Department of Finance Post Office Box 3278 and Administration

Transcription

1 STATE OF ARKANSAS OFFICE OF THE DIRECTOR 1509 West Seventh Street, Suite 401 Department of Finance Post Office Box 3278 and Administration Little Rock, Arkansas Phone: (501) Fax: (501) RE: In the Matter of Request for Revision Docket Numbers: and : This letter is in response to your request for a revision of the Administrative Decision entered in the above-referenced matter on November 9, Your letter, dated November 29, 2017, is considered a timely filed request for revision, and this letter will constitute the final decision of the Arkansas Department of Finance and Administration (the Department ) under the provisions of Ark. Code Ann (Supp. 2017). Following a review of your revision request letter, the administrative decision, and the documentation contained in the case file, the administrative decision should be sustained in full. FACTS ( Taxpayer ) is a commercial printer and distributor located in Little Rock, Arkansas. Taxpayer uses commercial printing machinery that prints by a web offset printing method. This method involves the use of a series of rollers to deliver ink to printing plates, which then delivers ink to rubber rollers that impress the ink onto the final product. In conduct of the audit that began on November 9, 2015, the auditor reviewed Taxpayer s sales invoices, journals, purchase invoices, credit card statements, and fixed asset listings and determined that Taxpayer failed to remit use tax on certain items, including ink rollers and cleaning chemicals. The auditor requested that Taxpayer provide exemption certificates from purchasers that had not remitted sales tax on their original invoices. After indicating that it did not have copies of some of the exemption certificates, Taxpayer was afforded the opportunity to gather the exemption certificates. The auditor assessed sales tax on the invoices for which Taxpayer failed to present an exemption certificate and for invoices for which Taxpayer failed to provide adequate proof that such transaction would have been exempt from tax.

2 Page 2 of 5 An administrative hearing was held on September 12, 2017, in Little Rock, Arkansas. Appearing for the Department were Guy Meneley, Audit Supervisor, and Deven Toney, Tax Auditor. Appearing for the Taxpayer were, President, and, Cost Accountant. The hearing officer determined that the Department properly assessed compensating use tax on invoices of out-of-state purchases, and sales tax on the invoices wherein no sales tax had been collected. ANALYSIS In your revision request, you state that the hearing officer erred in sustaining: (1) the sales tax assessment in relation to invoices from,,,, and ; and (2) the assessment of compensating use tax on rollers and press cleaning chemicals. Your request for revision does not cite any new facts in support of your position. 1. Sales Tax Assessment You are seeking a revision on the assessment of sales tax on the invoices of five specific purchasers referenced above. Testimony by the auditor established that these purchasers either did not present an exemption certificate or provide a valid sales tax permit number. Specifically, you contend that even without a sales tax exemption certificate or a valid sales tax number, the Taxpayer should be relieved of liability because Taxpayer proved by other means that the transaction was not taxable. You are incorrect. Arkansas gross receipts (sales) tax generally applies to all sales of tangible personal property and certain specifically enumerated services unless an exemption or credit is shown to apply. Ark. Code Ann (Supp. 2015). Printing services of all kinds are specifically enumerated taxable services. Ark. Code Ann (4) (Supp. 2015). However, Arkansas provides an exemption for gross receipts derived from the sale of newspapers and publications sold through regular subscription. Ark. Code Ann (4) and (14) (Supp. 2015). Arkansas Gross Receipts Rule GR-48(A) provides guidance on the definition of these terms: A. DEFINITIONS. 5. Publication means any pamphlet, magazine, journal, or periodical, other than a newspaper, designed for the information or entertainment of the general public or any segment thereof. 6. Regular subscription means the purchase by advance payment of a specified number (two or more) of issues of a publication over a certain period of time, and delivered to the subscriber by mail or otherwise.

