Sotheby's to pay $6.25 million to settle state lawsuit alleging tax cheating by clients

Auction house Sotheby’s will pay $6.25 million to New York State to settle a lawsuit alleging the firm helped clients cheat their way out of paying state taxes on tens of millions of dollars in purchases of pieces by Jean-Michel Basquiat, Andy Warhol and other artists.

The Manhattan-based fine arts broker, one of the largest in the world, will also make what the office of state Attorney General Letitia James called "significant reforms to ensure its employees do not violate New York tax laws."

"Sotheby’s intentionally broke the law to help its clients dodge millions of dollars in taxes, and now they are going to pay for it," James said in a statement.

A Sotheby’s spokeswoman, Karina Sokolovsky, said in an email: "These allegations relate to activity from many years ago — in some cases over a decade ... Sotheby’s admitted no wrongdoing in connection with today’s settlement and remains committed to full compliance with all applicable law."

The attorney general's press office declined to answer questions, but supplied a list of 10 artists whose work was allegedly sold tax-free, including painters Keith Haring and Gerhard Richter as well as sculptors Alexander Calder and Anish Kapoor.

In Thursday’s announcement and James's 2020 lawsuit against Sotheby’s, filed in  state Supreme Court in Manhattan, prosecutors alleged that between 2010 and 2020, at least eight Sotheby’s clients avoided paying sales taxes by filing resale certificates in which they claimed to be art dealers buying pieces for business purposes, rather than collectors purchasing for themselves. A resale certificate exempts a purchaser from paying 8.875% New York City and state sales tax.

Prosecutors alleged that Sotheby’s accepted the certificates even when its employees knew the art was going into clients’ private collections.

They described a high-pressure, hypercompetitive atmosphere at Sotheby’s sales departments, where staffers known as key client managers served the biggest collectors, researching their tastes and business prospects, taking them to meals and visiting them at home to facilitate more transactions for the firm.

The 2020 suit focused on the relationship between a key client manager just three years out of college and a client identified only as "the Collector," a shipping company owner with homes in New York City and Miami and a taste for Latin American and Contemporary art.

He placed "enormous pressure" on Sotheby’s for special treatment, including purchase of a $5.7 million Basquiat by installment, and threatened to go to rival house Christie’s if his demands were not met, prosecutors said. The client manager’s work for the unidentified collector helped win her praise from seniors at Sotheby’s, as well as a bonus and a raise, according to prosecutors.

The collector sometimes used a British Virgin Islands-registered company, Porsal Equities, to make his purchases. In 2018, James’ office announced a $10.75 million settlement with the company in connection with more than $50 million worth of art and other goods purchased in New York.

In 2010, according to the lawsuit, in a conversation at a tony Sant Ambroeus coffee bar in Manhattan, the same collector, who was mulling the purchase of a $1.4 million Kapoor piece, asked his client manager why some people did not pay sales tax on their art.

She told him about the resale certificates and partially filled one out for him, prosecutors said. The form enabled him to avoid what would have been about $126,000 in sales tax.

Among his subsequent purchases were two pieces, birthday presents for his wife, totaling $543,500, and the Basquiat. Altogether from 2010 to 2015, prosecutors said, the collector bought 35 pieces for $27 million from Sotheby’s using resale certificates, avoiding roughly $2.4 million in taxes.

A client accounting department at Sotheby's, described by prosecutors as "blinkered," did not know about the practice, prosecutors said, but at least 12 employees "at all levels of Sotheby’s" knew the collector was using resale certificates to buy art that was delivered to his apartment, or was displaying the pieces he bought, in some cases because auction house staff assisted with installation, prosecutors said.

In a 2020 filing in answer to the lawsuit, lawyers for Sotheby’s said that, in general, a seller has "no duty to police or investigate its clients."

Most of the alleged wrongdoing was "limited to the conduct of one junior employee dealing with one Sotheby’s client," prosecutors said, with only "limited, vague" allegations made against other employees.

The client manager had "misunderstood" tax law requirements and was not a "knowing participant in a fraud scheme," they said.