In 2015, fine art sales amounted to a whopping $63.8 billion. While this is nearly 5 billion dollars less than the art market’s all-time high in 2014, visual art is still a big business.
Art sales pose interesting problems for sales taxation. Some of those problems boil down to that most eternal of questions: what, precisely, is art? Is it just a painting? Or is it an investment?
In the United States, sales tax is only charged to the end user of a product, not wholesalers or retailers. If you buy a Picasso to hang on your wall for all to see, the artwork is clearly tangible personal property, and you’re the end user — that means you’re on the hook for sales tax on the total purchase price.
But what about if you bought the artwork as an investment, planning to sell it again? The answer depends on how soon you want to sell it and what you do with it in the meantime. If you purchase the art for immediate resale and put it on the market very soon after your purchase, you can avoid sales tax, as you are not the end user. In order to do this, you’ll have to obtain a reseller certificate and show it to the seller to avoid paying the tax.
However, let’s say you have every intent of reselling your brand new painting — when the market looks better. In the meantime, you plan to hang it up. What happens, then? The answer is that you still have to pay sales tax: any personal use of a work of art, even if accompanied by a later resale, qualifies as taxable.
Don’t just take our word for it: the state of New York has been cracking down recently on phony “resellers” who don’t really qualify for sales tax exempt purchases. New York Attorney General Eric Schneiderman, announcing settlements totaling $7.2 million pertaining to art sales and use tax violations, says: “Art buyers may not avoid sales or use tax simply by claiming that artwork they enjoy at home is intended for resale. That rule is clear, and my office is committed to ensuring the art industry follows it.”
Big ticket prices make buyers want to call themselves “resellers,” but they also attract the attention of the tax authorities. According to the state of New York, you need evidence that you’re a bona fide reseller or investor: records of frequent sales, maintaining a separate place of business, or advertising your gallery could all be used to show that a tax-free purchase was not an abuse of tax law.
The basic rule? The only way art purchases qualify for reseller exemptions is when they’re exclusively intended for resale, not display.
If the state finds out you’re using an exemption certificate illegally, you’ll be on the hook for the amount of the tax liability — and double the amount, plus a punishing 14.5% interest rate, if the state considers the tax avoidance to be deliberate fraud.
Art may be subjective, but sales tax is not. There’s real value in knowing the rules. For compliance tips, check out Avalara’s Sales Tax Survival Guide.