“While art looks as if it is all about beauty, as a business it is full of shady stuff.” — Nouriel Roubini
The global art market is opaque, unregulated and highly susceptible to fraudulent tax schemes involving the illegal avoidance of sales, use and income taxes. And because New York City is at the center of this market, the city and state of New York losses considerable tax revenue each year due to such frauds. New York’s whistleblower law – the New York False Claims Act (NYFCA) – protects and rewards whistleblowers who report art tax violations to the government.
In recent years, the New York Attorney General’s office, which oversees the NYFCA, has exposed a string of art tax scams, including obtaining multi-million settlements from art collectors and dealers for sales and use tax frauds.
Art tax violations generally involve sales, use or income tax schemes.
Those who hang art in their NY homes must pay “sales tax” when they purchase the art in NY and also pay “use tax” if they bought the art elsewhere buy display or store it in NY. However, many people — sometimes in collusion with NY galleries — buy art in NY without paying NY sales taxes. They do so by shipping the art to out-of-state locations, only to quickly roundtrip the art back to New York for display or storage without paying New York use taxes. This is illegal.
Another tax scam involves galleries or art shippers who create fake shipping invoices and/or ship empty “tax boxes” out-of-state while the art is quietly delivered to a NY apartment. Still others try to claim that they bought the art for “resale” (which qualifies the buyer for a tax exemption) but then enjoy the art in their home or office after the purchase. But NY law is clear: art displayed in the home or office of an art collector cannot be a tax-exempt art purchase for “resale.”
Income tax scams are also rampant. Many who maintain a pied à terre in Manhattan carefully avoid staying in NY for more than 184 days to avoid resident income taxes. That’s fine. But they then ignore the “non-resident” income tax obligation after they sell art that hung in that pied à terre. That’s illegal.
While most tax enforcement is aimed at the person or entity that owed the unpaid taxes, the NY Attorney General has recently expanded its focus and started casting a wider net to punish those professionals and businesses that help their wealthy clients commit tax fraud.