I regularly advise art collectors on the sales tax consequences of their transactions and, more often than you might expect, collectors are taken aback by what I have to say. What is most surprising to me, as a tax attorney, is that laypeople expect sales tax rules to conform to their expectations of how tax rules should behave. Nothing in tax is straightforward, not even a supposedly administrable sales tax. This is the first rule in tax, any tax. New York's sales tax regime in particular has its share of counterintuitive rules. This article attempts to clear up some common misconceptions about New York's sales tax rules as applied to art collectors, and should be relevant to any collector who sells artwork in or buys artwork from New York.
Let's begin with the basics. New York State levies sales tax at a 4% rate. Localities levy additional taxes, and the rates for these other taxes vary from locality to locality within the State. The cumulative rate for New York City, for example, is currently 8.875%. Sales tax applies to artwork only if delivered in the State.[1] Artwork purchased outside of the State generally is subject to use tax when brought into the State, with the use tax acting like the sales tax's mirror image. For example, sales tax applies at 8.875% for artwork delivered to a collector's home in the City, and use tax applies at an 8.875% when the same collector returns from a trip abroad with a newly acquired piece.
Most collectors understand the description in the preceding paragraph, but are surprised by the details of the State's sales and use taxes. Confusion arises with regards to: (1) who is a New York resident, (2) whether use tax applies to artwork only if purchased for use within the State, (3) the credit provided for taxes paid to other jurisdictions, (4) the consequences of lending artwork, (5) how best to arrange for shipping, and (6) the taxability of sales commissions. Clarification on these issues follows.
Residence
Artwork purchased outside of New York State is subject to use tax when brought into the State if the collector was a State resident on the date of purchase. The inverse also generally is true. This means that artwork purchased outside of New York State is not subject to use tax when brought into the State if the collector was not a State resident on the date of purchase.[2] (This is the so called "nonresident exception.") One's residence is, therefore, key to determining tax liability on artwork purchased elsewhere.
The general misconception here is that one's residence for income tax purposes sheds light on one's residence for sales tax purposes. This is not the case. New York has a variety of taxes, including income, estate, and sales taxes. These taxes were written at different times and have different guiding principles and rules. In particular, each of these taxes ascribes a unique meaning to the term "resident," and it is very often the case that an individual is a resident for some, but not all, of these taxes.
The sales tax's bar to determining residency is particularly low, applying to any individual who maintains a "permanent place of abode" within the State, even a pied-à-terre, with little regard to the frequency with which such individual visits this abode.[3] Consequently, individuals who primarily reside elsewhere, even outside the United States, are New York tax residents (for sales and use tax purposes) when buying artwork for their New York vacation home, for the simple reason that they have a vacation home within New York for which to purchase artwork.
Purchase for Use Elsewhere
Some states tax only those items purchased for use within their state. This benefits collectors who make their initial use outside of the taxing jurisdiction. New York does not count itself among such jurisdictions. New York law does not inquire into where a collector intends to display her artwork, nor does it ask where the relevant artwork was first displayed or used. This means that a collector who purchases artwork in Connecticut, pays sales tax in Connecticut, and keeps the artwork at her Connecticut home for 10 years becomes liable for a New York use tax if she moves the artwork to New York, subject to the possibility that she qualifies for the nonresident exception because she did not have a permanent abode within New York when she purchased the artwork.
Credit for Sales Tax
New York's use tax provides a dollar-for-dollar credit for sales taxes paid to other jurisdictions. Payment of sales tax to another jurisdiction can thereby mitigate a New York use tax liability, but it does not discharge one's responsibility for paying a New York use tax. For example, if our Connecticut art collector had paid sales tax at a 6% rate, her use tax liability should, in effect, be limited to 2.875% when, 10 years later, she moves the artwork to her New York City apartment. The reason is that the New York City use tax of 8.875% would be offset by the Connecticut sales the collector had paid at a 6% rate. Our Connecticut art collector cannot refrain from paying New York use tax simply because she previously paid sales tax to Connecticut.
Lending to a Museum
Sales tax does not apply to items purchased for resale. This is the so called "sale-for-resale exception." New York's sale-for-resale exception foresees the possibility of a vendor relying on this exception for items to be resold for less than their fair market value. Its remedy is to ignore below-market transfers. The regulations in particular contemplate ignoring the transfer of marketing materials.[4] So if a vendor buys tchotchkes for his customers, he owes sales tax on the tchotchkes. He cannot claim the sale-for-resale exception on his purchase of the tchotchkes, even if they are intended for resale to customers for a nominal fee or no fee.
