Scottsdale art galleries seek reprieve from new sales tax

This story appeared on Arizona Sonora News on March 20, 2015.

Scottsdale Art Auction1

Brad Richardson, owner of Legacy Gallery in Scottsdale, walks through the Scottsdale Art Auction room. Richardson is threatening to move his business out of state if a sales tax exemption isn’t passed by the Legislature.

SCOTTSDALE — Is a new tax creating another case of the struggling artist? Maybe.

Regardless, a group of Scottsdale art gallery owners say they are being crippled by a sales tax that kicked in at the beginning of this year. The new regulation adds the transaction privilege tax, Arizona’s sales tax, for fine art sales to out-of-state buyers who purchase the art here and have the seller ship it out of state.

This raises the sales tax of these out-of-state sales from the 1.65 percent Scottsdale city sales tax to 7.95 percent. Scottsdale art gallery owners say they are already losing business now that word has gotten out in the art connoisseur community and fear it could drive them out to Western art hub rivals like Santa Fe, N.M. and Jackson, Wyo.

“It really puts us in an uncompetitive position now that this is taxed,” said Brad Richardson, owner of Legacy Gallery in Scottsdale and a dealer at Scottsdale Art Auction, who added he gets more than half of his customers from out of state.

Richardson and other gallery owners are pinning their hopes on SB 1120 from Republican Sen. Debbie Lesko of Peoria, which would exempt those kinds of sales from the tax.

Not everyone is buying into the plight of the multimillion-dollar Scottsdale art galleries.

“I just can’t help thinking you’re overreacting to this,” Sen. Steve Farley, D-Tucson, told Richardson during a Senate hearing.

Farley, who is an artist himself, pointed out that people purchasing these pieces of art — and would likely be able to afford the extra tax — could get around paying it if they really wanted.

As with many tax-related matters, the details get messy.

The issue stems from sales tax reform legislation passed through the Legislature and signed into law in 2013. Among the provisions of that TPT reform was ending the sales tax exemption for works of fine art shipped out of state that were purchased here, which had been in effect for more than 30 years.

That legislation was crafted by Lesko.

“At the time people thought, ‘Why are we doing that?’” Lesko said. “So, we put a provision in the bill to eliminate that [exemption] and nobody talked about it until Jan. 1, 2015 came around and my bill went into effect.”

For Bob Pejman, owner of Pejman Gallery in Scottsdale, that came on Feb. 10 when he received a letter from the Arizona Department of Revenue in the mail informing him of the new sales tax. “The entire month of January we didn’t know that we should be collecting this tax,” he said.

Pejman then had to pay the sales tax dollars not collected for the month out of pocket. The prices for pieces of art in these galleries range from hundreds to hundreds of thousands of dollars. At Scottsdale Art Auction, some pieces go for more than $1 million.

Now, Lesko is seeking to rectify her tax increase on the art galleries. She said the art gallery owners contacted her, but at first she was reluctant to pursue the exemption.

“After much analysis with my staff members and talking with different gallery owners, I felt that it indeed was a worthy thing to exempt that these businesses especially the auctions do bring in tourists from all over the nation,” Lesko said.

On Feb. 16, Lesko filed the legislation as a strike everything amendment to a bill. The exemption would apply retroactively to the beginning of the year. SB 1120 already cleared the Senate on a 19-9 vote and received approval from one House committee.

Supporters of the legislation are working against more than one deadline. The Scottsdale Art Auction begins April 11 and other auctions occur during this time bringing in a great deal of business. The bill also needs from one more committee before it can be heard by the whole House and the cut off for committee hearings is fast approaching.

A main issue guiding Lesko’s reasoning behind pushing the legislation is that no other state has this tax — something gallery owners are quick to point out.

Ken Strobeck, executive director of the Arizona League of Cities of Towns, however, said it’s simply not true that no other state taxes this activity.

When someone buys a piece of art in any state that person would have to pay the use tax in the state the art gets shipped back to, if the state has that tax. For example, if someone were to purchase art in New Mexico and have it shipped to Colorado, that person would pay Colorado use tax.

“Any of those people who are out-of-state and buying art and come from a sales tax state are legally obligated to pay use tax on their purchase when they get back home,” Strobeck said.

The problem is not everyone follows that to the letter of the law, however. “About 99 percent of them never [pay] that,” he said. Arizona’s TPT on these sales isn’t as loose.

The League of Cities and Towns is against the exemption because it would compromise the uniform tax base it is trying to achieve, Strobeck said.

As Farley noted, art consumers can get around the sales tax through federal interstate commerce law by placing a hold on the piece in Scottsdale and leaving to buy it from out of state.

“They already have the break if they really want it,” Farley said. “So, why should we give them a special exemption just to make it slightly more convenient for their customers who can already afford to buy a $100,000 sculpture or painting?”

The art gallery owners insist this isn’t the way they want to do business.

Richardson said people being in the room drives up the prices for art being sold at the auctions and having people come to Scottsdale and other cities in Arizona helps drive tourism and spending.

“We want an active room,” Richardson said. “We want people to be here and see the art and they will have a tendency to spend more.”

John Marzolf, owner of the Biltmore Art Gallery in Scottsdale, said having people buy from elsewhere would make it more difficult to actually make the sale.

“If they say, ‘I want to go home and think about it,’ or ‘I’m going to come back and look at it,’ you’re lucky if you get 20 percent that come back,” Marzolf said.

“You want to be able to sell it while they’re there,” he said.

During a Senate Finance Committee hearing on the bill, Sen. Lynne Pancrazi, D-Yuma, raised concerns that this could open the door for other groups to come out to the Legislature and ask for their out-of-state sales to be tax-exempt, and “there goes the TPT reform right out the door.”

Farley also said the excess of sales tax exemptions cost the state billions in potential revenue. “I think it’s time to look at all these exemptions very carefully as they come forward and I think we should look at the ones already in place as well,” Farley said.

Legislation introduced this session would also see sales tax exemptions for crop dusters, billboard rentals and aircraft equipment. The only out-of-state sales currently exempt under the TPT reform law crafted two years ago are for motor vehicles, which is meant for car auctions.

Richardson is threatening to take his business out of the state if the sales tax exemption doesn’t get passed. He said he’s already explored Las Vegas as option for moving his Scottsdale gallery.

“If collectible cars get an exemption, then we think fine art should, too,” he said.

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