This morning brings a wry juxtaposition of stories about tax-free art storage facilities that are meant to allow buyers to defer taxes on their art purchases until they reach a final end-user. At Barron’s we get a warning not to use them; in the New York Times, we get excitement over the growth of Delaware as a local version of a freeport.
Over the last few years, freeports have gained notoriety as a perceived marker of the growth of art as a global asset. (We’ve called this art as reserve currency.) Most of the coverage of the freeports in Geneva, Luxembourg and Singapore suggest their purpose must be some form of money-laundering.
This was the theme of a Barron’s story over the weekend that concluded that for the honest art collector, using a freeport would expose one to reputational risk. “The benefits of freeports, if you play by the rules, aren’t worth the hassles of getting dragged into an investigation or triggering an audit with the IRS. Sometimes it’s best to be boring.”
This comment despite the story’s own emphasis that freeports offfered little shielding for assets. Barron’s quoted a former law enforcement official in private practice saying, ““Yes, the freeports are out of the traditional reach of U.S. law enforcement, but that’s not to say they’re not able to identify, through other means, what U.S. citizens have, how they’re transferring holdings, and what money is associated with those transactions.”
Barron’s even talked to two art advisors:
- “At their most basic level, they are storage facilities,” says Karen Boyer, principal at the New York art advisory firm Elements in Play. “However, one of the attractions is that they are tax-free facilities. It’s an easy way to store money and not pay taxes,” she adds, noting that “tax dodging is a big factor in their growth.”
- Todd Levin, director of Levin Art Group, a private consultancy, says, “I’ve always advised my clients to steer clear of the whole dynamic. Basically, it’s money laundering in the cleanest, nicest, most elegant way. And if it’s not money laundering, it’s an attempt to avoid sales and use tax [i.e., duties]—which is just a variation of money laundering.”
Interestingly, the entire tone of the freeport discussion changes when the facilities are located on US soil. Here’s the Times:
In June, another art storage complex opened in Delaware, a 50,000-square-foot warehouse run by a Philadelphia art storage company, Atelier, that promises to keep the art at a constant 68 degrees. Next month, Crozier Fine Arts, which operates storage spaces in Manhattan, New Jersey and other areas, is scheduled to open a 40,000-square-foot storage space in Delaware.
This state is special because storage spots in most other states cannot offer the same tax advantages as Delaware. It is one of only five states without any sales or use tax, meaning that a Manhattan collector who might owe, say, $887,500 in sales tax on the purchase of a $10 million painting at Sotheby’s in New York, would owe nothing by shipping the art to Delaware directly after purchasing it.
Once there, art can be bought and sold within a storage space without any tax on the transactions for as long as it remains there.
Perhaps more imporant, the freeports in Geneva and Singapore are said to be booming while Luxembourg’s facility struggles to find a clientele. But in Delaware, the first facility owned by Fritz Dietl seems to be finding a strong market:
“In the past, they would have shipped it to Switzerland,” he said one morning recently, gesturing at about 20 large crates in a 16,000-square-foot, climate-controlled space. The artworks packed in the crates were worth in total about $10 million to $15 million, he said. But more would arrive soon, and he was readying another, 20,000-square-foot room next door in the same warehouse. “Within a month, it will be close to $100 million,” he said. “I am planning to have this full by the end of next year.”
Art Collectors Find Safe Harbor in Delaware’s Tax Laws (The New York Times)