E-Photo
Issue #245  10/21/2018
 
Galleries and Private Photography Dealers Are Battling New Epic Challenges

By Alex Novak

While the general economy appears to be doing the best it has in nearly 50 years, and art and photography auctions and prices continue to hit numerous records, there is a darker story looming for many of this market's merchants, as well as for small businesses as a whole. It seems all the more bizarre given the rough ride through the Great Recession that many photo and art gallerists and dealers survived only to face even greater challenges in today's boom times.

Except for a few mega-galleries, dealers in the arts are suffering multiple blows at the same time. Here's just a few of them that have and will impact dealers nationally and internationally.


ESCALATING RENTS

Escalating rents in urban art centers like New York City are freezing out photo and art galleries.
Escalating rents in urban art centers like New York City are freezing out photo and art galleries.

Escalating rents that are often more than two to three times higher upon renewal are forcing many in major art centers, such as New York City, L.A., London, Berlin and Paris, to go private, move or downsize. Other urban centers have been hit with competition from big tech, pushing up rents in San Francisco, Seattle, etc. This is a trend that has been going on for some time now.

Just to give you a few small examples from our own photography field, AIPAD gallerists, Bruce Silverstein (moved and downsized), Alan Klotz (went private), Andrew Smith (moved out of state and downsized), Robert Miller Gallery (closed) and James Hyman (went private) all found that their old spaces became much too expensive on renewal. Many other contemporary galleries—some of whom showed photography--have just gone out of business in these major art centers. Some may view this trend as a healthy weeding out of an overpopulated gallery scene, but you could also see it as the canary in the coal mine: an early warning of what is to come.

After pioneering and helping to make many lower-end areas chic, such as Chelsea in NYC and Central Berlin, galleries in major urban centers are finding themselves priced out by their own success in popularizing those very areas. And local developers, building owners and politicians are greedy and shortsighted enough that they don't see the cultural disaster brewing from their actions and/or lack of action. Often the areas where galleries have been forced out for higher rental fashion boutiques, etc., quickly lose their "buzz" and turn back into boarded-up white elephants with "for rent" signs. The areas lose the very atmosphere that made them popular in the first place.

Many galleries are moving into other less expensive areas, such as Brooklyn, but are finding that their collectors often don't follow them to these new locations. For that matter, attendance at galleries is generally down sharply, never really recovering from the great recession, but made worse by a tenuous political situation. Museum attendance is also down precipitously in the U.S. and U.K.


TRAFFIC AND SALES DOWN AT GALLERIES

While prices aren't down in the market (and with inflation on the rise that isn't likely), retail business, art fair business, and--as we noted just above—even attendance at art galleries and museums have fallen off dramatically, according to numerous media sources.

There are a number of reasons for this, but primarily I feel it is the current political distraction, noise and fear/anxiety—whether warranted or not--in both the U.S. and U.K. that have weakened sales and attendance over the last two to three years. Most clients for art and photography priced below six figures are Democrats here in the U.S. and Labor in the U.K. Both groups are primarily urban and embrace a cultural milieu. My own clients are nearly 99% Democrat with a handful of moderate Republicans, as are virtually all the clients of my fellow photography dealers. It is an irony of the times that the political fallout would affect the very business that has been the most vocal against the political changes that Democrats protest. You might think that they would want to support and cherish such institutions, rather than largely ignore them during this period of upheaval.

On top of this a proliferation of art and photography fairs hasn't helped the situation for the brick and mortar galleries. Nor have the highly expensive fairs produced much, if anything, in the way of needed profit for exhibitors over the last two years, as costs have escalated and sales have dropped in the oversaturated marketplace due to too many fairs chasing too few buyers.

Of course, if you are selling $10-million-plus paintings and sculpture, you probably haven't been affected at all. This is a very two-tier market, but photography clearly belongs in that lower tier, even at its most expensive.


GREATER COMPETITION

Major auction house have grown into megalithic competitors taking away business from galleries and private dealers.
Major auction house have grown into megalithic competitors taking away business from galleries and private dealers.

