STATE OF ARKANSAS DEPARTMENT OF FINANCE & ADMINISTRATION OFFICE OF HEARINGS & APPEALS ADMINISTRATIVE DECISION

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1 STATE OF ARKANSAS DEPARTMENT OF FINANCE & ADMINISTRATION OFFICE OF HEARINGS & APPEALS ADMINISTRATIVE DECISION IN THE MATTER OF GROSS RECEIPTS (SALES) TAX ASSESSMENT (ACCT. NO.: ) AUDIT PERIOD: APRIL 1, 2014 AUDIT NO.: THROUGH APRIL 30, 2014 DOCKET NOS.: (SALES TAX) 1 TODD EVANS, ADMINISTRATIVE LAW JUDGE APPEARANCES This case is before the Office of Hearings and Appeals upon written protest dated August 23, 2017, signed by, COO, ( COO ) on behalf of, the Taxpayer. The Taxpayer protested an assessment issued by the Department of Finance and Administration ( Department ). A hearing was held in this matter on November 28, 2017, at 9:00 a.m. in Little Rock, Arkansas. The Department was represented by Greg Ivester, Attorney at Law, Office of Revenue Legal Counsel ( Department s Representative ). Also present for the Department was David Wilson, Audit Supervisor ( Audit Supervisor ). Danny Walker, Tax Auditor ( Auditor ), appeared by video teleconference for the Department., ( Taxpayer s Representative ) appeared at the hearing by video teleconference and represented the Taxpayer. Also present for the Taxpayer 1 This amount represents (Tax), (Failure to File Penalty), and (Interest). 1

2 by video teleconference was the COO,, Controller ( Controller ), and, General Manager ( General Manager ). ISSUE Whether the Department s assessment of the relevant transaction is correct under Arkansas law. Yes. FACTS AND CONTENTIONS OF THE PARTIES In his Answers to Information Request, the Taxpayer s Representative provided the following general information within his factual summary: is a contractor specializing in the. was hired by to clean its to restore the facility to its condition in order to meet the USDA standard imposed upon. contract with was based upon a time and material schedule that was provided to prior to the work being performed. purchased and supplied stored consumables and other required materials and supplies in for which it paid sales tax at the point of purchase. also purchased and supplied materials and consumable items in Arkansas for which it paid sales tax at the point of purchase. contacted the Arkansas Department of Finance and Administration (" DFA") to inquire whether it needed to obtain a sales tax permit or not. Upon describing the work it was to perform, was told by a DFA employee that it was not required to obtain a permit because the work it was to perform was not taxable pursuant to Arkansas Gross Receipts Tax Rule GR 9.4(E). job supervisor on site would track time sheets and material usage on the job daily and send those figures to corporate office. accounting clerk would then input those figure into their accounting software and generate invoices to. received total of 7 invoices for the job. accounting software automatically generated a line item for sales tax. Prior to submitting the final invoice to, conducted an audit of its time sheets, material usage forms, and reimbursable expenses. During this audit, it was discovered that the accounting clerk had made errors in excess of to the detriment of and that she had been including a line item for sales tax. Because an invoice had already been submitted to showing a grand total of, decided that 2

3 when they corrected the final invoice to send to, they would not bill for any expenses that exceeded that grand total. paid the invoice and closed its file. It was later discovered that accounting clerk had a brain tumor at the time which affected her work and she subsequently passed away due to brain cancer. Sometime in May of 2017, was audited by DFA and only provided DFA with the uncorrected invoice showing sales tax. During audit, provided DFA with its entire file for the job. See enclosed jump drive. On or about July 13, 2017, received DFA s notice of Sales and Use Tax Assessment. A. Hearing Testimony The Auditor testified that he performed the relevant audit of this Taxpayer. The Taxpayer has not registered for an Arkansas sales tax permit. He stated that the primary issue for the Department is that the Taxpayer performed services in Arkansas and the accompanying invoice (dated April 23, 2014 and numbered ) shows that in sales tax was collected from its customer. The collected tax was not remitted to the State of Arkansas. The Auditor further testified that the Taxpayer issued an amended invoice (dated April 22, 2014 and numbered ) to the customer that removed the sales tax line item and reallocated the tax amount to other line items on the invoice. The Taxpayer performed cleaning services in Arkansas that were necessitated by at its customer s location in, Arkansas. He did not research and analyze the actual services performed by the Taxpayer. He stated that his audit was simply based on the collection and non-remittance of the sales tax. During the Audit, he had no contact with the Taxpayer and assessed based on the original invoice that he received from an audit of the customer s records. Though cleaning services are generally taxable under Arkansas Gross Receipts 3

