Sales and use tax considerations can be quite complex, and when applied to the purchase of high-end art, these taxes can add up to a hefty sum. During the course of our everyday practice, our clients regularly ask us to address tax issues regarding the purchase and sale of artwork. These situations often provide great illustrations of the general principles behind sales and use tax laws and regulations. For instance, a recently issued New York State Advisory Opinion, TSB-A-16(17)S (May 2, 2016) presented an excellent example of whether sales and use tax would be due on the various transactions surrounding the purchase of a piece of art.
The Limited Liability Company (the “Company”) requesting the New York State Department of Taxation and Finance (the “Department”) to issue the Opinion was based in Florida. The Company had no place of business in New York, nor any employees located there. Moreover, it did not conduct business of any kind in New York. The Company entered into a contract with a New York-based art dealer to purchase a sculpture being created in Germany. The contract stipulated that the gallery would deliver the sculpture to the Company by common carrier.
After entering into the purchase agreement, the Florida-based Company agreed to loan the sculpture to a tax-exempt museum (the “Museum”) located in New York City. As per the agreement, the Museum arranged for a private fine arts carrier (the “Carrier”) to pick up the sculpture from its creator in Germany. The art work was then displayed at the Museum from June 2014 through October 2014; thereafter the sculpture was exhibited at various venues in Europe.
The transporting of the sculpture, before and during the tour, was arranged and paid for by the Museum. However, under the terms of the agreement with the Museum, the Company reimbursed it for any expenses exceeding $20,000 incurred while transporting the sculpture from its creator in Germany to the Museum. The Museum, in turn, agreed to provide all necessary insurance coverage relating to the sculpture, from the day it was picked up in Germany until it was delivered to the Company in Florida. At the end of the tour, the sculpture was delivered to the Company in Florida.
The Department’s Analysis
The Department started its analysis by noting that sales tax is a transaction-based tax. Consequently, liability for the tax arises at the time of the transaction. Under New York’s sales tax law, a sale is deemed to occur upon the transfer of title, possession, or both, of tangible personal property or the delivery of taxable services for consideration. Thus, in the Department’s view, the key to determining whether sales tax applied to the purchase of the sculpture by the Company was to determine where the Company took possession of it.
After reviewing the facts, the Department concluded that the Carrier was a contractor acting on behalf of the Company when it took possession of the sculpture in Germany. As a result, the sculpture was deemed to have been received by the Company in that country. Therefore, since the transaction took place outside of New York, no sales tax was due regarding the transaction.
Addressing the Company’s loan of the sculpture to the Museum, the Department reasoned that the transaction would normally be subject to sales tax as a license to use or a rental if it was supported by consideration. Upon reviewing the facts surrounding the loan transaction, the Department found it was supported by consideration since the Museum agreed to assume certain transportation costs that would normally be incurred by the Company. However, since delivery of the sculpture to the Museum with respect to the loan period occurred in Germany, not New York, no sales tax was due in connection with the loan.
Moreover, the Department concluded that no use tax was due by the Company on the loan of the sculpture to the Museum, since at the time the Company purchased the sculpture it was a nonresident and, consequently, qualified for the nonresident exemption available under New York State Tax Law. Finally, no use tax was due from the Museum regarding its exhibition of the sculpture in the state since it was a tax-exempt organization.
The Opinion offers an inside view of the plethora of sales and use tax issues often presented in connection with the purchase and sale of art work. Although unraveling the complex questions can appear daunting, a clear understanding of the parameters of the law makes the task easier.
If you have any questions regarding this area, please contact Tom Corrie at (212) 842-7019, or if you prefer, via e-mail at email@example.com.