A friend opened her solo art exhibition at a Detroit gallery last month. When my spouse and I bought one of the six pieces she sold that night, we paid Michigan’s 6 percent sales tax on the purchase.
Turns out not all art buyers are like us. High-end collectors can delay taxes indefinitely by buying and storing their art in “freeports,” a technique I learned about in the sci-fi spy thriller Tenet.
What are freeports?
Professor and Chair of International Studies at the University of San Francisco John Zarobell explains freeports date back to the 1800s. They gave importers a way to store unsold goods and defer taxes until the product was shipped to a buyer.
Today, there are about 3,500 freeports in the world, usually near shipping ports or airports, that exist beyond any government’s tax jurisdiction. In theory, their purpose is to spur manufacturing, trade, and investment. That’s why the United Kingdom plans eight new freeports in the wake of the coronavirus pandemic and Brexit. And it’s why the US established equivalent foreign-trade zones (FTZs) in 1934, in response to the Great Depression.
But in recent years, freeports in places such as Switzerland, Luxembourg, Singapore, Hong Kong, and Delaware have become dedicated to warehousing high-value art. The largest and oldest, in Geneva, holds 1.2 million pieces and has been called the “greatest art collection no one can see.” For comparison, the Louvre in Paris holds 380,000 objects and displays 35,000 of them.
Zarobell explains that some collectors use freeports to make works of art “disappear.” Some pieces may have been stolen, others lost in conflicts. “We don't know how many were destroyed in World War II, or might actually be sitting in a freeport,” Zarobell says.
At the same time, some countries allow collectors to temporarily remove art, tax-free, from freeports so it may be restored and exhibited, steps that increase market value. Some allow tax-free sales of art as long as the pieces remain within the facility.
Tax-free, private places that help strengthen the art market: What could go wrong?
Consider the sales trail of the most expensive painting ever purchased, the Salvator Mundi. In 2005, an art hunter bought the painting for $1,175 at a New Orleans estate sale. In 2013, after experts asserted the painting was by none other than Leonardo da Vinci, art dealer and freeport magnate Yves Bouvier purchased the canvas for $80 million. The next day he sold it, tax-free in his freeport, to Russian fertilizer tycoon Dmitry Rybolovlev for $127.5 million.
Four years later, a buyer widely reported to be working on behalf of Saudi Arabia’s Crown Prince Mohammed bin Salman purchased the painting at New York auction house Christie’s for $450.3 million.
Normally, a buyer in New York State would owe 8.875 percent sales tax on the purchase. In this case: a cool $39.9 million. Alas, New York State has not collected a dime.
Originally, the painting was scheduled to be exhibited at the Louvre Abu Dhabi. But it’s not there. Nobody knows, or is saying, where it went.
Today, buyers and sellers complete transactions like this all around the world, with art appreciating in value, locked away in freeports for only their owners to view. Maybe this isn’t a bad outcome. It’s their art, and they can do what they want with it. And if the art leaves the freeport, they’ll eventually pay their taxes.
Yet… Remember the Panama Papers? The European Union has since clamped down on 82 freeports after it determined their tariff and duty status helped finance terrorism, money laundering, and organized crime.
Here in the US, the Senate Permanent Subcommittee on Investigations sounded alarms in July 2020 about Russian oligarchs using freeports to avoid US sanctions following Russia’s first invasion of Ukraine. How? By using shell companies to anonymously buy and sell high-value art.
Anti-money laundering rules are stronger now. And last year, Congress added the art market to the 1970 Bank Secrecy Act, making it harder for buyers to hide their identities. That should help curb some crimes and other abuses.
But why are tax benefits still necessary?
Freeports have dramatically evolved from their original purpose 200 years ago. Today, who benefits from tax-free high-value art sales within freeports, beyond buyers and commission-collecting brokers?
The art market is vast and growing, especially among the incredibly wealthy but also among average investors. And now NFTs, or non-fungible tokens, allow people to buy digital forms of visual art that can be very valuable but don’t require warehousing at all.
Can the art market afford to give up those favorable tax regimes? Would governments ever shut the door to these playpens for the mega-rich?
In the meantime, I’m proud to have become a new, tax paying, art collector. I’ve just got to figure out where to display our sculpture.
The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.