4 Tax Rule GR-9, he acknowledged that some cleaning services are exempted from sales tax. He does not have firsthand knowledge regarding the reasons for the discrepancy between the original and amended invoice. The Auditor does not know whether the Taxpayer s invoices were paid but assumes that they were. If tax is collected by a vendor, the Auditor stated that the vendor must file a report with the Department declaring the taxable sales and remitting the associated tax. He did receive both invoices during the Audit. The Auditor concluded his testimony by explaining the he utilized the original invoice because he believes that was the invoice paid by the Taxpayer s customer. The Controller testified that his work duties include the oversight of the Taxpayer s accounting and human resource functions. The relevant invoices were created from information sent by multiple employees. He explained that time sheets and tick sheets are ed or faxed to the home office daily from a job site, which detail the material and equipment used throughout a job. The information presented on those spreadsheets is then manually entered into the Taxpayer s system. The original April 23rd invoice was sent to the customer at the end of the job. 2 On April 25, 2014, the Controller stated that he contacted the Department to obtain a one-time exception to the permit registration requirement to remit the sales taxes collected from its customer on the relevant job. During that telephone call, the Department s employee inquired regarding the services performed and that employee told him that the Taxpayer s services 2 This invoice was attached as Exhibit 1 to the Department s Answers to Information Request. That document contained a line item that stated as follows: Sales Tax (9.75%). 4

5 were exempt from Arkansas Sales Tax. 3 He did not obtain any written confirmation that the services were not taxable. The Controller further testified that, prior to his discussion with the Department, he believed that the Taxpayer s services were subject to Arkansas sales tax. After the phone call, the Taxpayer re-audited the invoice for accuracy and additional errors were discovered. It was discovered that the original time and material billings totaled rather than the 4 billed on the April 23rd invoice. 5 He asserted that the discrepancy in price was a bookkeeping error in the calculation of equipment and materials used on the project. Based on these discoveries, the Controller issued a final amended invoice (dated April 22, 2014) that still totaled 6 ; however, the tax line item was removed and that amount was reallocated to other line items on the invoice. He stated that the final amended invoice is still about below the actual service cost because they decided not to bill the extra cost to prevent a change to the original invoice total. The amended invoice is dated the day before the original invoice because the Controller simply chose that date and manually entered it. The invoice number was not changed because the same invoice number is used for all billings related to a single job. The customer did pay the 3 The Controller s contemporaneous handwritten notes from that telephone call were entered as Taxpayer s Exhibit 3. That Exhibit states that the Taxpayer s services are exempt under GR- 9.4(E). It also states that the file should be re-audited to see if any additional changes need to be made to the invoice besides the sales tax adjustment. 4 This amount represents the total for the original invoice minus the sales tax line item. 5 This document was provided in a digital format and was labeled as Taxpayer s Exhibit 4. 6 This invoice was attached as Exhibit 2 to the Department s Answers to Information Request. That document removed the sales tax line item and added to the Sub-Total In-House Material, to the Sub-Total In-House Equipment, to the Sub-Total Drying Services, to the Sub-Total Reimbursable Expenses, to the 20% of Reimbursable Expenses, and to the Mobilization Fee. When added together, these amounts equal, the removed tax amount. 5

6 full invoiced amount. The Taxpayer paid sales tax on warehoused materials in Texas and paid Arkansas sales tax on any materials purchased in Arkansas. The Taxpayer billed for this project using several installment invoices and each installment invoice contained a sales tax line item. The billings issued prior to the final billing were not amended. He does not know when the amended invoice was issued but it was issued no later than April 27, The Controller completed his testimony noting that the customer had not paid the final billing until after the final amended invoice was issued. The General Manager testified that he runs the day-to-day operations of his office and the catastrophe response section. He worked on the job site during the relevant transaction and supervised that project. He noted that the governing contract for this transaction specifically states that the Taxpayer s cleaning services must comply with. He also noted that were on site and he worked with those individuals to ensure compliance with the governing rules. On February 17, 2014, he sent an to to follow up on her request for MSDS sheets used in the cleaning process and informed her that the project was proceeding smoothly. 7 B. Contentions of the Representatives In his protest, the COO stated the Taxpayer s objection to the assessment, stating as follows: provided services to to clean and sanitize their facility to comply with. Pursuant to GR 9.4 E, this is not a taxable service. During the Administrative Hearing, the Taxpayer s 7 A copy of this invoice was attached as Taxpayer s Exhibit 2. 6

