STATE OF ARKANSAS DEPARTMENT OF FINANCE AND ADMINISTRATION OFFICE OF HEARINGS & APPEALS ADMINISTRATIVE DECISION IN THE MATTER OF ACCT. NO.: REFUND CLAIM DISALLOWANCE (Other Tobacco Products) DOCKET NO.: 16-363 Period: ($ ) RAY HOWARD, ADMINISTRATIVE LAW JUDGE APPEARANCES This case is before the Office of Hearings and Appeals upon a written protest dated January 12, 2016, signed by, CPA ( ), on behalf of, the Taxpayer. The Taxpayer protested the denial of a refund claim by the Department of Finance and Administration ( Department ). The Letter ID Number is. An administrative hearing was held on May 17, 2016, at 2:00 p.m., in Little Rock, Arkansas. The Department was represented by Gina Dougherty and Lisa Ables, Attorneys at Law, Office of Revenue Legal Counsel ( Department s Representatives ). Present for the Department was Andrew Smith Assistant Administrator/ Miscellaneous Tax Section. The Taxpayer was represented by ( Taxpayer s Representative ). Present for the Taxpayer were - Vice President and - CFO. The record remained open until May 24, 2016, for the submission of evidence. 1
FINDINGS OF FACT/CONTENTIONS OF THE PARTIES The Department s Answers to Information Request stated, in pertinent part, as follows: (the "Company") is licensed as a tobacco product wholesaler[footnote 1 cites to Ark. Code Ann. 26-57-203 (Repl. 2014)] operating in. It sells tobacco products to retailers. Tobacco products includes cigarettes and other items commonly designated as "other tobacco products ("OTP"). The sale of tobacco products is subject to gross receipts tax[footnote 2 cites to Ark. Code Ann. 26-52-301(1) (Repl. 2014)] and certain excise taxes.[footnote 3 cites to Ark. Code Ann. 26-57-208 (16%); Ark. Code Ann. 26-57-803 (7%); Ark. Code Ann. 26-57-805 (7%); Ark. Code Ann. 26-57-807 (36%); Ark. Code Ann. 26-57-1102 (2%) (Repl. 2014)]. Manufacturers of tobacco products sell those items to their Sales Affiliates. The Sales Affiliates sell tobacco products to Wholesalers. Wholesalers are responsible for collecting tobacco products taxes upon the incidence of the sale to Retailers. Wholesalers remit those taxes to the Department on a monthly basis.[footnote 4 cites to Ark. Code Ann. 26-57-211 (Repl. 2014)]. The Company complied with this responsibility. The Company alleged that it overpaid excise taxes because Act 631 of 2013 changed the tax base upon which to compute the amount of OTP taxes charged to and collected from retailers. The Company filed a refund claim for the period from November 1, 2011 to September 30, 2013 for the alleged amount of the overpayment of OTP tax. During the time frame upon which the refund claim is based, under Ark. Code Ann. 26-57-203(16) (Supp. 2011) the term Manufacturer was defined as follows: (16)(A) "Manufacturer" means a person who produces a tobacco product for sale and includes, but is not limited to, importers and distributors that deal in tobacco products as manufacturers and that are required under this subchapter to sell only to licensed wholesalers or licensed retailers located in Arkansas. (B) "Manufacturer" includes a sales entity affiliate of the manufacturer. (Emphasis added). 2
During the time frame upon which the refund claim is based, a "sales entity affiliate" was defined under Ark. Code Ann. 26-57- 203 (Supp. 2011), as follows: 26(A) "Sales entity affiliate" means an entity that: (i) Sells cigarettes the entity acquires directly from a manufacturer or importer; and (ii) Is affiliated with the manufacturer or importer from which the entity acquires the cigarettes. (B) "Sales entity affiliate" includes entities in a relationship in which one entity directly or indirectly through one (1) or more intermediaries controls, is controlled by, or is under common control with the other entity; Ark. Code Ann. 26-57-203 (Supp. 2011). During the time frame upon which the refund claim is based, a "wholesaler" was defined as follows: (33)(A) "Wholesaler, means a person other than a manufacturer or a person owned or operated by a manufacturer that: (i) does business within the state at or from an established place of business that purchases unstamped or untaxed cigarettes or other tobacco products directly from manufacturers that distribute tobacco products in the state; and (ii) sells to properly licensed cigarette vendors or retailers. The Company hinges its argument supporting the refund claim upon Act 631's change to the definition of the term "sales affiliate." The Company contends that until the passage of Act 631 of 2013 the definition of "manufacturer" included "sales entity affiliate" only for sales of cigarettes, not for sales of other tobacco products. Because of the amendment adding the term "other tobacco products" to the definition of sales entity affiliate, the Company argues that for OTP taxes the proper basis for the computation of the tax levy was the price at which the manufacturer sold OTP to its sales affiliate. Therefore, using the price at which the sales affiliate then sold OTP to wholesalers, which is higher, was not the proper basis for the computation of the tax levy. The levy based upon the higher price thus created an overpayment for which the Company is entitled to a refund. 3
