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Law and Coins
AN EXTENSIVE LOOK AT THE LAWS
THAT GOVERN OUR NUMISMATIC
COMMUNITY AND OTHER TOPICS
OF INTEREST
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Buying for Fun...or for Resale
by David L. Ganz
Column 3 - April 19, 1999
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Taxation is the heavy issue of the 1990's, and at the start of the millennium next year, could well become the dominant issue as states and municipalities -- and the federal government -- contemplate placing levies on Internet sales and other media.
Whether collectors pay sales tax on their purchases, or dealers fight attempts of 31 states that presently tax rare coin and bullion sales in some measure (19 have exemptions), it's clear that there is going to be a lot of activity in the area and a considerable amount of concern from all participants on not only the outcome, but the process of getting there.
Here are some tips that you ought to consider if you are a purchaser of rare coins with the intent of acquiring them as an investment vehicle - and some traps that you ought to try and avoid in making purchases.
A caveat is in order. The law of business taxation and tort liability differs in almost all of the 50 states, and there are separate sales tax rules and regulations for over 5,000 municipalities around the country.
That's actually one of the problems that the government has in trying to mandate the collection of sales or use tax on various transactions.
But as computer memories and programs become larger, and the cost of programs and hardware become smaller, there is theoretically less and less reason why firms can't calculate what might be due and owing elsewhere.
Meanwhile, the vagaries of law in multiple jurisdictions means that before you make any final determination as to what you should do, or not do, you ought to check out the peculiarly local requirements that might affect the specifics of any comment or proposal.
Right now, sales tax is collected in about 31 states on the purchase of various numismatic items. Fewer states collect tax on bullion transactions involving silver, gold or platinum. About 20 states either have no sales tax or exempt numismatic transactions outright, provided a minimum transaction (typically $1,000) is reached.
Two thoughts permeate any discussion on sales tax. First, nearly every state that has sales tax also has a corresponding compensating use tax. That means if you buy in State #1, and "import" the items to State #2 which has a sales tax, or have it shipped, you must pay the compensating use tax to State #2.
Presently, under existing law, the buyer has the obligation to report the sale, and to pay the tax. When you buy a car in a different state, the process is completed by registering the vehicle and paying the tax. For other items, there is usually a voluntary form that must be filled out, and filed, as the tax is paid.
Nearly all states have an exemption for sales tax on purchases that are made for resale. Typically, a resale certificate is required. Some states utilize a standard form in which the purchaser declares that the item is intended for resale. Other states have other more stringent requirements.
If a buyer or a collector intends to eventually resell the item, there may be a substantial advantage to becoming a vest-pocket dealer and making the purchase for resale. (Be sure to segregate those purchases that are not intended for resale, so that proper tax can be paid).
Where the purchaser is a corporation, there are substantial advantages that also may be employed. Among them:
When a corporation sells an item for cash, there is typically no 1099 withholding or reporting requirement.
The top tax rate for individuals is 39.6% on income exceeding $250,000; the corporate tax rate on income of $100,000 to $335,000 is 39% (but it drops to 34% on income over $335,000).
Various business deductions not normally available to an individual are available to corporate taxpayers.
Stock in the corporation can be utilized as a very effective estate-planning tool, especially if it is planned and distributed early with the help of your lawyer or accountant.
If you itemize on your return, medical expenses to be deductible (including health care premiums) must exceed 7.5% of adjusted gross income. A properly constituted corporation can form a very small medical group with attendant savings for a "C" corporation.
What is the down side to doing business this way?
For one thing, if you take a corporate form of ownership of your collection, it is essential for the corporation to function and act like one. That means that there must be several formalities observed, including:
Minutes of periodic corporate meetings
Formal corporate resolutions
An actual board of directors (in a one person corporation, it is a one person board)
Approval of the actions of the "management" by the Board, and election of the Board by the shareholders, in accordance with local law.
None of this is particularly complicated or time consuming. It takes a couple of hours a year. There are extra tax returns to file (and attendant accounting fees), but on balance, for someone spending even $5,000 a year on their collection, the savings could be considerable.
Suppose for example that you live in New York State (8.25% sales tax) and want to buy a 1909 S VDB cent, PCGS MS65 (red) listed in NumisMedia's pricing guide in March, 1999 for $2,130.
You form a "C" corporation to buy and sell coins and capitalize it with $5,000. You buy the coin. The sales tax saving is $175.72 on the first coin, alone.
This business is a part-time, vest pocket operation. You are otherwise employed, but have no health coverage. You pay it yourself. Unless you have massive medical expenses, there is no deduction.
Assume however that you buy and sell one coin a month over the next year, all in the same $2,000 price range, and that your net profits on the transaction (before business costs) is an 8 percent margin. The sales tax savings, then, are almost $2,000.
Now assume that you pay yourself no salary (preferring to keep the money in the firm to let it grow) but use the remaining funds to partially purchase health insurance for the corporation's employees (i.e., you). The expense should be deductible by you on the corporation's books. At the end of the day, it means tangible dollars -- real money -- in your pocket.
When you go to that out of town coin show, the expenses are also deductible (subject to certain substantiation requirements of the Internal Revenue Code, and to some minor prohibitions).
An important caveat is that you must operate the purchase and sale to make money, and not as a hobby. If the IRS were to show that you did not intend to make a profit (or actually didn't in three of five years), your deductions could be denied.
Here's a case where by simply recharacterizing what you do, and how you do it, substantial savings can be effected. For the long-term serious collector, it is something to think about.
DAVID L. GANZ is managing partner in the New York City law firm of Ganz & Hollinger, P.C., and has been an award-winning writer for the past 35 years. His "Under the Glass" column was first published in Numismatic News in 1969. He is the author of several books on coins including The World of Coins & Coin Collecting (3d edition, 1998, Bonus Books), and Planning Your Rare Coin Retirement (Bonus Books, 1998), and many law review articles and other articles involving coins, the law, and other topics. His firm is located at 1394 3rd Avenue, New York N.Y. 10021 telephone 212 517 5500 fax 212 772 2720, email DavidLGanz@aol.com.
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David L. Ganz
