A good advisor will be able to help a collector navigate the (often rapidly) shifting sands with regards to sales and import taxes and associated duties and levies on art acquisitions. While it may be unfair to expect an advisor or broker to understand the applicable tax rates in every scenario, advice can be given to help a collector avoid expensive errors or unforeseen costs. Here we give general information to help you know which issues are important to resolve about sales and import taxes before you purchase or move a work of art.
Starting with a specific example, auction houses buyer’s premiums are always quoted as a percentage of the hammer price (the amount you bid), but invariably this figure is net of applicable Sales Tax or Value Added Tax (VAT or TVA). In the USA, where Sales Taxes are routinely added on top of retail prices, this isn’t so much of an issue, but in countries such as the UK where VAT on art imports is usually included in a gallery’s retail price, the additional tax on the auction premium can come as a surprise to unprepared buyers. Export (VAT exempt) sales can be negotiated with UK auction houses for some overseas buyers, but you will have to use the auction house’s own shippers and may not be able to reframe or restore prior to shipping.
VAT / TVA regulations in EU countries can even trip up professional accountants. US collectors expecting a default 20% reduction on the asking price of a work sourced in the UK as a reflection of the VAT saving on export are often left disappointed when they find out that the work is being sold through the Margin Scheme. In this instance, the VAT is only levied on the dealer’s profit, therefore the export discount is nowhere near what the buyer might have expected. This article is not the place to discuss the inner workings of the Margin Scheme, but it’s another example of how a knowledgeable advisor can help with the practical aspects of art acquisition, not just the artistic.
We referred previously to shifting sands with regards to tax rates and their application. It surprises many new collectors that VAT rates can vary significantly across a unified economic block like Europe and, furthermore, an individual country’s rate can change markedly year on year especially with regards to reduced rates on fine art importation. Advising on the most tax efficient method of importing into a particular economic zone is an important part of an advisor’s role. It is also of primary importance that the advisor is equally aware, and advises against, any procedure which could be considered evasive of domestic or international tax laws.
Many issues regarding import and sales taxes are reasonably hard or time consuming to resolve if not handled correctly from the outset. For instance, it takes only a few minutes to produce a customs compliant declaration on a shipping invoice that will ensure a work leaves one country and enters another with the correct tax rates exempted or applied. Without that correct documentation, a shipper (particularly a courier company such as FedEx or DHL) will usually default to a standard customs entry which can significantly and unnecessarily increase your tax bill. A minor example of this from our direct experience was the shipping of several contemporary artworks (for the purpose of exhibition) from Cincinnati to London. The goods in the shipment, arranged by the artist using a well-known international courier, were described as being ‘painted aluminum panels’. Taken literally, this was entirely accurate, but the customs declaration failed to note that the painted panels were unique artworks, and the shipment was entered as manufactured goods as opposed to fine art, resulting in VAT at 20% rather than 5% was levied on the entire collection. The lack of a short descriptive sentence on a declaration can lead to a highly costly tax bill.
Reclaiming this tax overpayment once the entry has been made is not at all straightforward. Paying for good advice before shipping and employing a shipping broker might seem like unwanted additional expense initially but can end up saving the collector both time and money. One cannot always rely on shippers, particularly couriers, understanding the tax rules themselves. One recent case involved the shipment of an expensive sculpture from Monaco to TEFAF Maastricht for exhibition. On entry into The Netherlands the shippers entered it at the reduced VAT rate for a non-EU entry, misunderstanding that although Monaco is a tax haven exempt from wealth and capital gains taxes, it is subject to the same Sales Tax legislation as other EU states, and so art may travel freely from Monaco into France and beyond. Similarly, EU vendors may not offer tax exempt prices to collectors who wish to ship works to homes in Monaco.
Moving away from Europe and America, one finds widely differing import tax regimes. Though many hubs such as Singapore and Hong Kong pride themselves (justifiably) on the efficient customs procedures, costs vary hugely. There are no import duties and taxes into Hong Kong but a relatively steep GST (by European standards) into Singapore. Art destinations such as Dubai and Abu Dhabi might have fractionally lower import taxes, but considerably more bureaucracy which can cause substantial additional costs. Countries such as Canada manage to combine high GST levels with complex import procedures that can take skilled navigation.
