TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, April 14, 2014

NY Times: Buyers Evade State Taxes by Loaning Purchased Art to Museums in Non-Tax States

New York Times:  Buyers Find Tax Break on Art: Let It Hang Awhile in Oregon:

Collectors who buy art in one state but live in another can owe thousands, tens of thousands, even millions of dollars in state “use taxes”: taxes often incurred when someone ships an out-of-state purchase home. But if they lend the recently purchased work first to museums ..., located in a handful of tax-friendly states, the transaction is often tax-free.

Beyond the benefit to museums, this lucrative, little-known tax maneuver has produced a startling pipeline of art moving across the United States as collectors cleverly — and legally — exploit the tax codes. ... [L]oans — which rarely extend beyond a few months — also flow into other museums in Oregon, and occasionally New Hampshire and Delaware, all states that have neither a sales nor a use tax. ...

ArtPortland officials say collectors lend art for a variety of reasons, not just for the tax break. But only a few weeks after the painting [Three Studies of Lucian Freud] sold for a stunning $142 million last fall at Christie’s in New York, it landed, to the surprise of many, in the Portland museum, where it drew large crowds for 15 weeks. By shipping the painting first to Oregon, instead of her home in Las Vegas, the new owner, Elaine Wynn, may be eligible to avoid as much as $11 million in Nevada use taxes, though it is not clear whether she intends to take advantage of the break.

Collectors typically learn of this strategy only through savvy lawyers, dealers and auction specialists. But within the circle of people who know of the practice, it generates debate between those who appreciate how it fosters public access to art and those who suggest that such access comes at too high a price to unwitting taxpayers. For example, do taxpayers in, say, California even understand that they have given up millions of dollars in tax revenue over the years to, in effect, underwrite the display of paintings in other states? ...

Art collectors who seek to avoid the tax typically offer a recently purchased work to a museum in one of five states — New Hampshire, Oregon, Alaska, Montana and Delaware — that do not have a use tax so that the loan does not incur a tax. As long as the painting stays at the museum for an extended period, typically more than three months, before being shipped home, the practice in several states where collectors live, like California, is to regard the exhibition as a first “use” of the item and waive any tax. The result is a tax-free transaction. ...

The tax strategy is 100 percent legal, experts say, as long as all stages of the museum transfer are handled correctly. ... [M]any California collectors [have] taken advantage of the tax provision. ... California explicitly outlines a “first use” exemption in its tax code. It says that property, whether a couch or a Caravaggio, that is first “used” out of state for more than 90 days does not incur the tax. ...

Collectors who live in states that don’t recognize a first-use exemption are out of luck. New York, for example, typically imposes a use tax — 8.875 percent in Manhattan — on art brought into the state by a resident, even if it is first publicly displayed elsewhere.

(Hat Tip: Ted Seto, Mike Talbert.)

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Ah, a near-perfect illustration of how liberal 'tax the rich' works out in practice. High nominal tax rates come with a host of loopholes. High-tax-rate politicians can then double dip. They get votes from the poor for high tax rates and contributions from the rich for those loopholes.

Posted by: Michael W. Perry | Apr 14, 2014 7:32:11 AM

Lets face it, no one likes to pay tax, so people are always going to find ways to get around paying it. In the case of the $142 million painting, ask yourself this, would you want to pay $11 million in tax after buying it? no need to answer, as we all know your response.

Posted by: Business Accountant | Apr 14, 2014 11:02:44 AM

It's an interesting theoretical problem. We don't tax used goods with sales tax or use tax. Should an Old Master be classified as "used"? How about antiques? How about vintage cars?
For a painting, 90 days isn't enough for it to be "used". For a toothbrush, 90 days is more than enough. What should the law do?

Posted by: Eric Rasmusen | Apr 14, 2014 12:35:39 PM