The Company's argument is misplaced. It rests upon an immaterial change to the language of the tobacco products statutes and does not support its claim. All tobacco products, regardless of whether they are cigarettes or OTP remain subject to the levies imposed at the same sales price basis. To conclude otherwise would mean that the Legislature intended that certain tobacco products, although contained within the definition of tobacco products, would be taxed differently than other tobacco products.. [P. 2-4]. The Taxpayer s Answers to Information Request provides, in pertinent part, as follows: The tax will be collectively referred to as other tobacco products tax or OTP Tax at the combined tax rate of 68%[ 1, Footnote added] of the manufacturer s selling price. Senate Bill 540 (now Act 631) was passed during the 2013 Legislative Session amending the tax levy statutes by changing the tax base from manufacturing s selling price to invoice price to a wholesaler or retailer before discounts effective October 1, 2013. At all relevant times, the Company was a licensed distributor of tobacco products in the state of Arkansas, and was required to report and pay the OTP tax to the Arkansas Department of Finance and Administration ("DFA") on sales of OTP to retailers in Arkansas. The Company purchased its OTP directly from tobacco manufacturers, with the exception for products purchased from The Company has reported and paid the OTP tax at the combined rate of 68%. In 1990,, a vertically integrated firm that manufactured and marketed moist smokeless tobacco and other tobacco products, became a holding company of two separate wholly-owned subsidiaries: (1), which manufactured the smokeless tobacco products (referred to as "Manufacturing Entity"), and (2) (referred to as "Sales Entity"), which was the sole distributor who marketed and 1 See Ark. Code Ann. 26-57-208 (16%); Ark. Code Ann. 26-57-803 (7%); Ark. Code Ann. 26-57-805 (7%); Ark. Code Ann. 26-57-807 (36%); and Ark. Code Ann. 26-57-1102 (2%). 4
distributed all of the tobacco products manufactured by Parent company was purchased by in 2008, which now includes As illustrated below, the Company has incorrectly paid the Arkansas OTP tax based on the invoice price [B][ 2, Footnote added] from (a tobacco distributor) rather than paying the Arkansas OTP tax based on the "manufacturer's selling price" [A][ 3, Footnote added] of (a tobacco manufacturer) pursuant to the relevant tax statutes during the open refund period within the statute of limitation in 2011 through September 30, 2013: [P. 1-2, Footnotes added]. The testimony and arguments presented at the hearing were consistent with the relevant information contained in the Taxpayer s Answers to Information Request which stated, in part: The OTP tax refund claims were denied on November 18, 2016. (See Exhibit G) In the denial letter, Mr. Andrew Smith cited the following reasons for denying the refund: ii) "Sales Entity Affiliate" "Furthermore, the arguments cited in the claim involve an analysis of the Arkansas Code sections imposing the taxes in question. After reviewing these arguments and the cited statutory provisions, DFA has determined that the taxes were properly paid, and that the refund claim must be denied as a matter of law. DFA has concluded that the OTP tax is properly imposed on the amount charged by the sales affiliate to the wholesaler. Under Ark. Code Ann. 26-57-203(26(B)(Supp 2011), the term "manufacturer" includes a "sales entity affiliate." A sales entity affiliate is defined to include entities in a relationship in which one entity directly or indirectly through one (1) or more intermediaries 2 Designated on the omitted flowchart as The 1 st distributor (sales entity) selling tobacco products to a 2 nd distributor (namely, The Company) at the wholesale invoice price. 3 Designated on the omitted flowchart as A manufacturer (manufacturing entity) selling tobacco products to a 1 st distributor (sales entity) at the manufacturer s selling price referred to as the Transfer Price 5
controls, is controlled by, or is under common control with the other entity. Consequently the "manufacturer's selling price" to the wholesaler would be the invoice price paid by the wholesaler to the sales affiliate. Therefore, the Company remitted tax on the appropriate tax base and is not due a refund. ii) "Sales Entity Affiliate" The DFA has concluded that that the OTP tax is properly imposed on the amount charged by the sales affiliate to the wholesaler because the term "manufacturer" includes a "sales entity affiliate" as amended under A.C..A. 26-57-203(26)(B)(Supp2011). It is our contention that the DFA's conclusion is incorrect as the 2011 legislative amendment defining "sales entity affiliate" related to the selling of cigarettes only, and is not applicable to the selling of other tobacco products during the relevant refund periods. Accordingly, the Company has in fact overpaid the Arkansas OTP tax pursuant to the Arkansas Tobacco Products Act of 1977 ("The Act") on products based on the invoice price from ("sales entity" -- a tobacco distributor), rather than paying the correct OTP tax based on the "manufacturer's selling price" from ("manufacturing entity" -- a tobacco manufacturer). The context of the term "Sales Entity Affiliate" in A.C..A. 26-57- 203(26)(B)(Supp 2011) must be interpreted in its entirety to give effect to the intent of the legislature. The full text of A.C.A. 26-57- 203(26) (See Exhibit I) defines "sales entity affiliate" with a clearly expressed reference to selling of cigarette only, with no reference to selling of other tobacco products. [P. 4-7]. ISSUE Whether the Department s denial of the Taxpayer s claim for a refund should be sustained? Yes. CONCLUSIONS OF LAW Standard of Proof Ark. Code Ann. 26-18-313(c) (Supp. 2015) addresses the burden of proof to be applied to matters of fact and evidence in this case and states, as follows: 6
