Art Basel in Hong Kong, 2014.

The New York State use tax is a bit like your CPA’s love life: difficult to comprehend, and generally of interest only to other accountants.

That’s a shame (as to the use tax, that is). This little understood statute actually has important financial ramifications for any serious art collector, but separating fact from often fictional or incomplete “expert” advice in this area is no easy task.

For anyone inclined to ignore-or feign ignorance of- the use tax, Dennis Kozlowski’s six and a half-year prison term for tax evasion should serve as a cautionary tale, notwithstanding his surprisingly chipper recent interview in The New York Times (see New York DA Launches Secret Art Sales Tax Investigation). And as artnet News reported recently, the Manhattan District Attorney embarked on a new sales tax investigation and several New York City art galleries have been asked to provide information about their books. In past columns we advised art dealers on what to do if the DA knocks on your door (see Emergency Advice for Dealers Facing a Sales Tax Investigation and Manhattan DA Launches Secret Sales Tax 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 too afraid —or too embarrassed—to ask.

THE FACTS ABOUT USE TAX

Q: What the heck is the use tax anyway?

A: It’s a tax imposed on taxable goods or services used in New York when sales tax hasn’t been collected. Essentially, it’s a close cousin of the sales tax, but instead of paying it through the seller at the time of purchase of a work of art, it is payable directly to the Tax Department when you file your annual income tax return.

Q: What’s the amount of the use tax?

A: In New York State, the amount of the use tax is the same as 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 work?

A: Correct.

Q: What’s a practical 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 8.875% New York City 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 tax but must pay 6.35% Connecticut use tax on the purchase.

Q: Wait a second. My neighbor was audited on just this type of transaction and paid a big fine. Isn’t there an agreement between New York and Connecticut requiring New York residents to pay Connecticut sales tax on goods shipped to their second homes there?

A:   Nope. There was a sales and use tax “accord” between Connecticut and New York, but it was terminated a few years ago.

Q: Does the same apply to New Jersey?

A: Yes. 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 tax on a purchase in another state? Do I also have to pay a use tax when I bring the 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. First, make sure that what you 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 you paid sales tax; if so, you should be entitled to offset the taxes you paid. If the total tax paid in the other state exceeds the total use tax due in New York, no New York use tax is due, but —not surprisingly— any excess amount won’t be 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 foreign location and pay VAT, customs duties or other taxes before import?   Do I get any credit against New York’s use tax?

A: Not in this lifetime. Have you seen Albany’s budget?

Q: I’ve started buying prints through online auctions — nothing fancy, between $2,000-$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: As with off-line purchases, if you didn’t pay sales tax, and the item is shipped to you in New York State, you have to pay the corresponding use tax. The cost of shipping and handling must be added to the price when calculating use tax.

Q: I just 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 use tax payable here. Is this correct? Is there a special exception for art fair purchases?

A: This is not correct. There is no use tax exception for art fair purchases — and we would recommend that you triple-check the authenticity of the Dali before wiring funds.

Q: My college roommate’s 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 tax would not be due on purchases made prior to their moving back to New York. The one 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 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), but would owe use tax on works brought into New York.

Q: You’re kidding me, right

A: Sadly, no. The small bright spot is that if they have used an item out of state for more than six months prior to bringing it into New York, use tax is charged on the lesser of the purchase price or current market 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.

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’s between your friends and their conscience. And their CPA. And possibly their criminal defense counsel.

Q: That makes no sense. There must be some expiration of the time period in which purchases made outside of New York are subject to use tax.

A: No, there is no expiration in the statute. According to Gary Castle, Chair of the Anchin Art Specialty Group, “If New York sales tax 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 Department – no matter how long ago the purchase was made.”

Q: But there must be some date beyond which goods bought outside New York and brought into the state are not subject to the use tax, correct?

A: You just asked us that question. The answer is still “no.”  However, some accountants and tax 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 subject 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 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 tax if I keep my art in storage?

A: It depends where the 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 not relieve you of use 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 have your purchase delivered to any of those states you won’t have to worry about sales or use tax.   Jurisdictions within each of those states may (though rarely do) impose local taxes, so 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’s “first use exemption” rule. Taxable items or services that are first used out of state for a period of at least 90 days are exempt from use tax. As a practical matter, California collectors often ship big-ticket works of art to Oregon museums for display, and bring them home after 90 days. In that way they avoid California sales or use tax.

Q: Does New York have a similar exemption?

A: Haven’t you been paying attention? No, it does not.

Q: So what’s the takeaway on New York’s use tax law?

A: Like another perennially hot topic, many people talk about it, few people really understand it, 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, it’s better that you get the straight scoop from us than misinformation from the older kids on the playground.

Note: Because each situation is unique, nothing in this article is intended to provide the reader with specific legal advice. We 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 law. Patricia Pernes, Esq. is an attorney specializing in art and tax matters.