7 Representative noted that the governing contract clearly states that the Taxpayer must comply with performed was necessary to and each of the individual services. Consequently, he argued that each of the Taxpayer s services qualify for the exemption under GR-9.4(E). He noted that the Taxpayer billed for less than it owed. He argued that Cook v. Sears-Roebuck & Co., 212 Ark. 308, 206 S.W.2d 20 (1947) is distinguishable because, in that case, Sears was paid in full for its products and received the tax payments as a surplus, resulting in unjust enrichment. He argued that the Taxpayer was not unjustly enriched because it was underpaid for its services. In his Answers to Information Request, the Department s Representative responded to the assertion in the Taxpayer s protest. Initially, he argued that the Taxpayer s cleaning services are generally taxable and that the Taxpayer has not proven that an exemption is applicable. As a threshold issue, however, he asserted that, before the applicability of an exemption can be considered, the Taxpayer is required to remit the taxes collected from its customer as the Department s tax collector and pursue a refund claim (requiring the initial refunding of the collected tax amount back to its customer), citing the Sears case. Absent those actions, he argued that the assessment should be sustained without considering the Taxpayer s exemption claim. Regardless of accounting errors, he stated, during the Administrative Hearing, that the Taxpayer billed its customer for sale tax and collected it; therefore, it must be remitted. He concluded his argument asserting that the failure to file penalty was appropriate since the Taxpayer collected sales tax but did not remit those proceeds to the Department and that interest was appropriate under Ark. Code Ann (Repl. 7

8 2012). During the Administrative Hearing, the Department s Representative also argued that, though the Taxpayer asserted that were on site, the Taxpayer has not shown that any particular service would qualify for the exemption under GR-9.4(E). After a general discussion of the burdens of proof in tax proceedings and a discussion of the applicable law, the contentions of the parties shall be addressed with a legal analysis and associated conclusions. follows: CONCLUSIONS OF LAW Burdens of Proof 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. 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 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

9 313(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). Tax Assessment Subject to the applicability of an exemption, a deduction, or a credit, sales tax is imposed on sales of tangible personal property or specifically enumerated taxable services made by in-state vendors/sellers to in-state purchasers. Ark. Code Ann et seq. (Repl. 2014, Supp. 2017). Generally, the provision of cleaning and janitorial services is subject to Arkansas Sales Tax. Ark. Code Ann (D)(i)(b) (Supp. 2017). Taxable cleaning services are defined as services to rid the interior or exterior of any building, dwelling, or other structure of dirt, impurities, or extraneous matter. A narrow exemption does exist for cleaning services that clean and sanitize the production and packaging areas of food processing facilities to meet specific standards prescribed and required by the United States Department of Agriculture.... Arkansas Gross Receipts Tax Rule GR-9.4(E). Initially, the Taxpayer has asserted that the line item for sales taxes was in error and no taxes were collected from its customer as reflected on the final amended invoice. This argument, however, is not persuasive based on the record 9

10 in this matter. The Controller testified that, at all times before his April 25th phone call, he thought that the Taxpayer s services were subject to Arkansas sales tax. As a result, he stated that all billings (including the final billing prior to the amendment) intentionally billed and collected Arkansas sales tax 8 on behalf of the Department. After discovering the accounting errors which resulted in an underbilling of its customer and learning that the provided services might be exempt, the record shows that the Taxpayer removed the tax line item and attempted to use those proceeds to offset the cost of its underbilling error rather than attempting to otherwise collect the cost of the unpaid services. Though the Taxpayer attempted to apply the tax proceeds to other expenses that it failed to bill its customer, that fact does not recharacterize those proceeds as anything other than tax proceeds collected from its customer on the Department s behalf. Tax proceeds must be remitted to the Department and a taxpayer is barred from asserting that the proceeds were wrongfully collected prior to remittance. In Cook v. Sears Roebuck & Co., 212 Ark. 308, 206 S.W.2d 20 (1947), the Arkansas Supreme addressed the issue of whether a taxpayer may retain tax proceeds from a customer while arguing that the collected proceeds were exempted or otherwise not taxable. The Arkansas Supreme Court ultimately concluded that Sears status under our Tax Act is that of a tax collector, and that the rule against unjust enrichment is a bar to Sears effort to recover (or retain) the tax which Sears collected from its customers under this Tax Act. Id. at , 206 S.W.2d at 8 Though the Controller asserted that amended billing was issued prior to the final installment payment by its customer, he did not state that the customer paid that invoice based on the amended invoice rather than the original billing which still contained the tax line item. The Controller further testified that all prior billings (representing roughly ninety-four percent (94%) of the total cost of the job) contained the tax line item and were not amended by the Taxpayer prior to payment. 10

