STATE OF ARKANSAS DEPARTMENT OF FINANCE & ADMINISTRATION OFFICE OF HEARINGS & APPEALS ADMINISTRATIVE DECISION TODD EVANS, ADMINISTRATIVE LAW JUDGE

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1 STATE OF ARKANSAS DEPARTMENT OF FINANCE & ADMINISTRATION OFFICE OF HEARINGS & APPEALS ADMINISTRATIVE DECISION IN THE MATTER OF ACCT. NO.: COMPENSATING (USE) TAX ASSESSMENT AUDIT NO.: DOCKET NO.: TODD EVANS, ADMINISTRATIVE LAW JUDGE APPEARANCES This case is before the Office of Hearings and Appeals upon a written protest received August 11, 2017, signed by, the Taxpayer. The Taxpayer protested an assessment of Compensating (Use) Tax ( use tax ) resulting from an audit conducted by the Department of Finance and Administration ( Department ). A hearing was held in this matter on February 23, 2018, at 9 a.m. in Little Rock, Arkansas. The Department was represented by Lauren Ballard, Attorney at Law, Office of Revenue Legal Counsel ( Department s Representative ). Present for the Department by telephone was Amanda Butler ( Service Representative ) and Yaminah Holt ( Audit Supervisor ). The Taxpayer appeared by telephone and represented himself. ISSUE Whether the Department s Assessment of Compensating (Use) Tax Should Be Sustained. Yes. 1 This amount represents (tax) and (interest). The interest shall not be addressed in this decision since the Department s Representative explained that this amount was waived by the Department. 1

2 FINDINGS OF FACT/CONTENTIONS OF THE PARTIES Prehearing Filings The Department s Answers to Information Request summarized some of the relevant facts 2, providing in pertinent part, as follows 3 : On December 5, 2016, ("Taxpayer") purchased two (2) ATVs from in. A copy of the Certificate of Interstate Sales is attached as Exhibit 1. The Taxpayer did not remit compensating use tax on the purchases. The Department, through its DFA Service Representative Amanda Butler ("Representative"), determined that sales tax would be due on the two (2) ATVs. On or about July 21, 2017, Representative mailed a Summary of Findings to Taxpayer (attached as Exhibit 2). Per the Summary of Findings, Taxpayer owed in tax and in interest as of the date of the letter. On August l, 2017, Representative mailed a Notice of Proposed Assessment to Taxpayer (attached as Exhibit 3). The Taxpayer timely protested the Notice of Proposed Assessment on August 11, A copy of the protest is attached as Exhibit 4. In Taxpayer's protest, he alleged that the Department's local revenue office had provided incorrect advice and had advised him that sales tax would not be due on the ATVs and that he does not have the means to now bear the tax. In his protest, the Taxpayer provided his objections to this assessment, stating as follows: My disagreement with the assessment is simple. First, I didn t buy these two ATV s out of state and then not pay the sales tax trying to beat the state. I called twice to the Office to find out if there was any sales tax on these ATV s so I could borrow the money for the taxes as well as the ATV s. The first time I called I spoke to a gentleman who didn t work in our local office but was there filling in. Then a week or so later before the bank finalized the loan I called back and spoke to, who I know and trust, to reconfirm there wasn t any sales tax owed on the two ATV s. also said the same as the first 2 The Department s statement of the relevant facts is supported by the statement included with the Taxpayer protest. 3 All exhibits support the statements for which they are cited. 2

3 gentleman, no sales tax on the ATV s because the price of them was under $4,000 each. Fast forward a few more days or a week after picking the ATV s up, I went in to our local Revenue Department to see if the certificates of origin had came in so I could pay the registration fees and add the Bank as lienholder on the two ATV s. I spoke to, who I know and trust, who had my paperwork in. She AND got out a binder and looked for a third time and concluded there was NO sales tax due. I paid the registration fees and went on my way. Now fast forward another 6-7 months and I get a letter saying I owe this sales tax now on those ATV s!! I guess all I can say is I tried to do the right thing and did not try to get out of paying the sales tax. I m a here in and I always abide by the laws and try to do the right thing as we are in the public s eye 24/7. Like I told the young lady,, the two times I called her, this might as well be on a pay. If I was provided the correct information from day #1, I could ve just borrowed the sale tax money as well! In closing, as much as I like and, I don t believe I should be put in financial distress because the two of them, plus the third gentleman I didn t know, don t know all the correct info to do their jobs. Maybe they need some more training? Maybe the info in the binder they referred to was wrong? Thank you for taking the time to read my protest letter. Please take into consideration that I did try to do the right thing from the start. In her Answers to Information Request, the Department s Representative asserted that the ATV s qualify as tangible personal property and, thus, are generally subject to Arkansas use tax when purchased out of state for use within the state. The Department s Representative asserted that estoppel is not appropriate because all taxpayers are presumed to know the law and the Taxpayer failed to request a formal legal opinion under Arkansas Gross Receipts Tax Rule GR-75. Hearing Testimony The Service Representative testified she performed the relevant assessment. She stated that the Taxpayer purchased two ATV s on or about December 5, 2016 in Mississippi. A copy of the associated invoice was 3

