As the global boom in freeports — tax advantaged storage facilities for art and other collectibles — continues apace, the latest such luxe warehouse has cropped up on less distant shores: Delaware. Launched by the art-shipper Fritz Dietl of Dietl International, the Delaware Freeport is not the first art-focused facility to take advantage of the Mid-Atlantic state’s favorable tax regime. But should it receive a free trade zone designation, which Dietl tells ARTINFO is imminent, it will soon be the first art storage facility in the United States that can compete directly with the tax benefits offered by freeports domiciled in traditional havens like Switzerland, Luxembourg, and Singapore. (A representative from the Delaware Department of State did not respond to a request for comment on the Delaware Freeport’s free trade status as of press time.)
We spoke to Dietl about his plans for the Delaware Freeport, the kinds of clients he expects will make use of the facility, and how the New York State taxman is “the biggest promoter” of his business.
How did you come to decide on starting the Delaware Freeport? You have an arts-focused logistics business, but I understand this is a new kind of venture for you.
My main business is Dietl International. We are one of the largest international fine art logistics company around the world, and certainly in the United States. When it comes to the commercial art market — major galleries, auctions houses, collectors — we are likely the largest company in that arena. From that experience, and I’ve been doing this for a long time — I founded Dietl International in 1991 — from that experience I see the needs of my clients. I see the flow of the art around the world, and over the years I’ve seen how much inventory moves to various freeports around the world, and how much of it moves back to New York from various freeports around the world.
I’ve been thinking about the idea for many years, and I was able to spend a little bit more time in the past few years and I finally decided to pull the trigger on it and provide this service to my clients, because I feel there is a need for it.
What is the value proposition that the Delaware Freeport offers? Why would anyone in the US come to you rather than go offshore?
The value proposition is very simple and makes a lot of sense for a lot of people. Right now, the New York State Sales and Use Tax is the biggest promoter of my business that I can have. Because they are putting these new regulations into effect that make it even more complicated for clients to organize shipments from New York, and so right there Delaware is a good option.
To go back to your original point, where I see a benefit from it, because there are a lot of international and US-based art collectors, art investors, that don’t immediately put the work into their own home, if they are collectors, if they are investors, the art is not meant for the home anyway, [it’s meant] as an asset. One may or may not like it but art has become an asset class, and thus it needs to be cared for and stored properly somewhere.
The Swiss freeports were known for the quality of the facilities, number one, but also for the fact that you could ship something there, and hold it in a tax free environment indefinitely, and then whenever you are ready to trade the asset again, you could move it from that freeport to wherever it goes, or even trade it inside the freeport without having a tax on it, besides the usual taxes that any investor or company has — maybe capital gains or whatever it may be.
Do you have a sense of how much volume you’re expecting in the first year and terminally?
Those are good questions, — we have a 36,000-square-foot facility, and I expect it to fill up by the end of next year at the latest. We have inventory moving in now every week, we are receiving a large shipment right now that very likely would have been going to Europe. The client actually had second thoughts — “it doesn’t have to go to Europe, it can go to Delaware.” We are keeping it local, we are employing people in Delaware, in the US, truckers that move things back and forth to and from Delaware. I kept the footprint relatively small because I believe in not having incredible values, for insurance and safety reasons, in one location. Once we fill this location we will look to other locations in Delaware not far from the location we are in now.
Do you know what the anticipated breakdown is between institutional versus individual clients?
That’s really hard to predict and hard to say. My feeling is that we will have a lot of institutional clients, because there are a lot of collectors who don’t mind paying the sales and use tax because they want to be able to switch things out in their apartment. But there are more and more investors that obviously have no reason to pay sales and use tax, if you are a fund, or a trader, why should you pay a tax in New York. We also have a lot of international clients, international gallery clients, who are already making use of our facility, because let’s not forget there are more and more art fairs, and a number of important and big art fairs in the US, so it makes sense for international galleries to have a footprint in a sale and use-tax free state when it comes to distributing the work that they sell.
Have you partnered with any financial services firms or do you have plans to work with financial services firms should any of your clients wish to use artworks in storage with you as collateral for loans?
I have not and I don’t see this as a focus of our business. Everybody always wants to look at synergy and look at where they can get another buck out of something, and I’m a little bit old fashioned. I believe in a good personal and discreet service, so I have no plans, and never will, to use any of the information that we have to give feedback to clients.
In terms of regulatory risk, the pitch of classic tax-advantaged states like Luxembourg is that there is a lot of long-term stability. But tax maneuvers with art have drawn scrutiny in the US in recent years, so do you see that as a potential deterrent to your clients?
I have a simple answer to that. There is a reason why every single Fortune 500 company is incorporated in Delaware. If anything changes in the United States, Delaware is likely to be the last state where anything will change [laughs]. If something changes, it can only happen at the federal level, and if you look at US politics, it is extremely unlikely that any big changes are underway. And the Delaware Freeport is not a tax avoidance scheme, it’s just a perfectly correct and legal means for tax planning, and so there are no regulatory issues. Every major client knows that laws in New York are very clear, if you bring a work back to New York to show it in your living room, you are liable for use tax, end of story. We are not selling anything that helps people to not pay their taxes. And last but not least, we are going to be a bona fide actual free trade zone, a certain area, certain part of our warehouse that is separated from the rest of the warehouse. But if you place your artwork inside the free trade zone, you are outside the United States for all intents and purposes.
And is that zone in place or planned?
It’s almost in place — we have applied for it and are expecting to get approved very soon. It’s really not necessary for original works of art, but there are other reasons and other commodities for which this works very well. The state development organization is helping us with that process.
This interview has been edited and condensed for clarity.