Art collectors find a tax break on museum walls
Collectors who buy art in one state but live in another can owe thousands even millions of dollars in state “use taxes.” But if they lend the recently purchased work first to museums located in a handful of tax-friendly states, including Oregon, the transaction is often tax-free.
The New York Times
EUGENE, Ore. — The Jordan Schnitzer Museum of Art, tucked into a quiet corner of a college campus in Eugene, is hardly the epicenter of the art world. Yet major collectors, fresh from buying an Andy Warhol or a Jean-Michel Basquiat or another masterpiece in New York, routinely choose this small, elegant redbrick building at the University of Oregon to first exhibit their latest trophy.
The museum’s intimacy and scholarship are likely to play some role in their choice. But a primary lure for the collectors is often something more prosaic: a tax break.
Collectors who buy art in one state but live in another can owe thousands, tens of thousands, even millions of dollars in state “use taxes”: taxes often incurred when someone ships an out-of-state purchase home. But if they lend the recently purchased work first to museums such as the Schnitzer, located in a handful of tax-friendly states, the transaction is often tax-free.
Beyond the benefit to museums, this tax maneuver has produced a startling pipeline of art moving across the United States as collectors cleverly — and legally — exploit the tax codes.
Dozens of important works have come to the Schnitzer in recent years, largely because of the tax break, museum officials believe — so many that the museum has a program, “Masterworks on Loan”; the featured works are housed in a second-floor gallery.
Similar loans — which rarely extend beyond a few months — also flow into other museums in Oregon, and occasionally New Hampshire and Delaware, all states that have neither a sales nor a use tax.
The Portland Art Museum, for example, has a long history of receiving art loans from collectors, including, most recently, Francis Bacon’s triptych “Three Studies of Lucian Freud,” one of the most expensive paintings ever sold at auction.
Portland officials say collectors lend art for a variety of reasons, not just for the tax break. But only a few weeks after the painting sold for $142 million this past fall at Christie’s in New York, it landed, to the surprise of many, in the Portland museum, where it drew large crowds for 15 weeks.
By shipping the painting first to Oregon, instead of to her home in Las Vegas, the new owner, Elaine Wynn, may be eligible to avoid as much as $11 million in Nevada use taxes, though it was not clear whether she intends to take advantage of the break.
The practice generates debate between those who appreciate how it fosters public access to art and those who suggest such access comes at too high a price to taxpayers. For example, do taxpayers in, say, California understand that they have given up millions of dollars in tax revenue over the years to, in effect, underwrite the display of paintings in other states?
“Some states are going to become aware of this and realize what potential revenue they are missing under the current laws,” said Steven Thomas, a lawyer in Los Angeles who advises art collectors on tax matters.
Supporters defend the practice as an important way to ensure public access to significant art before it disappears into private collections. Robert Storr, the dean of the Yale School of Art, described it as a “great resource” for museums. At the Schnitzer, a teaching museum, curators and members of the faculty use the loans in their programs.
“The two museums, the Portland Art Museum and the Jordan Schnitzer Museum of Art, are the beneficiaries of getting amazing works of art that they would not get,” said Jordan Schnitzer, a businessman and collector who donated millions of dollars to the Eugene museum that bears his name and served on the board of the Portland museum.
Critics of the practice also question whether museums curry favor with possible donors by accepting loans, and they complain that works are sometimes exhibited without the context or curatorial judgment that museums traditionally provide. A recent visit to the Portland museum found some lent works exhibited haphazardly: a cubist work from the 1950s, for example, placed amid American art from the 1980s.
States employ use taxes to compensate for residents who avoid sales taxes by shopping in another state. The tax rate is generally the same as the sales tax, and people are supposed to calculate what they owe on items bought out of state, then pay that amount as part of their tax filings.
Art collectors who seek to avoid the tax typically offer a recently purchased work to a museum in one of five states — New Hampshire, Oregon, Alaska, Montana and Delaware — that do not have a use tax so that the loan does not incur a tax.
As long as the painting stays at the museum for an extended period, typically more than three months, before being shipped home, the practice in several states where collectors live, such as California, is to regard the exhibition as a first “use” of the item and waive any tax. The result is a tax-free transaction.
The Hallie Ford Museum of Art at Willamette University in Salem, Ore., the Delaware Art Museum in Wilmington and the Hood Museum of Art at Dartmouth College in Hanover, N.H., are among other institutions where collectors have lent art because of tax considerations.
The tax strategy is 100 percent legal, experts say, as long as all stages of the museum transfer are handled correctly.
Schnitzer officials said that many California collectors had taken advantage of the tax provision. “We are on their way home,” said Jill Hartz, the executive director of the museum.
California explicitly outlines a “first use” exemption in its tax code. It says that property, whether a couch or a Caravaggio, that is first “used” out of state for more than 90 days does not incur the tax.
Jerry Kohl, a California businessman, took the tax break when he lent a Warhol to the Schnitzer two years ago. But he said he would have made the loan even without any tax consideration. Still, he said, he thinks the tax code should be tightened.
“The provision should require owners to lend a work out at least every five years instead of just once,” he said.