In 1926 U.S. customs officials refused to classify Constantin Brancusi’s Bird in Space as artwork. Instead, the officials classified the seminal abstract bronze sculpture as “kitchen utensils and hospital supplies,” thereby subjecting the art to U.S. customs duties and triggering a long court battle. When the U.S. Customs Court considered the issue, it faced the impossible question of “what is art?” Various experts testified before the court and the judge ultimately decided that Brancusi’s abstract sculpture could be “art” for purposes of the U.S. customs law.

Over eighty years later, history appears to be repeating itself in Europe, but with a much different result. The European Commission ruled in 2010 that works by U.S. video installation artist Bill Viola and U.S. minimalist sculptor Dan Flavin were not “art” for purposes of European Union customs duties and the value-added tax (“VAT”). The surprising decision, which is binding on all European Union (“EU”) countries, could cause European galleries and collectors to pay EU customs duties and VAT at the highest rate on any video, light and technology based works imported from outside the EU.

Value added tax or “VAT.”

Galleries and collectors within the European Union must pay VAT on most goods imported from outside the EU. The VAT is a broad based consumption tax, assessed on the value added to goods and services and typically collected by the seller upon a sale. When goods are imported into the EU, VAT must be paid so that the imported goods are immediately placed on the same economic footing as equivalent goods produced in the EU.

The United Kingdom’s highest VAT rate is 20%. However, sculptures are taxed at a lower 5% rate (and are not subject to any customs duties) when imported into the EU. The recent European Commission decision essentially hinged upon whether the works of Bill Viola and Dan Flavin, on import into the EU, constituted art (and more specifically, “sculptures”) for purposes of the lower 5% VAT rate. The European Commission answered the question in the negative, thereby subjecting the Viola and Flavin works to full customs duties and VAT taxes.

The 2008 Tax Tribunal decision.

The case started in 2006, with a dispute between Haunch of Venison Partners Limited and the British HM Revenue and Customs Office (HMRC). Haunch of Venison imported artwork by Bill Viola into the United Kingdom and intended to import a fluorescent light sculpture by Dan Flavin.

Both the works by Viola and Flavin were shipped as component pieces to be assembled (or in the case of Viola, operated and projected) upon arrival. The Viola works were image projections recorded on a DVD. The projections from the DVD were intended to be shown only on sophisticated equipment specifically created for that purpose. That equipment, and a detailed instruction manual for its use, was included in the shipment, along with the DVD. The shipment of Flavin’s work, titled six alternating cool white/warm white fluorescent lights vertical and centered (1973), included the bulbs and a detailed set of instructions.

In a case heard before the VAT and Duties Tribunal (England) in 2008, Haunch of Venison argued that the artwork qualified for exemption from customs duties (and qualified for the lower 5% VAT rate) under either of two exempt categories under customs law: (i) “original sculptures and statuary, in any material” or (ii) “collectors’ pieces of historical interest.”

The HMRC took the position, however, that the works became art only when they were put together for display. Since the works had been transported in parts, the VAT analysis and classification should be based on the status of those separate parts, and therefore subject to the full VAT rates and customs duty. With respect to the Viola works, HMRC further argued that the works were not “sculptures” even when put together because they were not three-dimensional. Finally, the government noted that if the works as presented to customs authorities (i.e., in separate pieces) were treated as art, then any importer could declare any goods to be art and thereby circumvent the customs duty and full amount of VAT.

Interestingly, the HMRC further argued that the VAT and customs duty should be calculated based on the value of the shipment not as component parts, but as works of art. In other words, they may just be light bulbs or DVD players, but if someone is willing to pay huge prices for them as artwork, then those huge prices should be used as their value at import.

The Tribunal ultimately found HMRC’s arguments unpersuasive. The Tribunal heard expert testimony from Sandy Nairne, director of the National Portrait Gallery in London, Martin Caiger-Smith, independent curator and art critic, and Robert Cumming, writer and art critic. Nairne’s testimony included the following:

“We have a history of well over 100 years of art that can appear to be made of ordinary things that have other uses. It is very common for sculptures to be shipped in parts. The fact that the work in transit is not like a work of art could apply to a large bronze figurative sculpture -- an Anthony Caro piece would not necessarily travel as a whole sculpture in a single box.... The question of ‘is this the sculpture?’ is not to do with what it looks like when it is in customs but what it looks like assembled.”

The Tribunal agreed, ultimately holding that it would be “absurd to classify any of these works as components ignoring the fact that the components make a work of art.” The Tribunal then found that Viola’s works (as assembled) constituted a “sculpture” based on expert testimony. (The status of Flavin’s assembled works as a sculpture was not disputed by HMRC.) Finally, the Tribunal found HMRC’s concern that any goods could become art as “grossly exaggerated.” The burden would be on the importer to prove that the goods qualified as art and expert testimony could be elicited to reach a proper determination.

The European Commission ruling.

In December 2010 the European Commission overruled the Tribunal’s decision. Despite the general consensus among art dealers, critics and the public at large that the Viola and Flavin works are art, the Commission held that the Viola and Flavin works cannot be classified as “art” (or, specifically, “sculpture”) on importation into the EU. With respect to Viola’s works, the Commission said that it cannot be considered sculpture “as it is not the installation that constitutes a ‘work of art’ but the result of the operations (the light effect) carried out by it.” The Commission described the Flavin work as having “the characteristics of lighting fittings” and therefore classifiable as light fittings. In other words, if it looks like a light bulb, we will tax it like a light bulb.

Or maybe not. The Commission also accepted the view of the HMRC that even though the works cannot be characterized as sculpture on import, the full VAT rate should be calculated based on the value of the shipments as sculpture. The ruling has been very heavily criticized in the European community. As Sandy Nairne has said, “The logic does not hold up.” One of the original lawyers who represented Haunch of Venison called the Commission’s reasoning “absurd” and said, “To suggest...that a work by Dan Flavin is a work of art only when switched on, is comical.” Christopher Battiscombe, director of the Society of London Art Dealers, described the ruling as “regrettable” and said it could hinder the EU art trade.

Unless reversed, the Commission’s ruling will mean that any gallery or collector importing video, light, or technology based artwork into the European Community must pay both customs duty and the standard VAT rate on the full value of the work of art. According to The Guardian, St. Paul’s Cathedral in London will be one of the first organizations directly affected by the ruling. The Cathedral commissioned two altar pieces from Bill Viola and, unless the ruling is successfully challenged in the courts, the Cathedral likely will pay VAT on the pieces at the highest rate.