Investment activities do not necessarily constitute a business or trade. Some devious collector-investors call themselves art dealers so others will offer them art at wholesale levels and they do not pay sales tax. If an art investor identifies him or herself as a dealer but does not have a dealer tax exemption number and has not registered as a dealer with a local tax department, it could lead to a lawsuit, tax penalties or jail.
If a person poses as an art dealer to avoid paying sales tax, the IRS most likely will catch up with him or her and it can cost more than the sales taxes the person was trying to dodge.
It is safer and more ethical to admit being a retail person and to pay sale tax. Sales tax is tax deductible.
If a collector or investor claims he or she is a dealer, profits cannot be taken as a capital gain because legitimate dealers take profits and loses as ordinary-income and pay income taxes on those earnings. Further, a dealer’s gift of art to a charity or to a nonprofit organization is limited to a deduction of an artwork’s provable cost, not its current retail replacement value.
Most collector-investors buy and sell sporadically as a hobby, amusement or interest. They are not in the business of buying and selling. Art activity does not consume the majority of their time, nor are sales considered their primary source of income. They do not represent themselves as dealers to the pubic and they do not collect and pay sales tax on a monthly basis.
An art dealer is required by law to register with sales tax departments in the state or states where regular business takes place, and also is required to register for and obtain a resale certificate and wholesale resale number. It is illegal for anyone to pose as a dealer by virtue of having a resale number without filing sales tax returns. If caught, the state tax department will revoke the person’s resale number and levy high fines and penalties based on a calculation of possible sales.
Avoiding paying sales tax is not worth humiliation, costly legal fees, fines and lost time.
If a collector-investor can prove he or she is buying art with the intention of opening an art gallery after retirement, then that person can attain a dealer’s certificate and resale number without penalty. If that person sells art before a legitimate business is opened, or after that person retires, and he or she does not open an art gallery, the IRS and state tax department may issue audits and huge tax penalties.
Legitimate art dealers do not pay sales tax on items they purchase because the merchandise is to be resold.
An art dealer is responsible for knowing everything about the art that is purchased. If someone lies about being an art dealer and that person buys an artwork and finds out it is a counterfeit, rarely will a seller take back the picture or refund money.
There are no warranties unless put in writing.
Art dealers are supposed to comprehend the quality and authenticity of what they purchase. No dealer wants over-exposed or shopped art and it is assumed a dealer who returns artwork has offered and shopped it and could not sell it.
Pay sales tax when it is owed. Never ask a dealer or seller of art to ship an empty box out of state to avoid sales tax. Your request that a dealer perform an illegal act places you and the dealer in jeopardy. It simply isn’t worth the effort. Sales tax is deductible.
Suck it up!
If you don’t pay sales tax in the state where a purchase is made, you must declare use tax in your resident state. Unless you live in a state that has no sales tax, any purchases shipped to you (including mail-order and Internet purchases) should be assessed a use tax that is equivalent to the sales tax in your area.
If you purchase a painting for $10,000 in Massachusetts where sales tax is 6.25% you will pay $625 in sales tax but if you take (or ship) the painting home to New York where the sales tax is 8.75%, you will owe the state of New York a 2.50% use tax. If the Massachusetts dealer from whom you purchased the $10,000 painting has another gallery
in New York City, the dealer should charge 8.75% sales tax or $875.
Greed and cheating do not pay off.
In August 2002, former Tyco International CEO Dennis Kozlowski was charged with a 14-count indictment that included evading $1,000,000 in NY sales tax on the $13 million purchase of art after empty boxes (that were supposed to contain a Renoir and a Monet oil) were sent to Tyco’s NH headquarters (where there is no sales tax).
The art was not sent out of state.
Kozlowski allegedly took the paintings to his Manhattan apartment. This CEO’s high-profile indictment led to Kozlowski’s resignation, Tyco’s stock plummeting, public disgrace and imprisonment.
Samuel Maull of The Associated Press reported, “Three former Tyco International executives were charged with fraud and theft Thursday [9/12/02] for allegedly pillaging their company of tens of millions of dollars. Former CEO L. Dennis Kozlowski and former chief financial officer Mark H. Swartz were each charged with enterprise corruption and grand larceny for allegedly stealing more than $170 million from the company, and obtaining $430 million through fraudulent sales of securities… the DA’s office has moved to freeze $600 million in assets….Each faces up to 25 years in prison.” The SEC claims Kozlowski took $242 million from an employee loan program designed to help workers buy Tyco stock so that he could buy yachts, flowers, jewelry, luxury properties, vacations and fine art. SEC director Stephen M. Cutler said Kozlowski and two others “treated Tyco as their private bank….”
Kozlowski lavishly spent other people’s money as he went on decadent buying sprees.
It is reported Kozlowski’s decorator made more than $7 million, while others charged Kozlowski over-inflated prices for minor examples of art by famous artists.
Because he allegedly was not art educated but was rich and greedy, he fell for idle words and was ripped off big-time.
True entrepreneurs have a deep appreciation for the aesthetics of art. They understand how to judge stylistic characteristics and qualities of certain painters and they buy art primarily with goal to keep it for the long-term.
The IRS usually will not allow a collector to deduct expenses or losses on tax returns but the payment of commissions, finder’s fees, appraisals and shipping and handling costs often can be deducted.
Patricia Jobe Pierce is a freelance writer, art historian, art dealer-consultant, certified AAA appraiser, public speaker, photographer and American art authenticator for museums, auction houses and collectors. She graduated from Boston University with a BFA in 1965, is owner and director of Pierce Galleries, Inc. in Nantucket and Hingham, Mass., and is author of many works, including, "Art Collecting & Investing: The Inner Workings and the Underbelly of the Art World." For more of her submissions, Click Here Now.
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