New Delaware Freeport Offers New York Collectors an Art Tax Haven Close to Home
Is Delaware the art world's new Switzerland?
US and foreign art collectors and dealers are flocking to a newly opened 36,000-square-foot, state-of-the-art storage warehouse in Newark, Delaware. The September opening of the space in a state that has no sales tax comes at a time when New York state authorities have newly tightened regulations regarding works of art.
For example, in January, the Manhattan DA launched a secret investigation into galleries and dealers allegedly using tax havens that was first reported by artnet News. Which is where Delaware comes in.
The brainchild of art logistics expert Fritz Dietl, the new Delaware Freeport offers cutting-edge security capabilities to protect against fire, water damage, and theft, as well as the added benefit—for collectors who opt to ship or store art there—of the state’s lack of sales or use tax. For New Yorkers, who have to pay 8.875 percent in tax, the advantage is obvious.
“A big reason why I chose Delaware, being in the industry for so many years, I’ve seen how much property is moved to freeports around the world and obviously to Switzerland,” Dietl told artnet News in a phone interview. “I always thought, ‘Well, there’s got to be a better way to do this.'”
“In Delaware, of course, you have all the same protections and tax advantages that you have for moving something to Switzerland,” he continued. “There is really no reason for an art investor and international art collector—or a new York collector or investor who has no plans for using the work in his apartment or personal use—to have to ship something to Switzerland.”
As one might expect, Dietl has received enthusiastic response from the art world.
“Since we have opened up for business in September, we have received a good number of shipments coming down from New York,” he said. “Especially for some foreign collectors, who are investors and have no plans for importing in their home countries. In the past, this stuff would have immediately moved to Switzerland. Now it goes two hours south.”
Over the past few months, art world insiders have been concerned with news that the Manhattan DA has embarked on another of its periodic investigations into galleries and private art dealers. But a more recent memo from the New York State Department of Taxation and Finance, which reiterates compliance rules about collecting New York sales tax, has set off additional alarm bells in the art community.
The August 6 tax bulletin addressing “Delivery Rules for New York State Sales Tax” says that whether a sale is subject to New York State sales tax and the rate of tax that applies depends on the location to which property or services are delivered by a seller to a purchaser. The bulletin further elaborates on the rules governing where the “delivery of property or services occurs,” and the sales tax consequences that result from it.
The three-page bulletin outlines several different shipping scenarios. In one scenario, “tangible personal property” is delivered to someone acting on behalf of a buyer, whether an agent or representative. It also states that the property or services must be shipped by “common carrier” though it doesn’t define what that is.
In late September, the Art Dealers Association of America (ADAA) issued a memo to its presumably concerned members homing in on the distinction between “common carriers” and other types of carriers. artnet News obtained a copy of the memo, which states:
We understand that, during recent sales tax audits of New York art galleries, the Department is taking the position that certain art shippers are not ‘common carriers’ (for sales tax purposes) and, instead, are ‘private carriers’ because the carriers specialize in art shipments. They are not, for example, the same as Federal Express.
The memo goes on to add that the new requirements even extend to who has to handle the shipping in order for the tax consequences to be determined. “In order for a gallery not to collect any New York sales tax on such out-of-state deliveries,” the memo states, “the buyer cannot directly pay for the shipment or make arrangement for the shipment. Instead the gallery must arrange for the shipment or directly pay for the shipment.”
For example, if you buy a Matisse painting at Sotheby’s New York and you personally arrange and pay to have it shipped to Delaware, one art law expert told us, sales tax would be due. (Sales tax would similarly apply in this scenario if you were shipping to Switzerland, Asia, or anywhere in the world.) But if Sotheby’s arranges and pays for the shipping to Delaware, there would be no sales tax.
“That’s really an onerous new regulation for the trade,” said Dietl, who noted that the port is also proving to be a popular option for foreign galleries that do business in the US at art fairs, for instance. “This is absolutely a great place for them to hold inventory and distribute inventory from, without running into sales and use tax questions from the authorities.”
As is often the case with tax law, it can be extraordinarily complicated to navigate, and experts advise that you make sure to cross your proverbial t’s and dot your i’s.
David Lifson, a CPA at Crowe Horwath who works with many global high net worth clients, admonished New York collectors against shipping a collection to New York for storage or even inspection (before it goes into storage).
“Some works are purchased for long-term investment and not for current display or use,” he told artnet News in a phone call. “These should be shipped directly out of state and stored in a warehouse outside of New York to avoid inadvertently creating a use tax liability. Use tax is due virtually any time an investor or collector brings artwork into the state. Only dealers can avoid sales or use tax when they bring works to New York, because their artwork is inventory, not an object held for investment or personal enjoyment.”
“Always inspect at the gallery,” he added, “not at home!”
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