As I've noted before, the change in the auction market from modest wholesalers to full-blown high-end competitors has challenged the private dealer and gallery market in an unprecedented manner. While just 20 years ago a $2 to $5 million auction haul total for the three major NYC houses in a season would have been considered record-breaking, today that total for just one smaller auction would be a huge disappointment. In addition, we've seen dozens of other auction houses launch photography auctions or include photography in their sales.

Now multiple special auctions, online auction sales and $50-million seasons by megalithic auction houses have drained a lot of the money out of the photo market, leaving relative crumbs for dealers to survive on. In spite of the huge expansion in the photography market, there is just so much money to go around.

But there are other dark clouds that go beyond photography/art market dynamics. Small business is under attack in ways that I've never seen before. Since ALL photography merchants are small businesses, our marketplace will suffer along with others of our ilk. Unfortunately some of these challenges are aimed specifically at the art market.


NEW MONEY LAUNDERING REGULATIONS

The European Parliament when it adopted the fifth Anti-Money-Laundering directive in April of this year, tightened regulation of the art market. The regulations, which come into force in 2019, will cover all businesses selling works of art with total annual transactions of just €10,000 or more. And it doesn't matter what the payment method (credit card, bank transfer, check or cash) is. The law will require that art, collectibles and photography dealers verify the identity of customers before making a transaction, including—somehow—silent partners. Lower-value linked payments adding up to €10,000 or more will also now be covered. The existing regulations already apply to any business trading in goods or making transactions of €10,000 or more in cash. Virtually all--even small, part-time eBay dealers--will fall under the new directives.

The International Confederation of Art and Antique Dealer Associations (Cinoa) lobbied against the new legislation, arguing that it imposes heavy burdens on small businesses. Cinoa’s chief concern is that the €10,000 threshold is too low, and that the linked transactions rule means that many low-value sales will be affected, with dealers having to monitor each client’s annual totals, and then verify their identity if they reach the €10,000 threshold. Cinoa also questioned how Internet or phone sales can be verified when a business couldn't actually see a client's identity documents in person.

CINOA noted that art dealers were added to the high-risk category without consultation with the industry and without any evidence that the art trade was involved with terrorists or criminal trafficking.
Despite the lack of evidence of a terrorist connection to the art trade (in fact, in contradiction to the results of its own commissioned research), the EU has approved this proposed update.

Even though the United Kingdom is slated to leave the EU in March 2019, this Directive could still take effect there in the interim, and some sources say any Brexit deal will require its implementation in the U.K. even after the U.K. leaves the European Union.

If a person or business fails to comply with any of the directive's provisions, they may face significant civil penalties or criminal prosecution. This could result in unlimited fines and/or a prison term of up to two years.

Similar legislation is winding its way through the U.S. Congress. The Illicit Art and Antiquities Trafficking Prevention Act (H.R. 5886), introduced on May 18, 2018 by Republican Luke Messer of Indiana, seeks to expand the application of the Bank Secrecy Act to include "dealers in art or antiquities". If the proposed legislation passes, art and photo businesses will be required to report suspicious transactions to the U.S. Treasury Department, including those transactions involving cash payments totaling more than $10,000, although the act authorizes the IRS to lower those levels as it wants. The other administrative requirements would be similar to the EU's Directive on this matter.

Of course, the U.S. Congress has been known to further impact small businesses, because there is no real effective lobbying effort for this area, or for the art business. AIPAD, and similar art dealer associations, don't lobby for their members. At least the ADAA issued a statement opposing the legislation: "This could impose an unnecessary and onerous regulatory burden on galleries—small businesses all across the country that do not have the infrastructures or resources required to undertake the reporting and attendant filings for something that has not presented itself as a major problem."

As Cultural Property News reports, "Art and collectibles businesses are typically small businesses, often sole proprietorships with just a few employees. Placing regulatory requirements on businesses that already use regulated institutions for their banking needs seems like overkill, especially given the high cost of compliance for small businesses (estimates range from $2,000-5,000 per year), and the costs of government oversight."

