Though it may not be the most thrilling of subjects, with April 15th drawing near, tax is the word on nearly every American’s lips. But how much do you really know about taxes in the art world? We consulted the expert team behind A&F Markets’ comprehensive guide, Art and Taxation for the Global Collector (available here) to highlight 11 little-known facts about the complex world of art taxation.
There is no artist resale right in the U.S.
Introduced as a means of protecting the interests of artists, the artist resale right has become a controversial subject for many across the art trade. In a number of countries and jurisdictions around the world, living (and, in some cases, recently deceased) artists are entitled to a percentage share of the sum paid for an original artwork when it is resold, usually on the condition that the artwork is above a certain value. The Resale Rights Directive, which was implemented across the European Union in 2006, requires that artists receive a 4% share of the sale value of works sold for under €50,000, with the percentage decreasing as the sale price increases above that mark. The highest sum that can be paid to an artist upon the resale of a work is €12,500, which applies to all works sold for more than €2,000,000. Artists from the U.S. are out of luck, however, as there is currently no artist resale right in place in any state. Nonetheless, there may be a glimmer of hope for the starving artists of California. Though the state’s artist resale right law was repealed in May 2012, having been declared unconstitutional, a draft for a new law is currently under consideration.
Sales and use tax in the U.S. ranges from 0–8.875%
In the United States, use tax (the term used to refer to VAT in the context of imports) and sales tax vary from state to state. Residents of Oregon, Montana, New Hampshire, and Delaware are not required to pay any sales tax whatsoever, while the unfortunate art lovers of New York City must pay 8.875% sales tax, the highest figure anywhere in the country.
Capital gains or income tax: the choice is yours!
Capital gains tax, the tax paid on income generated by the sale of assets whose value has risen since purchase, is applicable to artworks across the U.S. provided that more than a year has passed between the purchase and resale of an artwork. When resale occurs within a year of the original purchase, any income gained is subject to normal income tax, which can reach 39.6% depending on annual income. If a work is sold more than a year after its purchase, however, sellers can choose either to pay capital gains tax on the income from that sale or to class it along with their other income and pay the appropriate percentage depending on their tax bracket. For almost any high-income individual (depending on their marital status and living situation) the more sensible financial choice is to opt for the capital gains rate of up to 28%.
Beware of customs duties
While in the United States and Europe imported goods are not subject to any customs duties, those taking works into China may be in for a nasty shock, since the country imposes high import duties, which vary according to the country of origin. Ranging from 0% in the country’s free ports up to a staggering 50%, the high rates of taxation have no doubt hindered the development of the Chinese art market.
Art patrons are eligible for tax deductions
In the United States there are a number of laws in place that encourage patronage of the arts, with tax deductions for individuals and organizations that donate artworks and cultural goods to foundations and nonprofit institutions. Generally, tax deductions for donations to charitable organizations vary between 20% and 50% of their value, with donations to cultural institutions resulting in a deduction of 30%.
Successions and donations are subject to federal taxation
In the U.S., artworks given as gifts or passed down via inheritance are subject to gift or inheritance taxes above a certain threshold. Over their lifetime or at death, each individual may pass on or donate items or cash up to a combined value of $5,250,000. For example, an individual who gives gifts amounting to a value of $1,000,000 may pass on gifts with a combined value of $4,250,000 at death without being subject to inheritance tax. Additionally, gifts to a single individual in any given calendar year amounting to a combined value exceeding $14,000 are subject to gift tax. A progressive tax ranging from 18–40% applies to gifts and inheritance, with gifts or inheritance over $500,000 subject to the highest percentage.
Louisiana: a haven for tax-shy art lovers
Though there are certain federal laws applying to the trade, import, and export of artworks, there are also state-specific laws and regulations, making some more favorable destinations for trade than others. One such example is the state of Louisiana, in which all sales of one-of-a-kind artworks, within the boundaries of a certified Cultural District, are completely exempt from state and local tax.
Payment in cash or in kind?
In the United Kingdom and other countries, inheritance tax can be written off in exchange for items such as important artworks or cultural goods which are deemed to be of sufficient artistic, historical, or scientific value. The scheme, which is operated by the Arts Council England, has seen many major artworks pass from private hands into publicly accessible institutions, with recent acquisitions including a collection of 37 paintings from the estate of former Prime Minister Winston Churchill.
The importation of cultural goods from certain countries is forbidden. Importing artworks and other cultural goods from countries such as Iraq and Syria has been subject to bans and restrictions in a number of countries around the world. In the United States, there has been a ban on the import of art and cultural goods believed to have been stolen from Iraqi cultural institutions, such as the National Museum of Iraq, since 1990. In 2008 a further law was passed regulating the importation of Iraqi ethnological and archaeological goods. Similar restrictions are in place in a number of other countries, including across Europe, where since May 2011 cultural goods from Syria suspected to have been stolen cannot be imported into or exported from the European Union.
The ATA Carnet
First established during the international convention signed in Brussels in 1961, the ATA Carnet is an international customs document currently signed by 84 countries, which allows artworks to be temporarily exported for international events such as art fairs and exhibitions without being subject to import duties upon re-entry to their country of origin. Facilitating easy cultural exchange between different countries, the document is expected to be signed by a number of additional countries (many of them burgeoning art markets) in the near future, including Brazil, Trinidad and Tobago, Saudi Arabia, and Indonesia.
Recent years have seen a number of new free zones (also known as freeports) springing up around the world. Art dealers, auction houses, and collectors have been among the first to jump on the tax-free bandwagon. Free zones are physically limited regions with favorable conditions for trade, allowing goods to be bought and sold without having to pay VAT or customs duties. Though the zones vary in the specific exemptions they provide, a typical freeport includes a warehouse where goods are stored during sales and transactions. The arrival of several new freeports in China and Southeast Asia has provided a boost to the countries’ art markets, saving buyers from otherwise high taxes.
—Anna Hill, Antoine Cadeo de Iturbide, and Pierre Naquin
Art and Taxation for the Global Collector (2015 Edition) was edited by Antoine Cadeo de Iturbide and Pierre Naquin. It is available from A&F Markets Éditions (www.arttaxguide.com) for €99 (approximately $105).