Art Market

Did a Small Clarification of Tax Law Have a Major Impact on the Art Market?

Isaac Kaplan
Jun 1, 2018 5:12PM

Photo by Richard Baker / In Pictures via Getty Images.

There are three words that send shivers through the art market, while making the eyes of everyone else glaze over: tax compliance investigation.

Periodic forays by attorneys general into the ledgers of galleries, collectors, and auction houses to ensure taxes have been paid properly only tend to attract attention for the big names felled by allegations of evasion. One example came in July 2016, when Gagosian agreed to a $4.28 million settlement with Eric Schneiderman, then New York’s top prosecutor, following an investigation that found, among other things, that the gallery failed to collect required tax on art purchased in New York and sent to out-of-state clients.

The case was premised on a new tax guidance that applied to the entire art market, one that suggested a change in how fine art shipping companies are classified under tax law, causing more paperwork and hassle for galleries and collectors.

That guidance, issued by New York State’s Department of Taxation and Finance the prior year, addressed when art sellers should collect New York sales tax on work shipped to out-of-state clients, who are not necessarily required to pay in-state levies. The new guidance suggested that if an out-of-state buyer hired a fine art shipper to collect their work, they would pay New York’s 8.875 percent sales tax rate on the transaction. Under the logic of the guidance (which was not a change to the underlying law) in that scenario, the buyer takes possession of a work in New York through their agent—in this case, an art shipper.

Sales tax is not due if the work is shipped via what is known as a common carrier—the United States Postal Service (USPS), FedEx, or UPS. Tax is also not charged if the seller handles the logistics. But, as those in the industry point out, collectors choosing between specialty art shippers and USPS aren’t choosing between two equivalent delivery services. One handles Picassos, the other handles postcards.

“It would be negligent to use USPS to ship a valuable piece of art,” said Amanda A. Rottermund, an associate at the law firm Withersworldwide. “People in this industry take logistics seriously—it’s such a big part of daily life.”

The bulletin’s suggestion that art shippers do not constitute common carriers took some galleries by surprise, with some predicting a drastic reshaping of how they would operate. There was also some initial uncertainty—the bulletin was first issued in August 2015, then withdrawn. But the subsequent Gagosian settlement in 2016 demonstrated to the art market that tax authorities would indeed classify art shippers as private carriers rather than common carriers, even after the bulletin’s withdrawal. The Department of Taxation and Finance declined to comment.

“It was definitely a huge headache at the get-go,” said Nic Flood, the registrar at gallery Ales Ortuzar. “But it seems like most galleries have turned to the same way of complying with the law—which is [to] be the one who pays the shipper.”

This has meant that the time and labor costs that go towards handling shipping are now on the gallery’s clock, rather than the collector’s. Registrars now must arrange shipping, pay the art shipper, and then invoice clients and hope for repayment. They also must hold onto all the paperwork—a description of the work; who arranged for the shipper; proof of payment; bill of lading; the original invoice—in case New York State comes knocking. For galleries that are moving a large volume of work, it is no small feat.

“It’s a nightmare,” said Geoffrey Minckler, Petzel Gallery’s chief registrar, who estimates that the tax clarification has doubled his workload.

Collectors aren’t necessarily happy to have this burden lifted. Galleries now must explain why collectors can’t simply pay their favorite shipper directly, and why they’re being invoiced for the cost separately. Minckler said it is hard to quantify, but estimates that less than 50 percent of buyers are aware of the common carrier classification change and how it impacts their art shipment. The need for the gallery to handle shipping can throw a wrench in the plans of out-of-state collectors who buy works from multiple galleries during trips to New York, planning for a single shipper to pick them all up.

Adam Fields, founder of ARTA, an online platform that allows users to compare art shipping quotes, said his firm has seen a downtick in the number of collectors arranging such bulk pickups, and an upswing in galleries coordinating those transactions.

The website has tailored its services to help galleries accord by the new tax law, and cut down on the physical paperwork. Under a new feature rolled out in late April, galleries can use the platform to send clients a range of shipping quotes, giving the client some control to pick the option they want. The gallery then pays, and bills the collector. All the invoices and related documents are stored electronically to make the process easier and compliant with tax law. Fields said that as collectors become more familiar with the law, they’ve gone back to arranging for shipments through ARTA, which can then invoice the galleries separately and take some of that work off their plate.

“The state has added a layer of challenge and complexities for all New York-based galleries,” said Fields. “We’re trying to help make these galleries more efficient.”

Indeed, the ball shifting to the gallery’s court does have the potential to force galleries to think about easier ways to comply. Flood also said the regulation might help push galleries out of storing everything in binders and towards the digital. And regardless, if the registrar gets to decide the shipper, they can make sure it’s a reputable one and that everything is handled properly.

But there are still ways for collectors to directly arrange and pay for art shipment without incurring the New York State sales tax. Minckler said that Petzel stores some of its inventory in a Delaware freeport. If a work purchased through a New York gallery is stored in Delaware, and then picked up by an art shipper arranged by the out-of-state collector, the sale doesn’t incur New York sales tax, since the shipping transaction doesn’t actually take place in the state.

But the impact on galleries is far from uniform, and depends on the gallery’s sales volume and client base. Gallerist Alex Ross, director of the smaller Lower East Side gallery Downs & Ross, said that there hasn’t been any drastic structural change in how his gallery operates following the clarification. The tax measure is just one of many elements that must be considered when executing a sale, even though out-of-state clients are a large part of the company’s business.

“There are always forms of diligence that need to be executed within the scope of any transaction or any sale,” he said. “It’s a granular shift in compliance.”

Granular or not, the compliance policy is now the rule of the land. If, on the surface, the New York art market looks exactly the same, underneath it are legions of registrars making sure everything moves smoothly.

“Everyone is very cognizant of the the new practices,” added Rottermund. “And everyone is doing their best to comply.”

Isaac Kaplan