Based on recently disclosed information during a discovery hearing August 24, 2022 in the New York State Supreme Court in Manhattan, Sotheby’s will need to vigorously defend the expanding sales tax resale exemption certificate fraud case brought by the New York State Attorney General.
“... the Attorney General must allege that the defendant “knowingly” made or used a “false claim, record or statement” to avoid an obligation to pay the government. ”
Procedural history
The issue with the NY AG, Sotheby’s, and fraudulent sales tax exemption certificates has been ongoing for more than a decade.
As set forth in the original complaint, in 2010 a Sotheby’s employee advised one of its clients, an individual collector and one of his companies, Porsal Equities, a British Virgin Islands-based holding company, to submit a resale certificate to avoid paying New York sales tax on his upcoming purchases.
The Sotheby’s employee knew the client’s occupation and also knew that he had no intention of reselling the art. Nonetheless, the employee partially completed a resale certificate and provided it to the client to complete. The client returned the resale certificate, left the "Purchaser Information" line blank, but it stated he was an art dealer and principally sold fine art. Although neither of those statements were true, the resale certificate was filed, reviewed and processed by Sotheby’s accounting department as a valid exemption certificate accepted in good faith.
Subsequent to providing the certificate to Sotheby’s, the client purchased $27 million in artwork, relied on the exemption certificate, and did not pay sales tax on any of the purchases. In 2018, the Attorney General's office settled with Sotheby’s client and his company for $10.75 million in taxes, penalties and damages under the New York False Claims Act.
Notwithstanding the settlement with its client, two years later the NY AG filed a lawsuit against Sotheby’s seeking damages plus civil penalties for violations also under the NYFCA. Sotheby’s responded by filing a Motion to Dismiss due to the complaint not having adequately pled any violations of tax law and that it should not be held responsible for the misuse of resale certificates distributed by low-level employees. Additionally, the U.S. Chamber of Commerce filed an amicus curiae brief which also set forth the argument the AG failed to establish the requisite NYS Tax Law violation necessary to bring a claim under the NYFCA.
In denying the Motion to Dismiss on September 27, 2021, the judge stated that Sotheby’s allegedly “not only willfully turned a blind eye” regarding the resale issue by “bifurcating the Client Accounting Department” from other Sotheby’s employees who had client relationships and “actual knowledge” but also actively conspired with the client to conceal or avoid and decrease their tax liability.
Sotheby’s appealed the Motion to Dismiss denial to the Appellate Division of the New York State Supreme Court, but the court affirmed the lower court’s decision in April 2022, and the case proceeded.
DISCOVERY
A discovery conference was held on August 24, 2022 back in front of Judge Borrock with the New York State Supreme Court during which the AG’s office represented that the exemption certificate issue extends well beyond the one client and that it had uncovered an entire tax fraud scheme involving at least 12 additional clients. This possibility may explain why Sotheby’s purportedly resisted a request by the AG’s office in March 2022 for records of some of its largest clients.
Sotheby’s Siloed structure
The AG claims that Sotheby’s intentionally isolated their accounting department from their employees on its sales teams and did not have policies in place to oversee communication between the two departments, thereby permitting the fraudulent practice to continue without notice. If these and the other allegations are ultimately proven to be true, it would indicate that Sotheby’s did far more that merely not accepting resale certificates in good faith which could potentially result in punitive damages being assessed under the NYFCA.