By the way, those cost estimates are unrealistically low in my own estimation and would sink a lot of photography dealers and galleries out there. And the record-keeping burdens, which extend for a minimum of ten years, are not insignificant.


WAYFAIR VS. SOUTH DAKOTA


Perhaps the most problematic new impact on U.S. small businesses in general--and art and photography galleries and dealers in particular--has come from this year's June 21st "Wayfair vs. South Dakota" Supreme Court decision, which overturned that Court's 1992 "Quill versus North Dakota" decision. And photography and art galleries are a good example why the concept of "brick and mortar" versus Internet companies just doesn't hold any water any more. Unlike some businesses, today's galleries can't survive just on local business. Virtually all maintain a significant Internet presence, as well as exhibiting at out-of-state trade shows. Not to mention that most walk-in gallery traffic and subsequent sales are from out of state in any case. Chicago Gallerist Stephen Daiter recently told me that considerably less than 5% of his sales come from his own Chicago area. His situation is typical of many galleries and private photo dealers.

While the Court's majority decision seemed to imply that only states that follow South Dakota's lead on requiring out-of-state vendors to collect sales tax might be held legal ($100,000 in sales or 200 sales into the state in a year), unfortunately the majority weren't clear about those guidelines for other states, especially those like New York, Missouri, Massachusetts, Illinois and California, which are not parties to the Streamlined Sales and Use Tax Agreement, which was cited by the majority in its decision to side with South Dakota. For a list of the current states that are members of the streamlined agreement, just go here: https://www.streamlinedsalestax.org/index.php?page=state-info.

By the way, it is not unusual to do that level of business in a state. Many galleries and dealers bid at auction as a service for top clients, often surpassing that $100,000 level in the process, although the bidding produces little financial benefit to them. Many larger sales are to museums or to other dealers. But all such sales, whether sales tax-exempt or not, will determine nexus under this Court ruling.

My own small, private company probably at one time or another has done that minimum level in about eight sales tax districts—ironically none a member of the Streamlined Sales and Use Tax Agreement. Many galleries do much more in sales than my own company.

It is highly unlikely in this political atmosphere to get U.S. Congressional action to solve this insane situation for America's small business. Virtually no photography, art or any small business that I know of is doing anything currently about this decision, given the total lack of direction and abdication of responsibility by both our Supreme Court and U.S. legislature. This is a disaster waiting to happen. So far, AIPAD and other art associations are offering no help to members, leaving them to fend for themselves.

The Court, for once, wasn't totally divided along political lines, with Justices Kennedy, joined by Thomas, Alito, Ginsburg and Gorsuch, ruling to overturn Quill in favor of South Dakota. Chief Justice John Roberts wrote the dissenting opinion, joined by Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan.

By a 5-4 majority the Supreme Court ruled that states may now charge sales tax on purchases made from out-of-state sellers, even if the seller does not have a physical presence in the taxing state. Many legal observers, as well as the Court's minority, noted that it seemed the Court's majority simply ignored the Constitutional issue of who controls interstate commerce to make a politically expedient decision to have states collect more taxes.

As Chief Justice John Roberts, writing for the minority of the Court, states: "The Court, for example, breezily disregards the costs that its decision will impose on retailers. Correctly calculating and remitting sales taxes on all e-commerce sales will likely prove baffling for many retailers. Over 10,000 jurisdictions levy sales taxes, each with 'different tax rates, different rules governing tax-exempt goods and services, different product category definitions, and different standards for determining whether an out-of-state seller has a substantial presence' in the jurisdiction…The burden will fall disproportionately on small businesses."

Roberts continued, "The Court is of course correct that the Nation’s economy has changed dramatically since the time that Bellas Hess and Quill roamed the earth. I fear the Court today is compounding its past error by trying to fix it in a totally different era. The Constitution gives Congress the power '[t]o regulate Commerce . . . among the several States.' Art. I, §8. I would let Congress decide whether to depart from the physical-presence rule that has governed this area for half a century."