3 Page 3 of 5 Generally, the liability for collection and remittance of sales tax is upon the seller. Ark. Code Ann (Supp. 2015). A seller, however, may be relieved of this liability if the customer makes an exemption claim and the seller obtains certain information from that customer. Ark. Code Ann (a) (Supp. 2015). At that point, the purchaser will become liable for the sales tax liability if the Department ultimately determines that the purchaser improperly claimed an exemption. Ark. Code Ann (e) (Supp. 2015). If a seller fails to obtain sufficient information from a purchaser making an exemption claim, a safe harbor is present. Ark. Code Ann (g)(2)(A) (Supp. 2015). Under that subsection, the seller is granted an additional one hundred and twenty (120) days from the date of the Department s request for substantiation to prove by other means that the transaction was not subject to sales or use tax, or to obtain in good faith a fully completed exemption certificate from the purchaser. Id. To obtain an exemption certificate in good faith, the exemption must have been available at the time in the jurisdiction where the transaction is sourced, could be applicable to the item being purchased, and must be reasonable for the purchaser s business. Ark. Code Ann (g)(2)(B) (Supp. 2015). It is undisputed that these five purchasers either did not provide exemption certificates or did not provide exemption certificates with valid sales tax ID numbers. The hearing officer did not consider the Taxpayer s argument that it should not be assessed because the underlying transaction was not taxable. Even assuming such an argument were considered, Taxpayer would not prevail. Taxpayer s argument that the provision of these publications as part of a paid membership to an organization qualifies as a subscription under Arkansas law is not well taken. The five purchasers at issue ordered the printing of publications that were provided to consumers free of charge as part of a larger paid membership. Because such items were not resold, they would not qualify for the sale-for-resale exemption. A payment of membership to an organization is not the purchase by advance payment of a specified number (two or more) of issues of a publication over a certain period of time, and delivered to the subscriber by mail or otherwise. See Ark. Code Ann (14) (Supp. 2015) and GR-48(A)(6). Moreover, the Taxpayer provided self-serving testimony via its Cost Accountant regarding the resale of these items, and thus failed to meet its burden by a preponderance of evidence that the purchases should be exempt as salefor-resale. For these reasons, the finding of the hearing officer with respect to the assessment of sales tax is affirmed. 2. Use Tax Assessment You are also seeking a revision on the assessment of use tax in relation to the rollers purchased for use in the Taxpayer s web offset printers and press cleaning chemicals, which are used to clean the presses during the printing process. Arkansas compensating (use) tax generally applies to the privilege of storing, using, distributing, or consuming tangible personal property and taxable services purchased outside the state for use inside the state. Ark. Code Ann

4 Page 4 of 5 (Supp. 2015). A purchaser is generally liable for Arkansas use tax unless a seller pays the tax on the purchaser s behalf. Ark. Code. Ann (Supp. 2015). Machinery and equipment used directly in the manufacturing of a printed newspaper by publishers and printers are exempt from tax. However, such machinery and equipment must still comply with the requirements of Arkansas Gross Receipts Tax Rule GR-55. Arkansas Gross Receipts Tax Rule GR-56.2(A). Items such as repair or replacement parts, tools, supplies, and other consumable parts and supplies are not exempt from tax. Arkansas Gross Receipts Tax Rule GR-56.2(E). To qualify as an exempt die, tool, or device, a piece of equipment must be attached to or a part of a unit of machinery that determine the physical characteristics of the finished product[.] Ark. Code Ann (c)(3)(B)(ii) (Repl. 2014). Specifically, a Taxpayer must demonstrate that an item is attached to, or part of, a unit of machinery and... imparts a predetermined and distinctive shape, pattern, texture, or finish to a material or impresses an object or material[.] Arkansas Gross Receipts Tax Rule GR-56(F)(2). A. Rollers Taxpayer testified that a system of rollers is used to transfer ink from the initial entry point to the printing plates. The rollers do not physically interact with the final printed product. The rollers are either hollow or steel centered cylinders that are surfaced with rubber or a similar material. In time, the rubber exterior wears down and must be returned to the vendor to have the coating repaired. The rollers do not contact the final product and do not impart a predetermined and distinctive pattern onto the paper. Accordingly, the rollers do not fit the definition of a mold or die for Arkansas sales and use tax purposes. The repair of the rollers is a taxable repair of manufacturing equipment pursuant to Arkansas Gross Receipts Rule GR-56.2(E). B. Press Cleaning Chemicals Taxpayer testified that it used certain chemicals to clean and remove excess ink from the printing equipment between jobs. The chemicals are not reused and are not meant to be incorporated into the final product. Taxpayer contends these chemicals are exempt under Arkansas Gross Receipts Rule GR-55.1(C)(2)(a). The Taxpayer is incorrect. The chemicals are used to clean the machinery and are taxable as cleaning chemicals under Gross Receipts Rule GR-55.1(C)(2)(c). Taxpayer s argument that the chemicals were not used to clean the equipment, but rather to prevent a physical effect during the manufacturing process is incorrect. The hearing officer particularly noted that testimony provided by the Taxpayer s President that established that the chemicals were used to clean the equipment in between print jobs in lieu of manual cleaning of the equipment. The evidence provided at the hearing established that the chemicals were used to clean the equipment. Taxpayer s argument that such

5 Page 5 of 5 chemicals are analogous to the sanitization chemicals used to meet USDA standards is not correct. CONCLUSION Having considered the arguments set forth by both parties, it is determined that the administrative decision should be sustained in full. This concludes your administrative remedies under the Arkansas Tax Procedure Act. Sincerely, Walter Anger Deputy Director and Commissioner of Revenue