NY State Attorney General Letitia James has sued Sotheby’s for its alleged role in helping a client (unnamed in the AG’s complaint) to “pose as an art dealer so he could illegally qualify for sales-tax exemptions reserved for the art trade” when purchasing art (in the words of Kelly Crow‘s recent report in the Wall Street Journal).
According to the AG’s 42-page complaint, the suspect activity began in November 2010, when the client, described by the AG as a contemporary art collector, asked a Sotheby’s sales representative “why some people did not pay sales tax when they bought art.” He was interested in purchasing an Anish Kapoor sculpture “for over $1.4 million. Sales tax on that purchase would amount to over $126,000,” in the words of the AG’s complaint.
The unnamed Sotheby’s employee’s reply to the collector’s query was “that people who purchase for resale use resale certificates which exempt them from paying sales tax,” according to the AG’s account.
Here, in the words of the AG’s Nov. 6 complaint, filed in NY State Supreme Court, is how that initial approach played out:
Sotheby’s enabled a valued client, a collector of contemporary art (“Collector”), to fraudulently avoid sales tax on $27 million worth of art [described elsewhere in the complaint as “35 pieces of artwork and furniture totaling over $27 million”] he bought from Sotheby’s for his art collection over a period of five years, between 2010 and 2015. Sotheby’s enabled the Collector to buy art tax-free by accepting his representation that he was an art dealer instead of a collector who bought for his own personal use, even though Sotheby’s knew that his representation was false [emphasis added].
In general, someone who buys art in New York City and takes delivery there must pay city and state sales tax. But under a feature of New York Tax Law known as a resale exemption, purchasers buying items as part of their inventory, for resale to their own customers in the normal course of business operations, do not have to pay sales tax.
The complaint, in which the AG seeks a jury trial, also alleges that Sotheby’s had accepted four resale certificates from the collector, first “individually, and later through an art holding company (“Porsal Equities”) that he owned and directed,” even though some “22 employees of Sotheby’s knew that art was being delivered to the Collector’s apartment and/or that he was displaying the art that he purchased; and at least 12 employees at Sotheby’s knew both.”
The AG is seeking payment by Sotheby’s of an unspecified amount in damages, penalties and plaintiff’s costs.
At issue are strictures elucidated in Ralph Lerner‘s and the late Judith Bresler‘s Art Law: The Guide for Collectors, Investors, Dealer, & Artists, published by the Practising Law Institute. The following passage is from my copy of that guide’s Third Edition, but I assume that the recently published Fifth Edition contains the same guidance regarding payment (or non-payment) of sales tax in connection with auction purchases:
Sometimes the investor or the collector of artworks who may buy and sell a work from time to time attempts to avoid paying the sales or use tax by registering for a resale certificate and number, either in his own name or in the name of a corporation set up for that purpose.
Doing so is usually a big mistake since, at best, the artworks purchased will be ordinary-income property that will produce ordinary income and not capital gain if sold, and a deduction will be limited to the artwork’s cost if donated to charity. At worst, the investor or collector could face possible criminal charges….
New York State sales tax must be paid by the buyer and collected by the seller on the sale of tangible personal property in the state unless: 1) the property is sold to a buyer for delivery out of the state of New York or 2) it is purchased by a dealer exclusively for resale. [Emphases added.]
I presume that, if consulted, Sotheby’s lawyers would have given similar guidance to the collector and to the Sotheby’s sales representative who were players in this drama. It is possible that, in its reply to the complaint, Sotheby’s will contest the AG’s version of the underlying facts and circumstances.
In a recent similar case, Eileen Kinsella of artnet reported last April that Sotheby’s rival, Christie’s, had agreed to a $16.7-million settlement with the Manhattan District Attorney’s Office for “failing to properly collect New York sales tax between 2013 and 2017.” (A Christie’s spokesperson confirmed to me the accuracy of Kinsella’s report.)
But back to the current Sotheby’s case, as described in the Attorney General’s complaint:
These [resale] certificates [provided to the collector by Sotheby’s] were false and fraudulent because they represented (i) that the Collector was an “art dealer,” and later that his company was engaged in “art export,” (ii) that both principally sold artwork, and (iii) that they were purchasing artwork from Sotheby’s for resale outside the State, when in fact these statements were not true.
Actually, the Collector, and later Porsal Equities, purchased for the Collector’s personal use, namely, for display and enjoyment at his vacation homes in New York and his other properties. In 2018, the State entered into a settlement agreement with Porsal Equities, in which Porsal Equities admitted to improperly using resale certificates to purchase art for personal use, in violation of the New York False Claims Act.
In response to a series of questions about this contretemps that I emailed to Sotheby’s, Derek Parsons, the firm’s vice president and senior press officer, said he could “share the statement we put out last week, but that’s all we can share at this time.”
Here’s that statement:
Sotheby’s vigorously refutes the unfounded allegations made by the Attorney General, which are unsupported by both fact and law. This is an issue between the taxpayer and the state dating from between five and ten years ago, which, as the Attorney General noted in her complaint, was settled two years ago. [Emphases added.]
And here’s what the AG’s complaint says about that settlement:
In 2018, Porsal Equities reached a settlement with the OAG [Office of the Attorney General], in which it admitted that it and the Collector used false resale certificates, primarily at Sotheby’s, in violation of the New York False Claims Act. Porsal Equities admitted that it and the Collector falsely certified they were purchasing artwork and other goods for resale, but in fact, were actually purchasing solely for personal use, and paid a portion of the liabilities incurred with respect to these sales.
Parsons of Sotheby’s did not respond to my question as to what aspects of the AG’s highly detailed complaint were (in in the words of Sotheby’s statement) “unfounded.” I requested (but did not receive) an explanation as to why the allegations were “false and/or are not probative or material” (in the words of my emailed questions).
When I checked back today with Sotheby’s to see if it had any further comment, Karina Sokolovsky, its worldwide communications head, replied:
As I’m sure you can understand, we are not in a position to comment above and beyond the statement which Derek shared previously.
Answers may come in Sotheby’s formal reply to the complaint, which is due 20 days from the service of the AG’s Nov. 6 summons. At this writing, no reply brief had been posted to the online site for “The People of the State of New York vs. Sotheby’s.”
UPDATE: The deadline for Sotheby’s to respond to the AG’s complaint (or to move for dismissal) has been extended to Dec. 18. And we now know the names of the lawyers who will represent Sotheby’s in this case–Barry Berke and Darren Laverne of Kramer Levin Naftalis & Frankel, New York.
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