Because buying and selling are a major part of the art and collectibles world, it is important for collectors to understand the way taxes can affect their transactions. Although for many this is limited to knowing that they will have to pay sales tax on the items they purchase, other taxes (such as use, income, and even estate) can come into play. Knowing how each of these works as well as making sure that all transactions are processed legally is crucial to anyone attempting to start or maintain a serious collection.
Sales Tax
By far the most common tax that affects collectors is sales tax. It applies to retailers who sell personal property directly to individuals. Almost universally, retailers pass this tax along to their customers. In most cases, it is added on at the end as a percentage of the invoice price in accordance with local and state regulations.
There are two primary instances in which sales tax is not required. The first is in dealer-to-dealer transactions. For sales tax to be waived, the purchaser must be licensed to resell the goods. The second situation in which sales tax is not charged is that in which a customer is receiving goods from an out-of-state vendor. Buyers who live in a state different from the vendor (or have their purchases directly shipped to another state) are exempt.
Use Tax
Although exempt from sales tax, individuals who purchase art or collectible items from vendors outside of their home state are technically required to pay a use tax on those purchases. On the surface, it may seem that the purpose of a use tax is to generate additional revenue for the state. More than that, however, use taxes are meant to prevent buyers from purchasing goods out of state solely to avoid paying sales tax.
As the primary markets for art and collectible sales, New York and California are the most rigid enforcers of use tax laws. New York even has use tax figured into its state income tax returns. Although many states have yet to follow suit, the surge in online retailing (in addition to purchases from catalogs) is making the perceived need for use tax stronger.
Income Tax
Significantly more complicated than sale and use taxes is the issue of income tax. The rules that govern income tax for transactions involving art and collectibles are complex and vary based on the amount of money involved as well as the status of the individual. Any collector looking to minimize tax liability should seek expert advice. That said, there are some general bits of information that apply in most, if not all, cases.
First, it should be noted that income derived from the sale of art and collectible items is taxable. The key word here is sale; only when an item or collection is sold for profit is income tax charged. (This differs from traditional investments, in which appreciation in value is taxed every year. This is one of the reasons art and collectibles are often seen as good investments).
Although tax liability for income applies to everyone - collectors, investors, and dealers - allowances for losses and relevant expenses vary greatly. Generally, everyone who does not seek to qualify otherwise is considered a collector. As a collector, income from profitable sales is taxable, but losses and expenses are not tax deductible. Those who qualify as investors are allowed some deductions, dealers even more. There are some strict guidelines regarding how individuals are classified; anyone looking to claim a status other than "collector" should research carefully what is required.
Copyright 2009 LexisNexis, a division of Reed Elsevier Inc.
