New York’s attorney general, Letitia James, has claimed that Sotheby’s, the auction house, has been involved in an “extensive and serious” attempt to help wealthy art collectors avoid paying sales tax on purchases made for their homes. Ms James has filed a lawsuit against the auction house, alleging that it helped a wealthy shipping executive to use a false resale certificate to avoid taxes. The case has now expanded to include seven additional collectors and numerous Sotheby’s employees from across the organisation, including its tax department. Ms James is seeking permission to conduct almost two dozen more depositions of people involved in the alleged practice.
According to Ms James, documents that were recently handed over to state investigators during the litigation revealed that the alleged tax dodge by the shipping executive was “only the tip of the iceberg”. She is seeking to depose Sotheby’s employees who signed off on the paperwork, as well as a Missouri art gallery owner who allegedly used resale certificates improperly to buy untaxed jewellery from Sotheby’s for his wife, and a New York-based interior designer who deployed the practice to avoid taxes on jewellery and a handbag he bought from Sotheby’s for Mother’s Day gifts. None of the clients are identified in the court filing and none are named as defendants in the suit.
Sotheby’s has previously denied any wrongdoing in the matter. The company initially refused to hand over records beyond those involving the shipping executive, arguing that Ms James was on a “fishing expedition” and that additional documents would not “yield evidence of wrongdoing”. However, once the court ordered Sotheby’s to produce the documents, Ms James claims that they showed that Sotheby’s misconduct was far more extensive and serious than previously known. Neither Sotheby’s media office nor the company’s lawyer has yet responded to messages seeking comment on the matter.
The allegations against Sotheby’s have serious consequences, as sales tax is a significant source of revenue for the state of New York. The state’s tax department has been investigating the use of resale certificates to evade sales tax for some time. Such certificates are intended to be used by businesses to avoid paying sales tax on goods that they will resell. However, they have also been used by individuals to avoid paying sales tax on goods that they plan to keep for personal use.
In the case of Sotheby’s, it is alleged that the auction house knowingly facilitated the misuse of resale certificates by wealthy individuals. The shipping executive at the centre of the case reportedly used a resale certificate to purchase a $1.4m painting from Sotheby’s, which he then kept for his own personal use. He subsequently sold the painting at a profit, but did not pay any sales tax on the original purchase.
The case highlights the challenges faced by tax authorities in enforcing sales tax laws in an age when many transactions take place online. The use of resale certificates to evade sales tax is not a new phenomenon, but the rise of online marketplaces has made it easier for individuals to purchase goods without paying sales tax. This has led to concerns that some businesses may be facilitating the misuse of resale certificates in order to attract wealthy customers.
The case against Sotheby’s is likely to be closely watched by other auction houses and luxury retailers, as well as by tax authorities in other states. The outcome of the case could have significant implications for the way in which sales tax is enforced in the US, and could lead to greater scrutiny of the use of resale certificates by businesses and individuals alike.