E-Commerce State Sales Tax Laws Don’t Paint a Pretty Picture for the Art World

With the holidays on our heels, more of us are spending down time (or maybe a few work hours) doing online shopping. Early reports for this year’s Cyber Monday show a 19.7% increase in sales from 2018. Amazon reported that customers bought more items around the world on Monday than on any other day in Amazon’s history. Which is great news for anyone selling items online. Or maybe not so great, due to the Supreme Court’s recent landmark sales tax case, South Dakota v. Wayfair. This case overturned the previous ruling that online businesses, or any business shipping items into specific states, no longer have to have a physical presence in the buyer’s state in order to collect and remit state sales tax. The new law states that the standard for determining constitutionality of a state tax law is whether the tax applies to an activity that has a “substantial nexus” with the taxing state. The thought was that this will even the playing field between brick and mortar and remote sellers.

The law allows states to collect sales tax from not only online retailers, but any business that ships items to another state. Currently 30 states have established sales tax rules for online businesses. The most common adoption is for sales of over $100,000 or 200 transactions in a 12-month period. It is imperative that anyone who sells online be aware of which states currently require the collection and remittance of sales tax. (For a state by state breakdown of the most recent sales tax rules, please click here). By the end of this year, it is expected that most states will adopt some form of this rule.

How Does This Affect the Art World?

The art industry is being hit hard with this new law, since the majority of sales exceed $100,000 and are consigned to galleries or sold at auction in other states. This can create nexus. Sales representatives, agents and online referrers can also create nexus. Additionally, if an artist or dealer attends an art show, they need to consider whether the physical presence standard has been met and therefore sales tax must be collected. The international law firm Withers LLP shared with clients that “this new development may negatively affect New York art merchants, who often arrange shipments of out-of-state deliveries using fine art carriers. As a result, when New York merchants control the shipment of artwork outside of New York, they now must consider whether they are inadvertently exposing themselves to the sales tax withholding requirements of other states.” Tax evasion of sales tax on artworks has been a concern in the past for New York City prosecutors.

What Happens Next?

Collectors and galleries should take the new ruling into account when planning a large art sale or purchase. Many dealers and galleries are finding that they have to be compliant in multiple states. Due to the nuances with each state, it’s strongly recommended that art dealers speak with an accountant to help them perform an economic nexus evaluation report. This will help determine which states have a sales tax requirement and provide a better understanding of the state’s sales tax rules.

The economic nexus rules are changing rapidly. It is very likely that the footprint of state’s implementing the Wayfair case will expand in the next month and its financial impact will dramatically affect many of those in the art industry.

LHF has a strong presence not only in the art world representing artists, galleries and dealers but also in many other distribution businesses that are especially exposed to this new normal under sales tax regime. Please reach out to us at info@lhfcpa.com to discuss your specific situation.

For a deeper dive into the details and impact of the Wayfair case, click here.