New York State's tax authorities have been investigating whether New York-area art galleries are properly collecting and remitting New York sales tax on sales of artworks, and a recent New York State Department of Taxation and Finance ("Department") Tax Bulletin has shed some light on several Department positions with regard to sales of property to out-of-state residents, one of which is important to gallerists, collectors and other art industry professionals. The Tax Bulletin expresses the Department's view that New York sales tax is owed with respect to a sale of property by a New York seller to an out-of-state resident when the purchaser hires a "private carrier" to deliver the property to the purchaser's residence outside New York. By contrast, no New York sales tax is due when either the seller hires a "private carrier" to deliver the purchased property to the out-of-state purchaser, or the purchaser or seller hires a "common carrier," such as FedEx, to deliver the property to the out-of-state purchaser.
Background
In New York, it's not where title passes that determines whether sales tax is due on a sale of property to an out-of-state resident; what matters is where delivery occurs. Put another way, the point of delivery or point at which the seller transfers possession of property to an out-of-state purchaser generally determines whether sales tax is due and the applicable rate of tax. Unless an exemption applies (e.g., purchaser has a resale certificate), a sale is subject to New York sales tax if the seller delivers purchased property to a buyer in New York. For example, a New York art gallery that delivers artwork to a purchaser located in New York must collect sales tax from the purchaser, but if delivery or transfer of possession of the artwork occurs outside New York, no New York sales tax is due.
Who hires the carrier - and what kind of carrier is used?
Under the recent Tax Bulletin, if a New York seller transfers possession of artwork to a "private or contract carrier" hired by the purchaser, New York sales tax is due even if the artwork ultimately is delivered outside New York. If the seller delivers purchased property out of New York in its own vehicle or through a "private or contract carrier" hired by the seller, however, no New York sales tax is due. If either the purchaser or the seller ships the work outside New York by "common carrier," no New York sales tax is due. According to the Tax Bulletin, "[a] common carrier is different from a private or contract carrier in that a common carrier does not operate under a private arrangement or contract with negotiated terms." A common carrier "holds itself out to the public as one who will agree to carry (transport) personal property for all who apply; is required to carry for all who apply; agrees to carry for a specified and standard rate of compensation; and makes deliveries under standard delivery schedules." FedEx would qualify as a "common carrier" under this definition.
The Tax Bulletin does not define "private or contract carrier," but it is reasonable to assume that most fine art delivery services would not qualify as "common carriers" and would be deemed "private or contract carriers" for New York sales tax purposes. Thus, while FedEx deliveries outside New York of artwork purchased in New York would not be subject to New York sales tax, an art buyer's decision to hire a "private or contract carrier" would trigger application of the sales tax. This narrow view of "common carrier" may be surprising, as fine art shippers have been designated "common carriers" for other non-tax related purposes.
Take-away
Here's what you need to know. Where the delivery of fine art purchased in New York to the purchaser's out-of-state residence requires the services of a fine art shipper, the seller should arrange for the shipment and directly pay for the shipment. Although not explicitly stated, the Tax Bulletin implies that New York sales tax may not apply under these circumstances even if the seller is reimbursed by the purchaser for the shipping costs. In addition, the Tax Bulletin's closing admonition that sellers keep accurate records of their sales, particularly records substantiating "points of delivery for sales of taxable products or services," should serve as a warning that the Department will be focusing in its sales tax examinations on the choice of shipper and whether the seller or the buyer arranged for the shipment.
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