When Resale Certificates Put You on the Chopping Block!

It’s all fun and games until someone gets caught! Sotheby’s, a well-known broker of fine art, collectibles, jewelry, and real estate has been facing a lawsuit for helping its customers evade paying sales tax on their purchases. 

When a resale certificate is accepted by a seller, it’s accepted in good faith. This means that the seller doesn’t have to put on their detective hat to figure out if the purchaser is eligible for that exemption. When a certificate is accepted in good faith the state will generally pursue the purchaser rather than the seller if the exemption isn’t valid. In order for a certificate to be considered accepted in good faith, it must be on the correct form, be completely filled out, and pass the common sense test. A good example of a common-sense test is a software company buying one desk for resale. Common sense would tell us that this desk is probably being purchased for the company’s own use rather than for resale. The reason being the company isn’t in the business of selling desks. So the certificate should be rejected and tax should be collected in a scenario like this. 

One way to invalidate good faith acceptance is when the seller accepts a certificate they know to be untrue. In cases like this, the state can and often does pursue both the seller and purchaser for the improper use of certificates. The improper use of certificates cannot only create civil penalties but can sometimes create criminal penalties. Many sellers don't realize they can be complicit in tax evasion by knowingly accepting certificates where the purchaser is not eligible for the exemption.

The recent Sotheby’s case is a cautionary tale. A few years back, Porsal Equities admitted they provided a resale certificate to Sotheby’s, when in reality, the artwork they were purchasing was put up for display in the purchaser’s home. When the New York Office of the Attorney General (OAG) investigated Porsal Equities, they of course did not stop there. Who was letting Porsal Equities get away with evading tax? The OAG turned to their seller, in this case, Sotheby’s. During these multi-million dollar transactions, Sotheby’s not only accepted resale certificates under false pretenses but aided the purchaser on how to fill the certificates out. They knowingly coached their purchaser in avoiding tax in order to “boost their own sales”. Sotheby’s went on to accept 3 more resale certificates from Porsal Equities. 

Porsal Equities was in the wrong and ended up paying only $10.75 million in tax, penalties, and interest. On the other hand, the state is pursuing Sotheby’s for $27 million.

The moral of this case is that any one client, sale, or group of sales is not worth the potential civil and or criminal penalties of not following the rules. We sometimes see owners and managers allowing behavior like this, but many times they are unaware of these scenarios and it is the salespeople who are coaching purchasers. Sometimes it is not intentional but rather a lack of knowledge of how serious an issue this is. 

It’s good to keep in mind that any transaction can show up in an audit, either your audit as well as your customer’s or vendor’s audit. The paper trail can always lead to all parties involved. Having a good process in place and making sure that the process is being followed is important to prevent situations like this. Knowledge is also key. As a purchaser, do research to find out if and which exemption your business can claim if any. As a seller, always be cautious and review exemption certificates as thoroughly as you can to save you money, integrity, and time in the future! Exemption certificate management can be tricky. If you want to talk with someone about our exemption certificate management services, click here. 

By: Priya Sorathia

This blog is intended for educational purposes and not as tax advice. Tax policies and procedures change frequently, so specific information, such as thresholds, rates, etc. included in this blog may have changed since it was originally published. Please request a consultation for more in-depth information.