NEW YORK STATE SUES SOTHEBY’S FOR ABETTING TAX FRAUD

New York’s Attorney General has filed a lawsuit against Sotheby’s, alleging that the auction house knowingly aided a buyer to avoid sales taxes on $27 million worth of art.  The complaint states that Sotheby’s violated the New York False Claims Act when it aided a collector to purchase art while posing as a dealer.  A collector, purchasing for personal use, must pay sales tax.  A dealer, intending to sell the art to a third party, is exempt from paying sales tax. 

The collector in question used a British Virgin Islands company called Porsal Equities.  Porsal Equities had settled with the New York Attorney General in 2018 over its activities between 2010 and 2015 in which the company was accused of tax avoidance on over $50 million worth of art and other items purchased in New York.  The company admitted that it fraudulently used resale certificates to avoid paying sales tax.  Resale certificates are issued to dealers who state that their intent is to resell a product and applies from everything to high end art to finger paint sold at craft stores.  The idea behind a resale certificate is that any taxes due are paid by the end-user.  

Unfortunately, unscrupulous collectors game the resale certificate to avoid paying sales taxes.  A similar scenario involves collectors purchasing high end art in New York and “shipping” it to New Hampshire.  New Hampshire is the closest state to New York that does not have a sales tax, and items shipped to states without a sales tax do not have to pay that tax, as the end-user is in a non-sales tax state.  However, “shipping” is in quotations because many collectors never actually ship the items to New Hampshire but keep them in New York.

The current lawsuit claims that Sotheby’s not only knew of the false nature of the resale certificates, but that it knowingly helped Porsal Equities obtain these certificates.  Furthermore, the lawsuit claims that Sotheby’s had actual knowledge that the collector, using Porsal Equities, had no intent to resell the artwork, but was purchasing it for his own enjoyment.

This will be an interesting case to watch, as traditionally large auction houses have been able to avoid legal repercussions for illegal activity.  If the allegations are true and Sotheby’s is held liable, this could be a major reckoning for auction houses.