Art Law Report

The Taxman Cometh­—Christie’s Penalty is the Latest Example of Sales and Use Tax Pitfalls

Posted by Nicholas O'Donnell on April 15, 2020 at 2:20 PM

News broke last week that auction house Christie’s had agreed to pay a $16.7 million fine to the Manhattan District Attorney for failing to collect sales tax between 2013 and 2017. This was surprising in many ways, but a reminder of the lurking dangers of sales and use tax in multi-state and international art transactions. While the variables can seem daunting, the decision-tree of how to account for sales and use tax need not be overly complicated. The Christie’s settlement is an opportunity to review the rules of the road.

According to the news reports, Christie’s failed collect New York sales tax on works sold by foreign offices but delivered to New York customers.  Moreover, Christie’s allegedly centralized its private sale operations in London in 2013 and then proceeded on the assumption that those private sales (including those to New York clients) did not require the collection of sales tax. This was apparently on the advice of an attorney. The resolution is the product of cooperation between Christie’s and the DA’s office, though it is not apparent from what we’ve read at what point when the cooperation began. The fine consists of $6.7 in uncollected taxes, penalties and interest, as well as a flat $10 million sump sum. It takes Christie’s cooperation into account, according to the DA.

We had occasion to address sales and use tax a few years ago as so-called domestic “freeports” were being placed in jurisdictions that have no sales tax, like Delaware. Most of us are familiar with sales tax; eligible goods and services are taxed at the point of sale; if I buy an I L❤️VE NY mug in Times Square, I pay sales tax. It doesn’t matter where I live, that’s where the sale is.

The temptation arises when a buyer does have a connection to a lower or no-sales-tax jurisdiction. A New Hampshire tourist still pays sales tax on that mug. But what if the mug cost $20 million?  As discussed previously, there is precedent. The conglomerate Tyco International, Ltd., was headquartered in Exeter, N.H. Former CEO Dennis Kozlowski was indicted in 2002 for an alleged failure to pay New York sales tax on over $13 million of art. In that case the allegation was outright fraud, the claim that the art never even left New York and that the “shipments” to New Hampshire were fictional. Kozlowski settled with the Manhattan DA in 2006 and agreed to pay $17.9 million in state and city income tax, interest and penalties, of which $8.3 million represented the tax liability.

But even if the art had left New York, that is not entirely enough. The touchstone is the point at which the buyer takes title and possession. If the gallery sells an object in a state with sales tax and ships it to the buyer in a state without one, sales tax will probably not be due. By contrast, if the buyer makes the purchase and assumes title and possession in a state with a sales tax to move the property to its sales-tax-free jurisdiction, it is likely too late to avoid sales tax. Considerable thought goes into what that means, and there has been a back and forth with taxing authorities over which carriers (specialized art logistics companies vs. common carriers like UPS) may handle the delivery.

Even if the sale and delivery are arranged to the satisfaction of the New York authorities, the buyer will still likely use tax in his or her jurisdiction. If I buy the $20 million mug in New Hampshire there is no sales tax, but if I bring it to Boston to use, I will have to pay use tax.


Once more down to the lake…maybe just leave the mug there!

That is to say nothing of the tax consequences if the art’s destination is a foreign country, about which we won’t offer any opinion here.

What to do? As always we recommend consulting a professional. This is cold comfort to Christie’s, which seemed to have done just that (awkward conversation likely to follow). Yet perhaps the old adage is apt here: if it seems too good to be true, it might be. There are entirely legitimate ways to structure a tax-advantaged sale of fine art, but the stakes are high.

Topics: Christie's, Sales & Use Taxes, Dennis Kozlowski, Tyco International, Ltd., Manhattan DA

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About the Blog

The Art Law Report provides timely updates and commentary on legal issues in the museum and visual arts communities. It is authored by Nicholas M. O'Donnell, partner in our Art & Museum Law Practice.

The material on this site is for general information only and is not legal advice. No liability is accepted for any loss or damage which may result from reliance on it. Always consult a qualified lawyer about a specific legal problem.

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