Art Basel in Hong Kong atmosphere, 2014.

Fine art Basel in Hong Kong, 2014.

The New York Land use tax is a bit similar your CPA's love life: difficult to comprehend, and generally of involvement but to other accountants.

That'due south a shame (as to the utilize revenue enhancement, that is). This little understood statute really has important financial ramifications for any serious art collector, merely separating fact from often fictional or incomplete "expert" communication in this area is no easy task.

For anyone inclined to ignore-or feign ignorance of- the use tax, Dennis Kozlowski'due south vi and a half-year prison house term for tax evasion should serve as a cautionary tale, notwithstanding his surprisingly chipper recent interview in The New York Times (come across New York DA Launches Secret Art Sales Tax Investigation). And as artnet News reported recently, the Manhattan Commune Attorney embarked on a new sales tax investigation and several New York City fine art galleries accept been asked to provide information about their books. In past columns we advised fine art dealers on what to do if the DA knocks on your door (see Emergency Communication for Dealers Facing a Sales Tax Investigation and Manhattan DA Launches Hole-and-corner Sales Tax Investigation).

Now, in an effort to unravel the sexy secrets of the utilize revenue enhancement, we have put together some questions regarding this statute that many collectors have long had, just might accept been too afraid —or besides embarrassed—to ask.

THE FACTS ABOUT USE Revenue enhancement

Q: What the heck is the utilise tax anyway?

A: It's a tax imposed on taxable goods or services used in New York when sales revenue enhancement hasn't been nerveless. Essentially, information technology'southward a close cousin of the sales tax, but instead of paying it through the seller at the time of purchase of a piece of work of art, it is payable directly to the Tax Department when you file your annual income taxation render.

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

A: In New York State, the corporeality of the use taxation is the same every bit the amount of the sales tax.

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

A: Correct.

Q: What'due south a applied example of the difference between the sales tax and the use tax?

A: If a New York City resident buys a painting at a Chelsea gallery and ships it to her downtown loft she must pay viii.875% New York Metropolis and State 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 revenue enhancement but must pay 6.35% Connecticut apply tax on the purchase.

Q: Look a second. My neighbor was audited on just this type of transaction and paid a large fine. Isn't there an agreement betwixt New York and Connecticut requiring New York residents to pay Connecticut sales taxation on goods shipped to their 2d homes in that location?

A:   Nope. There was a sales and use revenue enhancement "accord" betwixt Connecticut and New York, but information technology was terminated a few years agone.

Q: Does the aforementioned utilise to New Jersey?

A: Yes. That accord was also terminated. You would pay New Jersey apply tax, non New York sales tax, on goods shipped direct at that place.

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

A: Possibly not, since you may be entitled to a reciprocal credit for sales or use tax paid to another state. Get-go, make certain that what you paid is actually labeled as sales tax (equally opposed to, say, a surcharge of some kind). Second, your accountant should determine whether New York permits a reciprocal credit for the country where you paid sales tax; if and so, you should be entitled to offset the taxes you paid. If the total revenue enhancement paid in the other state exceeds the total use revenue enhancement due in New York, no New York use tax is due, but —not surprisingly— whatever excess amount won't be refunded. If the tax paid is lower, you still owe the rest to New York Country in employ tax. And if a reciprocal credit is not immune yous volition likely have to pay the full New York use tax.

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

A: Non in this lifetime. Have you seen Albany's budget?

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

A: Every bit with off-line purchases, if you didn't pay sales tax, and the item is shipped to you in New York Land, yous have to pay the corresponding apply revenue enhancement. The cost of shipping and treatment must be added to the price when calculating employ tax.

Q: I but bought a Dali lithograph at an art fair in New Mexico, and the dealer told me that if I brought it back to New York there would be no employ tax payable here. Is this correct? Is there a special exception for art fair purchases?

A: This is not correct. In that location is no use tax exception for art fair purchases — and we would recommend that y'all triple-cheque the authenticity of the Dali earlier wiring funds.

Q: My higher roommate's sister married a Goldman Sachs broker, and has been living large in Europe for the past x 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, utilise tax would not be due on purchases made prior to their moving back to New York. The one exception would exist if they had kept an flat in New York during their overseas residency (non unlikely, if he is a Goldman banker). Assuming the art was shipped straight to their European home, they won't owe sales tax on their purchases (that would be nerveless at the fourth dimension of purchase), but would owe use tax on works brought into New York.

Q: Yous're kidding me, right

A: Sadly, no. The minor brilliant spot is that if they have used an item out of land for more than vi months prior to bringing it into New York, utilize tax is charged on the bottom of the purchase price or current market value of the appurtenances at the time they bring them into New York. This may or may not exist helpful in the context of a purchase of artwork.

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

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

HOW WILL THE GOVERNMENT Ever KNOW?

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

A: That'due south betwixt your friends and their conscience. And their CPA. And possibly their criminal defense counsel.

Q: That makes no sense. In that location must be some expiration of the time menstruum in which purchases made outside of New York are subject to utilize revenue enhancement.

A: No, there is no expiration in the statute. According to Gary Castle, Chair of the Anchin Fine art Specialty Grouping, "If New York sales taxation hasn't been nerveless on a taxable item or service, and the item or service is used in New York, you lot must report and pay use tax direct to the Tax Department – no thing how long ago the purchase was made."

Q: Simply there must be some engagement across which appurtenances bought outside New York and brought into the state are not discipline to the use tax, correct?

A: You lot but asked us that question. The reply is still "no."  Withal, some accountants and revenue enhancement lawyers have the position that goods such as artwork purchased more than than ii years prior to importation into New York are "grandfathered" in and are non subject to taxation. Unfortunately, in that location is zero in the revenue enhancement constabulary that supports this position.

Q: Damn.

A: That's not a question.

Q: My trainer wants to sell me a Basquiat drawing he got directly from the artist (long story). Would that sale, between two private individuals, be subject to sales or use tax?

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

Q: Can I avoid the use taxation if I go on my art in storage?

A: It depends where the fine art is stored. Use revenue enhancement applies to "use, storage, or other consumption," and then keeping your newly purchased pieces in crates or in a storage unit in New York State does not save you of utilize taxation obligations.

Q: And other states?

A: V states don't impose sales tax or utilise tax: Delaware, New Hampshire, Montana, Oregon, or Alaska. If y'all have your purchase delivered to any of those states you won't take to worry virtually sales or use tax.   Jurisdictions inside each of those states may (though rarely do) impose local taxes, and then check first.

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

A: The "gimmick" is California'south "showtime use exemption" dominion. Taxable items or services that are kickoff used out of country for a menses of at least xc days are exempt from use revenue enhancement. As a practical affair, California collectors often ship large-ticket works of fine art to Oregon museums for display, and bring them home after 90 days. In that way they avert California sales or employ tax.

Q: Does New York have a similar exemption?

A: Haven't you been paying attention? No, it does non.

Q: So what's the takeaway on New York's use tax constabulary?

A: Like some other perennially hot topic, many people talk almost it, few people really understand it, and for most non-professionals the subject is shrouded in myth, exaggeration and sometimes even outright lies. At to the lowest degree as far as use tax goes, it's ameliorate that you get the straight scoop from us than misinformation from the older kids on the playground.

Note: Because each situation is unique, nil in this article is intended to provide the reader with specific legal communication. Nosotros would encourage anyone with a specific legal issue 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 art police. Patricia Pernes, Esq. is an attorney specializing in art and revenue enhancement matters.

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