Freeports? What’s the Use (Tax)?

Your Guide to State, Local, Federal, Estate + International Taxation

Art investors in the United States that are looking for a tax haven may not have to look very far anymore. Fritz Dietl has opened a fine arts storage facility in Delaware to keep investors’ artwork closer to home. These facilities are known as freeports.

It is no surprise that spending millions of dollars on a piece of art is going to cost you a pretty penny in sales tax. It may be a surprise to some of you, though, that Delaware is one of five states without sales or use tax. We all know what sales tax is, but for those of you who are unfamiliar with use tax, let me explain. Use tax is imposed when a person in a state with sales tax buys a large ticket item from a state without sales tax. For example, let’s say that you live in North Dakota (a state with sales tax), and you buy a car in Montana (a state without sales tax). You may think that you just got away with escaping the hefty sales tax on such a purchase. However, as soon as you take the car to your residence in North Dakota, you will be responsible for paying a use tax to make up for it.

With the growing popularity of purchasing art as investments, it is expected that investors will look for these freeports in order to avoid the pricey tax bill. Traditionally, they would ship the art to places like Switzerland or Luxemburg, but why incur the risk and expense of shipping it overseas when you can ship it somewhere right here in the United States? Sounds like a great idea.

So far there is some controversy regarding the legality of these freeports. Some look at it as money laundering, while others say you are just deferring your tax liability. That being said, if you follow the rules and make the correct disclosures, you can store your artwork in these facilities and take advantage of the tax benefits that they offer. If you sell you artwork from there, you have just passed on the sales tax to the next buyer. However, keep in mind that you still need to pay taxes on the gain from the sale.

The other catch to these freeports, even when you do follow the laws, is that you are likely to be watched by the authorities. The use of a facility of this sort with the deferral of taxes on the purchase of fine art may lead to an investigation or an audit (which no one wants to deal with.) So before you decide that you want to use a freeport, make sure that you are willing to deal with the hassle that may ensue.

By Joanna Yergler