4 attached as Exhibit 1 to the Department s Answers to Information Request. No sales or use tax was collected by the vendor during that transaction. She asserted that this purchase was taxable under Arkansas Gross Receipts Tax Rule GR- 12(A), which taxes sales of all-terrain cycles. She stated that ATV s do not qualify as motor vehicles. She concluded that the ATV s are generally taxable. She further asserted that no evidence has been presented by the Taxpayer to show that these ATV s qualified for a tax deduction or exemption. She concluded her testimony by noting that the Taxpayer owed in tax and in interest on this transaction as of August 1, The Taxpayer testified that his only issue with this assessment was that he is a law-abiding citizen that tries to do right; however, three times he requested instruction (including conversations with,, and ) from his local revenue office regarding the payment of tax on the ATV s. Each time, he was told that no tax was owed on the transaction. Consequently, he finalized his loan and registered the ATV s without paying any taxes. 4 Then, six months later, he was told that he owed sales tax on the purchase. He never thought that the revenue office employees would fail to understand their job duties. Similarly,, he asserted that he is responsible knowing his area of the law and is responsible for what he does and says. He is uncertain how he will pay this tax since the loan is already issued on the ATV s. He does not doubt that the vehicles are subject to tax but said that he was misinformed at the time of registration by the revenue office staff. Due to that misinformation, he asserted 4 The Department s Representative stipulated that the Taxpayer was allowed to title and register the ATV s without paying any taxes. 4

5 that he should not be responsible for the tax at this time. 5 He further testified that he simply wanted to voice his grievance regarding this matter. He was particularly frustrated because he felt this matter made him appear like his was trying to evade the applicable taxes. He explained that he decided not to have the revenue office employees participate in the hearing because he was unsure what they would recall and state during the proceeding. He concluded his testimony stating that, he tried to do the right thing but it still got him bit. After a general discussion of the burdens of proof in tax proceedings, a legal analysis with associated conclusions shall follow. CONCLUSIONS OF LAW A. Standard of Proof follows: Ark. Code Ann (c) (Supp. 2017) provides, in pertinent part, as The burden of proof applied to matters of fact and evidence, whether placed on the taxpayer or the state in controversies regarding the application of a state tax law shall be by preponderance of the evidence. [Emphasis Added.] A preponderance of the evidence means the greater weight of the evidence. Chandler v. Baker, 16 Ark. App. 253, 700 S.W.2d 378 (1985). In Edmisten v. Bull Shoals Landing, 2014 Ark. 89, at 12-13, 432 S.W.3d 25, 33, the Arkansas Supreme Court explained: A preponderance of the evidence is not necessarily established by the greater number of witnesses testifying to a fact but by evidence that has the most convincing force; superior evidentiary weight that, though not sufficient to free the mind wholly from all 5 At this point in the Administrative Hearing, the Department s Representative stated that she would fully waive the entire interest balance based on the evidence provided by the Taxpayer. 5

6 reasonable doubt, is still sufficient to incline a fair and impartial mind to one side of the issue rather than the other. The Department bears the burden of proving that the tax law applies to an item or service sought to be taxed, and a taxpayer bears the burden of proving entitlement to a tax exemption, deduction, or credit. Ark. Code Ann (d) (Supp. 2017). Statutes imposing a tax or providing a tax exemption, deduction, or credit must be reasonably and strictly construed in limitation of their application, giving the words their plain and ordinary meaning. Ark. Code Ann (a), (b), and (e) (Supp. 2017). If a well-founded doubt exists with respect to the application of a statute imposing a tax or providing a tax exemption, deduction, or credit, the doubt must be resolved against the application of the tax, exemption, deduction, or credit. Ark. Code Ann (f)(2) (Supp. 2017). B. Use Tax Assessment Arkansas Compensating (Use) Tax generally applies to the privilege of storing, using, distributing, or consuming tangible personal property and taxable services within the State of Arkansas that were purchased outside this state. Ark. Code Ann (Supp. 2017). A purchaser is generally liable for Arkansas Use Tax unless a seller pays the tax on the purchaser s behalf. Ark. Code. Ann (Supp. 2017). Generally, the protested items represent tangible personal property and are subject to Arkansas use tax. Consequently, the Department has borne its burden of proven that the items are generally subject to Arkansas use tax. 6

