New York prosecutors have been investigating the sales tax treatment on fine art sold to the former chief executive officer (CEO) of Tyco International Ltd. The former CEO pled not guilty to a 12-count indictment on June 5, 2002, and this has helped shine a spotlight on the techniques often used to avoid sales tax on pricey but easily portable products.
According to the allegations, the former CEO, who had residences in several states, purchased artwork worth $13.2 million and had it shipped to his office instead of his home, thereby saving the 8.25% combined New York city and state sales taxes. Prosecutors have also said that some boxes purporting to contain artwork arrived empty at the company’s headquarters. The charges came two days after the former CEO resigned his position at Tyco.
According to the Wall Street Journal, tax avoidance techniques are common in locations with sales taxes as high as New York's. These techniques typically involve shipping art to a museum exhibition or to a home or office in a state with no sales tax, even though the collector's primary residence and the artwork's intended home is elsewhere. The legality of the sales tax avoidance varies according to the exact circumstances:
- If the art is shipped to a state with no sales tax and the collector intends to house the art there, this is perfectly legal.
- If the art is delivered to the client's home in New York, but an empty carton is shipped out of state, the transaction is illegal.
- If the art is delivered to a museum, the legality varies by state. In some states, the sales tax can be legally avoided, if the artwork is put on public display for three months or more.
Regardless of whether or not the former CEO is found guilty, the Wall Street Journal concludes, some art dealers will no doubt be grateful for the publicity surrounding the case. It gives them something to point at and say, "See I can't do it. The government is watching." ("Sales-Tax Investigation Has Art Dealers 'Shivering in Their Boots,'" June 5, 2002.)