Will California collectors take their secondary market business out of state?

Panel of federal judges say 5% resale royalty law can only apply to works sold within California

Collectors in California are not required to pay a royalty on sales that take place outside of the state, a federal appeals court ruled on Tuesday, 5 April. But buyers must still pay a 5% royalty on works purchased inside California. The decision raises questions about how far collectors will go—and whether they will take their business out of state—to avoid paying the royalty.

The decision by a panel of judges (eight voted against the royalty, three in favour) limits the scope of the 1976 California Resale Royalty law, the only one of its kind in the US, which originally provided American artists a 5% royalty on works of art resold in California or by a California resident for more than $5,000.

The decision stems from a class action lawsuit filed by a group of artists and foundations, including Chuck Close, Laddie John Dill and the Sam Francis Foundation, against the auction houses Sotheby’s, Christie’s and eBay. A judge dismissed the case in 2012, and the artists appealed.

Yesterday, the appeals court reinforced the lower judge’s decision that the most controversial portion of the law violated the US Constitution by attempting to regulate sales outside California’s own borders.

“If a California resident has a part-time apartment in New York, buys a sculpture in New York from a North Dakota artist to furnish her apartment, and later sells the sculpture to a friend in New York, the act requires the payment of a royalty to the North Dakota artist—even if the sculpture, the artist, and the buyer never traveled to, or had any connection with, California,” wrote the judge Susan Graber. “We easily conclude that the royalty requirement, as applied to out-of-state sales by California residents, violates the dormant commerce clause.” The rest of the case has been sent back to a three-judge panel for further consideration.