancement.

Q: Tin I avoid the use revenue enhancement if I go along my art in storage?

A: It depends where the fine art is stored. Use tax applies to "use, storage, or other consumption," so keeping your newly purchased pieces in crates or in a storage unit in New York State does non salve you of utilize tax obligations.

Q: And other states?

A: Five states don't impose sales tax or use tax: Delaware, New Hampshire, Montana, Oregon, or Alaska. If you lot accept your buy delivered to whatsoever of those states you lot won't have to worry near sales or use taxation.   Jurisdictions inside each of those states may (though rarely practise) impose local taxes, so check kickoff.

Q: I sympathise that California has a gimmick which permits wealthy art collectors to avert sales and use taxes altogether on major fine art purchases. True?

A: The "gimmick" is California's "start utilise exemption" rule. Taxable items or services that are first used out of land for a period of at to the lowest degree xc days are exempt from use revenue enhancement. As a practical matter, California collectors oftentimes send big-ticket works of art to Oregon museums for display, and bring them dwelling house later on 90 days. In that way they avoid California sales or use revenue enhancement.

Q: Does New York have a similar exemption?

A: Oasis't y'all been paying attention? No, information technology does non.

Q: And so what'southward the takeaway on New York's use tax constabulary?

A: Similar another perennially hot topic, many people talk about it, few people actually understand information technology, and for most non-professionals the subject is shrouded in myth, exaggeration and sometimes even outright lies. At least as far as use tax goes, information technology's ameliorate that you lot get the straight scoop from us than misinformation from the older kids on the playground.

Note: Because each situation is unique, zip in this article is intended to provide the reader with specific legal advice. We would encourage anyone with a specific legal outcome to contact his or her attorney directly.

Thomas C. Danziger, Esq. is Managing Partner in the firm of Danziger, Danziger, & Muro, LLP, which specializes in fine art law. Patricia Pernes, Esq. is an chaser specializing in art and tax matters.

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