While the impact of a single nationalized sale tax would clearly dampen overall sales and hurt the economy, most merchants would still grit their teeth and deal with it. What's impossible about this decision though is the myriad of state regulations, separate filings for each tax authority and other state impacts—not to mention just the uncertainty of how the ruling applies to other states.

For instance, New York State claims that ANY corporation that does a single dollar in business in the state must also file state and city income taxes. Many photography galleries and dealers are small S-Corporations. If New York gets its way, it and the City of New York would tax any company doing business with anyone in the state—not only for sales tax, but for income tax as well. The additional accounting fees alone would eat up most businesses.

The absurdity of all of this is beyond ridiculous, and reflects the out-of-control state and city governments there, greedy for tax revenues at any cost to our economy. New York, Illinois and California—to name three such states—have refused to sign on to the Streamlined Sales and Use Tax Agreement. It remains to be seen if the majority on the Supreme Court will allow those states to charge sales tax (or other taxes) under its "Wayfare vs. South Dakota" ruling, if those states do not change that position. The solution normally would be simple: have the U.S. Congress do its job and resolve this issue with a well-drafted federal solution, as the Constitution requires. In this environment, good luck on that.

To add insult to injury, spammers have already started to use scare tactics to spread viruses by sending threatening messages from supposed state sales authorities to some dealers. Be cautious not to click on attachments. When in doubt, it is best to call the authority directly.


NEW DIGITAL PRIVACY LAWS

Another looming challenge for small businesses is the onerous European privacy laws (with new ones reportedly imminent both there and here in the U.S.) that can arbitrarily fine you a minimum of 50,000 euros on the basis of some rather dubious charges. That goes for U.S. and other international galleries, not just Europeans. They consider nexus if you have any European clients. And sending out those emails to your list doesn’t mean that you’ve complied with those laws. Quite the contrary. Apparently the EU is gearing up to fine businesses in 2019, but there are still a few hoops for them to jump through first.

Expect some U.S. action, especially after California has passed its own digital privacy protection law, which goes into effect sometime in 2020.

But real help from the U.S. Congress is unlikely, especially after a mid-term election that looks to split control of Congress between Democrats in the House and Republicans in the Senate. Compromise seems to be a dirty word on both sides of the political aisle, which is looking more and more like a chasm the size of the Grand Canyon. Getting Congressional relief on any of these problems is looking less and less likely.

Soaring interest rates add on one more pressure point.
Soaring interest rates add on one more pressure point.


HIGHER INTEREST RATES

No one has to be told what is happening on interest rates. With the Federal Reserve and other central bankers raising interest rates at an accelerating pace and regulators making loans tougher, all small business is caught in this double vise. Art and photography galleries and dealers are no exception. When money is easy and cheap, it makes considerable sense to borrow to finance inventory purchases. When the final cost of that debt suddenly goes soaring, it adds to financial burdens and the cost of doing business.

It used to be relatively easy to open equity lines, lines of credit and mortgages. Today the immense amount of paperwork and incredibly strict underwriting rules make these alternatives more and more difficult to obtain. And with current interest rates ever increasing on their debt, more and more small businesses are finding it more difficult to add to inventory or even to service current debt levels.


IN CONCLUSION

It looks more and more like a war on small business, on top of an already difficult market for art and photography dealers. If you don't want to see our businesses disappear that have supported and made this photography market in the first place, please lend your own support and recognize that we in the trade are your friends. We came into photography because we love it.

Go to AIPAD, Paris Photo and the smaller tabletop fairs. Go to a gallery this weekend. Visit one of our websites. Make a purchase. Learn and enjoy. Photography is a social art. It should bring people together. It shouldn't be controlled only by a few megalithic auction corporations, where you rarely get a good deal after insane shipping costs and buyer's premiums that top 25% or more.

And, while you are at it, write your state and federal legislators, to get them to stop writing business-harmful laws—like some of those above--and start doing their jobs, so that misguided courts don't put all of us out of business. Unless governments, legislators and both political parties start realizing that there is no more juice left in this lemon of small business, we may see a major downturn in the economy that will be harder to turn around than the last great recession.