This principle of ignoring below-market transfers also applies to no-fee loans, including artwork on loan to a museum.[5] The result of this ignoring rule is that the lender (as opposed to the borrowing museum) is treated as using artwork in the State to the extent the artwork is lent to a museum in the State on a no-fee basis. Consequently, a use tax liability would arise if our Connecticut art collector were to lend the painting that has hung on the wall of her Connecticut home for the past 10 years to a New York museum on a no-fee basis. Again, this is subject to the nonresident exception applying if, when our collector purchased the painting, she did not then have a permanent abode within the State. If, instead, our Connecticut art collector were to lease the painting to the museum for a fair market rent, sales tax would apply to the lease payment.
Shipping
New York's sales tax is a destination tax, meaning that tax applies to only those items that are delivered in the State. (Items delivered outside the State are not subject to sales tax but may be subject to use tax when brought into the State.) Delivery can occur outside the State under either of two circumstances: 1) if the seller delivers the property outside the State by any means, including by private or common carrier, or 2) if the buyer arranges for the delivery of the property outside the State, but only if the delivery is by way of common carrier, and only if the property is transferred directly from the seller to the common carrier without the buyer or her designee first taking possession.[6] This "common carrier" exception is provided for in rulings, but is not clearly mandated by statute or regulation.[7]
The foregoing description should not be surprising because this has been the lay of the land for quite some time now.[8] What is surprising is a Tax Bulletin issued by the New York State Department of Taxation and Finance last year, which mentions that a carrier qualifies as a common carrier only if, in relevant part, it "does not operate under a private arrangement or contract with negotiated terms; ... agrees to carry for a specified and standard rate of compensation; and makes deliveries under standard delivery schedules."[9] Among the bulletin's examples is a reference to a carrier hired to package and deliver a painting as a private (not a common) carrier.
With this bulletin's narrow description of what types of carriers qualify as common carriers, the State appears to have been trying to chip away at its common carrier exception, taking particular aim at the art market. The State's latitude at narrowing this exception is unclear because, on the one hand, this exception exists largely on account of State rulings; but, on the other hand, State courts have found in related contexts that a carrier qualifies as a common carrier even if it abides by an irregular delivery schedule and even if it limits itself to specialty cargo.[10] The State's intentions have become even less clear in recent months since its apparent withdrawal of the bulletin purporting to narrow the types of carriers qualifying as common carriers.[11] The State has not clarified why it has taken down this bulletin from its website, and we can only wonder if this means its intentions with regard to the common carrier exception have softened.
Until there are further rulings clarifying how the common carrier exception applies to specialty delivery services, art collectors should consider asking sellers to arrange and pay for shipping. Otherwise, a collector may be subjecting herself to scrutiny as to whether the carrier hired to transport her art qualifies as a sufficiently "common" carrier.
Commissions
The sales tax generally applies only to tangible personal property, not services. One might therefore be tempted to separately state the cost of tangible personal property and the sales commission paid to acquire it, reasoning that only the former should be taxable. The New York courts might not respect the parsing of an invoice to this extent. In one case, a court found the payment of a buyer's premium to Sotheby's to be such an "integral aspect of petitioner's purchase of the painting," that it too should be taxable.[12]
Concluding Thoughts
New York's sales and use tax rules are complicated. This should have little impact on collectors who purchase artwork only for their New York home because such collectors can then assume that sales or use tax always applies at the rate in effect for where their home is located. Collectors with ties outside the State, or with multiple homes, including within the State, might benefit from consulting with a professional advisor to determine their sales and use tax liability and options for mitigating this liability.
Footnotes
[1] The terms "State" and "City," as used in this article, refer respectively to the State and City of New York.
[2] New York Tax Law section 1118(2). Exceptions to this rule are not described in this article, as these exceptions typically do not apply to art collectors.
[3] NYCRR 526.15(a).
[4] NYCRR 526.6(c)(4).
[5] See, e.g., New York Advisory Opinion Nos. TSB-A-08(7)S and TSB-A-11(10)S.
[6] See, e.g., New York Advisory Opinion Nos. TSB-M-82(3.1)S and TSB-A-96(23)S.
[7] Id.
[8] See, e.g., New York Advisory Opinion No. TSB-A-09(28)S.
[9] TSB-ST-155.
[10] See, e.g., In the Matter of the Petition of Verizon Yellow Pages Company f/k/a Bell Atlantic Yellow Pages Company, NYS Division of Tax Appeals, ALJ, DTA No. 819215, 04/07/2005.
[11] The State's list of 2015 tax bulletins no longer includes a reference to TSB-ST-155.
[ 12] In the Matter of the Petition of Samuel I. Newhouse, Jr., NYS Division of Tax Appeals, ALJ, DTA No. 809455, 05/06/1993.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