11 26. The Arkansas Supreme further concluded that it was not a valid defense to the assessment for Sears to argue that the taxes it collected and retained should not have been collected. Id. at 320, 206 S.W.2d at 26. Under this precedent a customer may not retain tax proceeds collected from its customers and assert that those taxes were wrongfully collected as a defense to an assessment. Though the Taxpayer s Representative argued that the Taxpayer underbilled its customer and thus was not unjustly enriched in an attempt to distinguish the Sears case, this argument is not persuasive. The Taxpayer has utilized tax proceeds owed to the Department to offset the cost of its accounting error with its customer. This offsetting of the cost of its error with funds owed to the Department does result in unjust enrichment. Consequently, the Sears analysis applies as the Taxpayer was operating as a tax collector on behalf of the Department and is unjustly enriched by the retention of the tax proceeds for the purpose of offsetting its unpaid expenses. A clarification of the Sears holding was discovered during legal research for this decision. In Thomson v. Rhodes-Jennings Furn. Co. et al., 223 Ark. 705, 268 S.W.2d 376 (1954), a Tennessee furniture company was assessed Arkansas sales tax on purchases that were deemed completed in Tennessee. The furniture company s purchasers paid the applicable taxes on the relevant transactions into an escrow fund that would refund the collected taxes to each purchaser should the furniture company prevail in its assertion that the taxes were not owed. The Arkansas Supreme Court held that the Sears case s holding regarding unjust enrichment was not applicable because the money was held subject to return to the purchasers if the company prevailed, preventing unjust enrichment. Here, 11

12 however, the Taxpayer does not hold the tax proceeds subject to an obligation to refund those proceeds to its customer. Actually, the Taxpayer intends to retain the proceeds to offset an underbilling created by its accounting error. Consequently, the holding in the Thompson case is not applicable to the matter at hand. Thus, the general prohibition in the Sears case that prevents the retention of tax proceeds while asserting that those tax proceeds were wrongfully collected applies and controls this proceeding. In conclusion, the amount collected as tax on the customer s billings represents tax proceeds. As tax proceeds, that sum must be remitted to the Department and the Taxpayer is unable to assert that those proceeds were wrongfully collected as a defense to this assessment under the Sears case. The assessment of tax is sustained. 9 Failure to File Penalty With respect to the failure to file penalty, Ark. Code Ann (1) (Repl. 2012) provides as follows: In the case of a taxpayer's failure to file any return required by any state tax law on or before the date prescribed determined with regard to any extension of time for filing the return, unless it is shown that the failure is due to reasonable cause and not to willful neglect, there shall be added to the amount required to be shown as tax on the return five percent (5%) of the amount of the tax if the failure is not more than one (1) month, with an additional five percent (5%) for each additional month or fraction of a month during which the failure continues, not to exceed thirty-five percent (35%) in the aggregate.... Further, lack of knowledge of publicly available statutes and rules cannot be recognized as a defense to their enforcement. 29 Am. Jur. 2d Evidence 290; see 9 Since the Taxpayer is unable to argue that the tax proceeds were wrongfully collected in defense to the assessment under Sears, this decision shall not address whether the exemption under GR- 9.4(E) is applicable as it is rendered moot. 12

13 also Edward v. US, 334 F.2d 360 (1964) and Jellico Coal Min. Co. v. Commonwealth, 96 Ky. 373, 29 S.W. 26 ( Ky. App. 1895). The U.S. Supreme Court has explained the reason for this legal principle as follows: The whole course of the jurisprudence, criminal as well as civil, of the common law, points to a different conclusion. It is a common maxim, familiar to all minds, that ignorance of the law will not excuse any person, either civilly or criminally; and it results from the extreme difficulty of ascertaining what is, bonâ fide, the interpretation of the party; and the extreme danger of allowing such excuses to be set up for illegal acts, to the detriment of the public. Barlow v. US, 32 U.S. 404, 411 (1833). The Arkansas Supreme Court has also provided that the maxim that ignorance of the law is no defense applies in equal force to acts committed or omitted in violation of the criminal or civil laws of the land. State v. Simmons, 1 Ark. 265, 266 (1839). Consequently, the lack of knowledge of the legal requirements cannot be considered in the analysis regarding alleged violations. Here, the record shows that the Taxpayer collected sales tax from its customer but failed to remit those proceeds to the Department. Under the Sears case, the Taxpayer could not retain the collected tax proceeds on its sale from its customer even if it believed that the taxes were wrongfully collected. Those tax proceeds must still be remitted to the Department and any refund of those taxes must comply with the refund procedures outlined in Arkansas Gross Receipts Tax Rule GR Ignorance of this requirement cannot be recognized as a defense to the assessment of the failure to file penalty. Consequently, the assessment of the failure to file penalty is sustained. 13

14 Interest Interest must be assessed upon any tax deficiencies for the use of the State s tax dollars. See Ark. Code Ann (Repl. 2012). Consequently, the assessment of interest on the assessed transaction is sustained. DECISION AND ORDER The assessment 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 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. The Taxpayer may seek relief from the final decision of the Administrative Law Judge or the Commissioner of Revenues on a final assessment by following the procedure set forth in Ark. Code Ann (Supp. 2017). 14

15 DATED: December 22,