Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 570.0150


570.0150 Fine Art. An individual purchased many pieces of fine art from out-of-state sellers without paying sales tax reimbursement or use tax. The paintings were either placed on the walls of the individual's home or in a vault there. This home is and has been a California historical monument. Based on the following, it was concluded that this individual's purchases of fine art was for the purpose of investment and not for resale and the paintings are therefore subject to use tax.

The following factors tend to show that he was not an art dealer. (1) He did not obtain a seller's permit which was required to be held by each person engaged in or conducting business as a seller in California. (2) He also did not file sales tax returns listing his gross receipts which he would have been required to do as a seller. (3) He apparently did not obtain a local business license. (4) He also appears to have not notified the IRS about the details of his art activities. He represented to the IRS that the paintings were not inventory of a business because he declared the paintings to be capital assets for which depreciation deductions and capital gain treatment benefits were taken.

There was no desire to immediately resell any paintings because he would have incurred either a loss by a sale at or below cost, or a small profit which did not please the investment goals of a person with his stature. He needed to hold each painting "off the market" rather than as inventory in order to treat it as a depreciable asset and to allow an increase in value prior to eventual sale. The primary purpose for the initial storage or wall hanging of each painting at his home was to retain the paintings as an asset for the necessary holding period in order to allow the appreciation in value. That use was not a demonstration or display for purposes of attempting to make an immediate resale. Once a painting was held long enough to appreciate in value sufficient to satisfy this individual, then an attempt was made to sell it for a long term capital gain. 9/19/94.