Predictions for 2016

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Predictions for 2016: Taxes and Regulation in the Art World

BY Art+Auction | January 08, 2016

                                          

Maria Claudia Jimenez

(Maria Claudia Jimenez)

The following essay is by Mari-Claudia Jimenez, Art Law Partner, Herrick, Feinstein LLP.

As both art dealing and collecting become more professionalized and higher prices raise the stakes for all concerned, legal issues loom ever larger in the art world. In the months ahead, I expect to see this become apparent in calls for new regulations, increased client focus on tax compliance, and progressively more complex sales contracts.

Certainly the issue of oversight has been around for a long time. Auction houses face some regulation, but private sales remain largely unconstrained—a wild, wild West. The issue resurfaced this past winter following economist Nouriel Roubini’s mention of it at Davos. I wouldn’t expect to see legislative developments in the near future, but the discussion heightens awareness. Similarly, lawsuits such as the one brought by collector Dmitry Rybolovlev against dealer Yves Bouvier, with accusations of excessive commissions, drew attention to the opaqueness of art world transactions. Clients read the headlines and then ask about drawing up proper agreements that spell out all parties’ rights and obligations.

We are also hearing a lot more questions from clients about free ports and related ways to manage tax liability. As individual artworks become more expensive and more people look at art as an asset class, it makes sense that such tools attract more attention. Free ports do not serve a purpose for collectors who want the work on their walls, but for investors, the aim is to store the work between purchase and resale to avoid sales and use taxes. There have been other examples globally, and even some earlier ventures in Delaware, but Fritz Dietl’s new space there is really the first one created in the United States for the purpose as it is understood today. Delaware is one of only five states with no sales or use tax.
On another tax issue, New York State authorities are expected to continue auditing galleries. These investigations grew out of concerns that sales tax exemptions for works shipped out of state were being applied too liberally. So on the one hand, State authorities are worried about losing out on revenue, while on the other, galleries and collectors give thought to compliance, at the same time weighing strategies to decrease liability. These are not schemes, they are legal strategies. In light of today’s stratospheric prices, it becomes all the more important for our clients to know what course is open to them.
One of the more intriguing recent developments has been increased focus on a scientific approach to authentication. On the technological front there is the invention of tagging with electronic DNA. But that is just one response to a backlash against connoisseurship as the foundation for authenticating works. It’s a fallible technique, and with prices where they are, more buyers are saying they want something more than an expert saying he or she can identify the work of an artist. For some time there have been companies that base opinions on physical evidence such as paint samples. Once, such techniques were used only after a lawsuit had been filed. But now we are seeing collectors raise the issue of making such tests part of presale due diligence. With everyone aware of csi-style forensic science, it makes sense that its role in the art world is expanding.