Business,  Law

Sotheby’s Motions for Dismissal of New York Attorney General’s Tax Fraud Complaint

Sotheby’s has launched its rebuttal against New York’s Attorney General in the state’s Supreme Court after the NY AG filed a complaint against the auction house for “fraudulent avoidance of sales tax“. The 27-page memo seeks to dismiss the complaint – using a plethora of case law and statute – arguing that NYC AG Letitia James “fails to allege facts constituting a violation of tax law at Sotheby’s” and therefore cannot establish a violation of the New York False Claims Act (“FCA”). And while things are just starting to heat up, the client in all of this remains unidentified, despite recent art world speculation.

Last November, AG James accused Sotheby’s of breaching its responsibility as a vendor under State Finance Law to collect and remit sales tax. The complaint alleges that Sotheby’s accepted four false resale certificates on $27M. worth of purchases – including a $1.4M. sculpture by Anish Kapoor and a $5.7M. Basquiat – made by a client between 2010 and 2015. Despite having internal tax compliance guidance in place, the auction house allegedly allowed the client, a shipping magnate with “private residences in New York and abroad” to “hang the artworks in [his] home”, then claim false resale certificates – a tax exemption form typically reserved for dealers, not private collectors.

Sotheby’s previously dismissed the issue as a matter between Porsal Equities (the client’s British Virgin Islands entity used to make purchases at Sotheby’s) and the New York AG — both of which reached a $10.75 million settlement in 2018. Now, the dealers argue that the “AG improperly seeks to use the New York False Claims Act (“FCA”) to circumvent requirements of state Tax Law”.


Sotheby’s says it didn’t “fail to assess or remit the sales tax” – rather, the auction house contests, they aren’t required to. Under NY Tax Law § 1132(c)(1)], as long as a seller receives a properly completed resale certificate in “good faith” – that is, without actual knowledge that it’s false or fraudulent – the seller may accept the certificate without inquiry into the buyer’s proposed use of property.

For example, in model scenario #3 provided by the NY Tax Department – which Sotheby’s doesn’t refer to in its response, instead using scenario #2 –  one ‘XYZ Building and Supply Company’ is let off the hook for accepting a false resale certificate only because it “appeared to be properly completed” and they had “no knowledge the certificate was false”, which demonstrates acceptance in “good faith”.

Key words: properly completed. There is one instance in the complaint where AG James alleges [a] resale certificate was accepted, despite being incomplete. Namely, the Sotheby’s KCM filled in – on behalf of Porsal Equities who only half-finished it – the certificate’s business description line to read “I am in the business of art dealer and principally sell artwork”, even though the client (1); “[never wrote this]”; and (2) “had given Sotheby’s a full, accurate description of his shipping business and collecting interests”.

Moreover, if “reasonable ordinary due care is exercised” in acceptance, and it turns out the certificate isn’t what it purports to be, then the courts won’t say the vendor knew otherwise.

To distinguish: according to the NY Tax Department’s scenario #1, “the lack of internal control by a store owner which allowed two clerks to perpetrate a fraudulent practice over a period of time without detection indicates that reasonable ordinary due care was not exercised by the store owner”.

In that scenario, the two clerks knowingly allowed “friends and acquaintances” to make unauthorised tax-free purchases, resulting in the owners liability. Sounds awfully familiar… And as AG James points out, auction house business hinges on the ability to successfully court prospective buyers in a competitive market. As such, business-relationship oriented employees at Sotheby’s – called Key Client Managers (KCMs) – are “closely familiar with their clients” on a “personal level”, potentially fulfilling the “friends and acquaintances” comparison above. James also describes a lack of adequate “structure, practice and policies” in regards to tax compliance procedures at Sotheby’s. Coupled with how a junior employee was able to allegedly issue false resale certificates largely unnoticed, this could also evidence a “lack of internal control”.


Since there’s no duty on a good faith vendor to assess sales tax, Sotheby’s argues that they couldn’t have submitted ‘knowingly false’ tax records to the state, as AG James alleges. To hold a seller liable – which the NY AG will need to successfully plead – the Tax Law requires “actual knowledge”. Per American Cyanamid [et al.] v Joseph [1955], “reason for suspicion and belief that sales were taxable” was not enough for the Courts to determine that a seller (“American Cynamide”) or any of its responsible officers have actual knowledge. Throughout the complaint, AG James alleges that Sotheby’s acted “in reckless disregard of the truth or falsity” of information, per FCA. According to Sotheby’s however, “recklessness in accepting resale certificates is not enough to create an obligation for a seller to collect and pay over sales tax”.

The NY Attorney General is demanding a jury trial and has until Jan. 29th 2021 to respond. Assuming that happens, Sotheby’s has until Feb. 19th to reply. And as to whether Sotheby’s has some plausible arguments? Well, we’ll just have to see how the saga unfolds.

Edit: Sotheby’s filed the motion to dismiss on Friday 18th.

Case details: The People of the State of New York, by Letitia James, Attorney General of the State of New York v. Sotheby’s, Inc. No: 452192/2020