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“No Duty to Police Clients”? The Continuing Saga of NY Attorney General’s Sales-Tax Suit vs. Sotheby’s

Artnet‘s art-market reporter Eileen Kinsella beat me to the punch today in reporting on Sotheby’s rebuttal of the NY Attorney General’s complaint that accused the auction house of complicity in a client’s allegedly “fraudulent avoidance of sales tax.”

Eileen cited but didn’t link to Sotheby’s 27-page Memorandum of Law, which seeks the court’s dismissal of the AG’s complaint. (You’re welcome.)

By perusing the new Sotheby’s filing, you will discover that its arguments boil down to three contentions that the AG’s office will likely contest (at least in part):

—Sotheby’s maintains (p. 10 of the Memorandum) that the auction house was not legally obligated to collect sales tax: “The law is clear that a seller has no duty to police or investigate its clients, or conduct additional diligence to ensure the accuracy or truthfulness of the information provided in a resale certificate” (which exempts the buyer from paying sales tax).

—Sotheby’s states that it neither knew nor recklessly disregarded the alleged fact that the purchaser to whom it issued a resale certificate wasn’t legally entitled to one because he was buying for personal use, not for resale in connection with business activities.

—Sotheby’s asserts that it was not complicit in any alleged sales-tax transgressions: “The wrongdoing alleged is limited to the conduct of a very small number of non-management employees, and most of the allegations relate to the conduct of one junior employee dealing with one Sotheby’s client. On this basis, the OAG [Office of the Attorney General] tries to invoke the FCA [New York’s “False Claims Act”] against the entire Sotheby’s organization, seeking statutory penalties and damages that, under the FCA’s trebling provisions, are punitive. The OAG is seeking to punish Sotheby’s in this case, rather than simply recover sales tax. In fact, the State has already been compensated for unpaid sales tax: Two years ago, it settled with the customer at issue, who agreed to repay tax the OAG claims was due.”

Having reviewed the court papers to date, I have an opinion about what they indicate regarding auction-house business practices, but I’m not going to presume to decide this case in this post. I’ll withhold judgment, at least until we hear from the Honorable Andrew Borrok.

Judge Andrew Borrok’s profile photo for his court bio

With the AG’s response due by Jan. 29, and Sotheby’s reply to that response due Feb. 19, the resolution of this case could drag on for quite some time…

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