7 C. Estoppel In Duchac v. City of Hot Springs, 67 Ark.App. 98, 992 S.W.2d 174, the Arkansas Court of Appeals discussed the requirements for an estoppel claim against a governmental entity, stating as follows in pertinent part: In City of Russellville v. Hodges, 330 Ark. 716, 957 S.W.2d 690 (1997), our supreme court set out the elements of estoppel: Four elements are necessary to establish estoppel. They are: (1) the party to be estopped must know the facts; (2) the party to be estopped must intend that the conduct be acted on or must act so that the party asserting the estoppel had a right to believe it was so intended; (3) the party asserting the estoppel must be ignorant of the facts; and (4) the party asserting the estoppel must rely on the other's conduct and be injured by that reliance. [Citations omitted.] Additionally, we have specifically held that a sovereign is not bound by the unauthorized acts of its employees. [Citations omitted.] Ark. at 719, 957 S.W.2d at The trial court also cited Hope Educ. Ass'n v. Hope School Dist., 310 Ark. 768, 839 S.W.2d 526 (1992), which applied the same elements of estoppel, with a few wording changes, to a sovereign. In applying these elements of estoppel to the facts of this case, the chancellor found they were not all satisfied.... According to appellant, the second element of estoppel, that the party to be estopped must intend that the conduct be relied on, is satisfied by the City billing and collecting occupational taxes, thereby acquiescing in appellant's use of the house as an apartment building. The Arkansas Supreme Court has held that estoppel may only be applied against the State when there has been an affirmative misrepresentation by an agent or agency of the State. Arkansas Dep't of Human Servs. v. Estate of Lewis, 325 Ark. 20, 922 S.W.2d 712 (1996). See also Foote's Dixie Dandy, Inc. v. McHenry,supra. Estoppel should not be applied where there was no clear proof of an affirmative misrepresentation. Everett, Director v. Jones, 277 Ark. 162, 639 S.W.2d 739 (1982). These requirements are equally applicable to municipal corporations. Miller v. City of Lake City, 302 Ark. 267, 789 S.W.2d 440 (1990). In the instant case there is no allegation of any affirmative misrepresentation by any agent of the City. The chancellor was correct in not applying estoppel to the City because of the City's acquiescence in appellant's use of the house as an apartment for many years. 7

8 As to the third element of estoppel, the party asserting the estoppel must be ignorant of the facts, appellant argues that he was justifiably ignorant of the zoning violation because the house was divided into apartments that were fully occupied when he purchased it, and, in the thirty years he has owned the house, the City never informed him that he was violating a zoning ordinance. Again, appellant is not claiming an affirmative misrepresentation by an agent of the City, only acquiescence. The chancellor found that since the zoning ordinance was law, and one is presumed to know the law, appellant could not rely on his ignorance. It has long been held that every person is presumed to know the law and that ignorance of its mandates is no excuse. Henderson v. Gladish, 198 Ark. 217, 128 S.W.2d 257 (1939). See also Hogg v. Jerry, 299 Ark. 283, 773 S.W.2d 84 (1989); Dunkin v. Citizens Bank of Jonesboro, 291 Ark. 588, 727 S.W.2d 138 (1987). Duchac, 67 Ark. App. at , 992 S.W.2d at As shown above, under court precedent, an estoppel claim against the Department requires proof that the Department s employee was aware of the necessary facts and made an affirmative misrepresentation; the Taxpayer lacked knowledge of the relevant facts; and the Taxpayer relied to their detriment on the Department s assertion. The Arkansas Court of Appeals specifically noted that mere lack of knowledge of a publicly available law is insufficient to support an estoppel claim. Here, the Taxpayer chose not to have the revenue office employees participate within this proceeding, providing a single perspective of his communications. It is uncertain precisely what information was told to the revenue office employees regarding this transaction and what advice was communicated to the Taxpayer prior to and during the registration. Further, the Taxpayer is unable claim lack of knowledge of the publicly available laws when satisfying the third element of an estoppel claim. The elements of an estoppel claim have not been met. Consequently, this argument is not persuasive. 8

9 D. Financial Hardship The Taxpayer contended that paying the assessment will create a financial hardship for him. If proven, the Taxpayer may qualify for the Department s Offer in Compromise program, allowing a portion of a tax debt to be forgiven based on a taxpayer s insolvency. The Offer in Compromise program is outlined in Regulation governing settlement or compromise of tax liabilities. To obtain the application for an Offer in Compromise and for assistance in filing the required information, the Taxpayer should contact Problem Resolution and Tax Information Office at DECISION AND ORDER The proposed assessment of use tax is sustained. The file is to be returned to the appropriate section of the Department for further proceedings in accordance with this Administrative Decision and applicable law. Pursuant to Ark. Code Ann (Supp. 2017), unless the Taxpayer requests in writing within twenty (20) days of the mailing of this decision that the Commissioner of Revenues revise the decision of the Administrative Law Judge, this decision shall be effective and become the action of the agency. The revision request may be mailed to the Assistant Commissioner of Revenues, P.O. Box 1272, Rm. 2440, Little Rock, Arkansas A revision request may also be faxed to the Assistant Commissioner of Revenues at (501) or ed to revision@dfa.arkansas.gov. The Commissioner of Revenues, within twenty (20) days of the mailing of this Administrative Decision, may revise the decision regardless of whether the Taxpayer has requested a revision. 9

10 Ark. Code Ann (Supp. 2017) provides for the judicial appeal of a final decision of an Administrative Law Judge or the Commissioner of Revenues on a final assessment or refund claim denial; however, the constitutionality of that code section is uncertain. 6 DATED: February 28, See Board of Trustees of Univ. of Arkansas v. Andrews, 2018 Ark