SEATTLE—After shutting down an investigation late last December of art collectors who may not have paid taxes on their purchases, the Washington State Department of Revenue (DOR) abruptly reversed itself last month, announcing that it would aggressively pursue them. “Our core mission is to collect taxes,” said recently appointed DOR director Cindi Yates. “We have to do that in a fair and consistent manner.”
The reversal came days after the Seattle Post-Intelligencer published a series of articles describing how the agency treads carefully around wealthy collectors, sometimes slashing their tax bills and sometimes ignoring them altogether.
About one month ago, Linda Fryant, the agent who spearheaded the investigation, was put on paid administrative leave but returned on June 2. Her supervisor Brian Moran was forced to accept a demotion and relocated out of state, to Florida, where he remains.
Many citizens, including art collectors, are confused by the controversy and are demanding answers about what happened. In response, Yates says, she is launching an investigation into the matter; Washington’s department of audit is conducting its own investigation as well. Says state auditor Brian Sonntag: “There are some questions, I think, that need to be answered.”
Most of the major collectors who spoke to the newspaper seemed baffled by the on-again, off-again policies of the tax agency. Art patron and collector Bagley Wright says he can’t imagine what was going on at the Department of Revenue.
“What are they doing over there?” he asks. “Why did they let that woman go who collected from us and everybody else? I always thought that whatever you buy in New York and have shipped to Seattle to avoid the (New York) tax was perfectly all right. When we learned otherwise, we paid right away.” Wright stresses that he thinks the tax ought to be consistently and fairly collected: “It doesn’t sound as if that’s happening.”
Washington State has no income tax. Instead, it relies on sales and property taxation. The tax in question is called a “use” tax, which people owe if they buy something out of state and don’t pay the equivalent sales tax at the point of purchase. Although use-tax legislation has been on the books since 1935, the state had not pursued it seriously in the past few decades.
However, in 1995, a year after Microsoft co-founder Bill Gates bought a Leonardo da Vinci manuscript (Codex Leicester) at auction for $30.8 million, his lawyers sought to have him excused from the use tax. They contacted Len McComb, then DOR head, to work with Gates’ legal team to draft what has come to be known in tax circles as the “Da Vinci exception.” In return for showing the work at a museum, the collector gets a pass on the use tax owed.
At the time, McComb said, chances of it being approved by the legislature were good, but other art collectors “went crazy.” (Most were not paying the tax anyway.) Gates’ attorney Richard Ford said the idea was dropped, and Gates not only paid the tax but loaned the manuscript to the Seattle Art Museum for an exhibit.
In 2003, tax discovery agent Fryant received a tip about an art collector who was buying millions of dollars worth of art and paying no use tax. After investigation, she discovered a way to find out how much tax other major collectors owed.
It appeared that as much as $100 million could be collected in back taxes, plus approximately $25 million a year going forward. There is a four-year statute of limitations on collection of the tax. But Fryant learned that collectors go out of state to buy more than $300 million in art each year, and that the state was getting a trickle of the tax due.
Her investigation focused on records she had obtained from Seattle-based Artech, a full-service company that packs, ships, stores and hangs fine artworks. However, the investigation was frequently blocked or stalled before it was eventually shut down altogether. It is currently still on hold.
During the investigation, for instance, Fryant’s supervisor Moran received an e-mail from his boss reminding him to be careful of “high profile or sensitive issues (Seattle Art Museum [SAM] donors being the latest example).”
Theoretically, art collectors who came forward voluntarily (usually through their lawyers) were able to cut better deals than those who received summons. However, internal records showed that some collectors had cut great deals (50 percent on the dollar) even after receiving a summons. Most art collectors claim that they had no idea they owed the tax.
Not all collectors agree with the use tax. Art collector Jay Glazer said he thought it unfair and unenforceable.
Meanwhile, art museums are worried about a possible chilling effect on both collecting and loaning artwork. Through an e-mail, Mimi Gates, director of SAM, stated that she and the board “agree with the need for people to comply with tax laws. We hope that this determination by the DOR is approached in such a way that it would not discourage making art accessible to the community.”
Fryant and the rest of Moran’s staff had visited museums to check who was showing what and just when the work had been purchased.