On April 9, 2020, the Manhattan District Attorney's Office announced a substantial settlement with Christie's, requiring the auction house to pay $16.7 million for the ultimate benefit of the State. The settlement related to Christie's withholding of taxes that should have been collected and remitted on private sales of artworks that were made in, or delivered to, New York between 2013 and 2017. This news served as a strange interruption from the non-stop, COVID-19 pandemic reporting. But, according to Art Law Co-chair Bill Charron, there is a common thread: just as the Coronavirus is curbing the social practice of handshakes, the Christie's settlement should be a cautionary alarm to art market participants to move away from a "handshake deal" mentality and similar lax transactional practices.
The art market has historically, and notoriously, been opaque and less uniformly regulated than other markets. It relies on a patchwork of laws including those promulgated at the federal, state, and city levels, as well as on self-reporting by market participants. The privacy and even anonymity that are typical of art deals can promote an atmosphere of: "Who will ever know?" It is perhaps unsurprising that even large, institutional sellers engaged in private sales could get wrapped up in such a mindset; yet, according to White Collar partner Scott Schirick, this false sense of security is misguided given the wide array of investigative tools at the disposal of relevant authorities. Indeed, the severity of the penalty recently imposed on Christie's appears to be attributable in part to the company's continuing failure to report, even after realizing in 2015 that it had mistakenly failed to pay New York taxes in earlier years.
Recent enforcement initiatives, however, have started to awaken sellers to the need to more carefully paper and account for their transactions. Two years ago, the U.S. Supreme Court, in the Wayfair case, caused a seismic art market stir when it held that states may require out-of-state sellers to collect and remit sales and use taxes. Recent anti-money laundering regulations in the European Union have required sellers and brokers in Europe, as well as those in the U.S. who do business with European parties, to document customer identity and beneficial ownership (such protocols are often referred to as "Know Your Client" or "KYC"). Art Law Co-chair Megan Noh notes that pending legislation in the U.S. would create similar KYC and reporting obligations for certain art market participants as part of an existing, broader anti-money laundering ("AML") statute. These legal changes are invitations for governmental bodies to knock on a seller's door and demand a reckoning, with the threat of criminal prosecution for non-compliant sellers at their backs.
New York's settlement with Christie's is another warning for sellers to shore up their compliance efforts. New York continues to be aggressive in looking for seller misconduct, which is in keeping with the general trend of tighter regulation. The current public health crisis did not mitigate the State's enforcement; in fact, the District Attorney's press release announcing this Christie's settlement suggests that the State is now even more actively seeking funds for public use through its enforcement powers.
The Christie's settlement also follows on precedents established by two high-profile investigations settled with the Attorney General in 2016: one with a prestigious international art gallery in relation to sales tax, and another with a major collector-dealer in relation to the use of resale certificates and payment of sales and use tax. Tax partner Michael Dunworth emphasizes that, despite the challenges posed by remote working environments and limited availability of logistics vendors during, it is imperative that transactional parties ensure that they comply with New York's comprehensive and nuanced rules for the out-of-state delivery of art property, including engaging shipping/transportation services and registering as a sales tax vendor where and when required.
The continued scrutiny of tax compliance in the art transactional context, as well as the still-developing regulatory push on KYC and AML issues, are stark reminders that art market participants need to know their legal responsibilities, which have become more myriad. Pryor Cashman's full-service team, with its Art Law practice at the helm, is here to help you navigate the increasingly congested minefield. Our transactional, litigation, tax, and white collar criminal attorneys can help you most ideally to stay out of trouble, but can also help if you find yourself already in trouble, or starting to implement more careful practices a bit late.
Handshaking these days can have drastic consequences. Handshake deals and other informal or improperly-documented art transactional practices can easily do the same.
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