A certain degree of confusion surrounds the use of bonded warehouses. These are locations, usually administered by shipping companies, where valuable goods such as art and wine can be stored indefinitely without the owner/importer having to pay import tax. The rules governing bonded warehouses are extremely tight though. Works may not be removed, and nor can a change of ownership occur while the artwork is in bond (or more specifically, the import tax liability rests with the original importer unless transferred to another bond or deferral mechanism such as a Temporary Import Waiver). Private individuals cannot operate bonded warehouses, so cannot enjoy their art in their homes under these conditions. Bond and user fees, particularly in Geneva, are substantial – so before considering making use of a bonded facility a collector would be advised to examine what they ultimately want to do with their artwork. Switzerland’s unique position in the art market is down to the fact it exists geographically but not economically within Europe. UK collectors may well find that they have a greater need for bonded warehouses after the UK withdraws from the EU in January 2021. This process will certainly affect the free movement of goods between the EU States and the UK.
In the US, Delaware does not have a State Sales tax and thus has seen a rapid increase in art storage facilities. Art buyers can ship their purchases directly to an art warehouse in Delaware and avoid paying sales tax for as long as the works remain there. For someone living in New York City, that amounts to a saving of nearly $900,000 on a $10 million painting. And for art investors don’t need to live with that piece of art, that tax need never be paid if the art remains in Delaware until a concluded sale.
Staying in the US, most buyers assume that art sales tax is not payable if they want to ship artwork to a residence in a state other than the state where it is purchased. This is not always true. Firstly, if a painting is bought at a Miami art fair, for example, and the buyer lives in New York and the gallery selling the work has a business in New York, then sales tax is payable. Secondly, many US states have use tax regulations which mean that if a painting is bought in another state or from abroad then the buyer has the obligation to file for use tax. However, use tax can be legally avoided in some states if the artwork is loaned to a museum for a minimum of 90 days before entering the home state – recently we brokered the sale of a valuable sculpture by Ruth Asawa and the buyer used our advice on a museum loan avoid the use tax. Acquisitions are also subject to other levies and duties which can confound even experienced collectors. For instance, although there are no duties or import taxes for works entering the USA, an MPF (Merchant Processing Fee) is payable on entry on a percentage of the declared value.
Perhaps the greatest source of confusion is over Artist Resale Rights (ARR – or Droit de Suite as it’s commonly referred to in mainland Europe). ARR is a levy, not a tax, which is applied to the net selling price of an artwork. This levy operates in the same way as a copyright payment whereby the artist (or estate if the artist has died within 70 years of the purchase) receives a small percentage of the sale proceeds. It only operates on the resale of an artwork, not the first time it is sold and is charged by galleries and auction houses on a sliding scale with an initial rate of 4% with a maximum of € 12,500. Although honorable in intention, its application is rather fraught, and in practice mainly benefits estates that are already wealthy. To be applicable, an artist has (or had) to be resident in a country with ARR legislation in place. Secondly, the point of transaction needs to be within a country with ARR legislation (but not necessarily the country of the artist’s origin). Thirdly, not all countries have reciprocal ARR legislation. Fourthly, and this is particularly confusing in the UK, the value is calculated on the Euro equivalent price rather than the Sterling. All that is before you get involved with the sliding percentage scales and the fact that on works sold through the Margin Scheme, you may have to pay ARR on the VAT on art imports because you cannot net out the sales value – confusing isn’t it!
The information in this article is written not to put off potential collectors or to make the process of acquiring art, particularly across international borders, seem overly complicated, because in the vast majority of cases that simply isn’t true. Most transactions are relatively straightforward and require little or no thought on the part of the buyer with regard to sales taxes and levies. However, there are pitfalls that an advisor can inform you about in advance and steer you around after the art acquisition. There are also certain aspects of any transaction that may need to be demystified even for very experienced collectors. That’s where a good advisor comes in; to state clearly why you have to pay a tax or levy, when you have to pay it and how its value is calculated, or if there is a legal way to avoid paying unnecessary fees. An advisor or broker should also be willing and able to carry out this administrative work for you.
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Last Updated 2021