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. See 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 that: [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. Ark. Code Ann. 26-18-507 (Repl. 2012) provides for a refund of any state taxes erroneously paid in excess of the taxes lawfully due. The Taxpayer bears the burden of proving by a preponderance of the evidence that the claimed refund was erroneously paid and in excess of the taxes lawfully due. Refund Claim During the audit period, Ark. Code Ann. 26-57-203(26) (Supp. 2011) provided as follows: (A) "Sales entity affiliate" means an entity that: (i) Sells cigarettes the entity acquires directly from a manufacturer or importer; and (ii) Is affiliated with the manufacturer or importer from which the entity acquires the cigarettes. (B) "Sales entity affiliate" includes entities in a relationship in which one entity directly or indirectly through one (1) or more intermediaries controls, is controlled by, or is under common control with the other entity[.] The construction and interpretation of Ark. Code Ann. 26-57-203(26) (Supp. 2011) is critical to the resolution of this case. The Taxpayer s 7
Representative argued that the provisions of Ark. Code Ann. 26-57-203(26)(A) (Supp. 2011) and Ark. Code Ann. 26-57-203(26)(B) (Supp. 2011) should be construed so that sales entity affiliates were limited to sellers of cigarettes. The Department s Representatives argued that Ark. Code Ann. 26-57-203(26)(B) (Supp. 2011) did not limit sales entity affiliates to sellers of cigarettes. The Department s argument is persuasive. An interpretation of Ark. Code Ann. 26-57-203(26)(B) (Supp. 2011) to include the limiting language contained in Ark. Code Ann. 26-57-203(26)(A) (Supp. 2011) (i.e. [s]ells cigarettes ) would violate a rule of statutory construction. 4 In Neeve v. City of Caddo Valley, 351 Ark. 235, at 238, 91 S.W.3d 71 (2002), the Arkansas Supreme Court stated that, we will not read into a statute a provision not put there by the General Assembly. Additionally, the absence of a conjunction between subdivisions Ark. Code Ann. 26-57- 203(26)(A) (Supp. 2011) and Ark. Code Ann. 26-57-203(26)(B) (Supp. 2011) logically leads to the conclusion that Ark. Code Ann. 26-57-203(26)(B) (Supp. 2011) was intended to set forth a separate and distinct definition of sales entity affiliate from Ark. Code Ann. 26-57-203(26)(A) (Supp. 2011). 5 The Department s interpretation of a tax rule or tax statute is entitled to deference unless the interpretation is clearly erroneous. The Arkansas Supreme Court has recognized that administrative agencies are often required to interpret statutes and rules. In Walnut Grove School Distr. No. 6 of Boone County v. 4 Bullet points 11 and 12 on Taxpayer s Exhibit J accurately describe the language of Section 3 of Act 631 of 2013 regarding Ark. Code Ann. 26-53-203(26)(A). 5 See Prunty v. US Dept. of Agriculture, Food, & Nutrition Service, 573 F. Supp. 1015, 1020 (1983). 8
County Board of Education, 204 Ark. 354, 162 S.W.2d 64 (1942), the court s opinion stated, in part: The administrative construction generally should be clearly wrong before it is overturned. Such a construction, commonly referred to as practical construction, although not controlling, is nevertheless entitled to considerable weight. It is highly persuasive. Id. at 359, 162 S.W.2d at 66. The plain wording of Ark. Code Ann. 26-57-203(26)(B) (Supp. 2011) supports a finding that the Department s interpretation is not clearly wrong since the limiting language of [s]ells cigarettes is not contained in the subdivision. Under the facts and circumstances of this case, a preponderance of the evidence supports a finding that was a sales entity affiliate of, under Ark. Code Ann. 26-57-203(26)(B) (Supp. 2011), with respect to taxes levied on other tobacco products during the audit period. Based upon the finding that was a sales entity affiliate of taxes 6 during the audit period on the invoices from, the Taxpayer remitted the correct amount of Consequently, the Taxpayer failed to prove that taxes were erroneously paid in excess of the taxes lawfully due and the Taxpayer failed to prove entitlement to the requested refund by a preponderance of the evidence. 7 6 See Ark. Code Ann. 26-57-208 (16%); Ark. Code Ann. 26-57-803 (7%); Ark. Code Ann. 26-57-805 (7%); Ark. Code Ann. 26-57-807 (36%); and Ark. Code Ann. 26-57-1102 (2%). 7 This conclusion rendered moot the numerous other issues raised by the parties including, but not limited to, the identity of the entity which borne the taxes, whether the Taxpayer merely collected rather than paid the taxes, whether Act 631 of 2013 amended the law or clarified the law, and the adequacy of the retail consents or assignments. 9
DECISION AND ORDER The refund claim denial 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. 26-18-405 (Supp. 2015), 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 72203. 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 notice of a denial of a claim for refund by following the procedure set forth in Ark. Code Ann. 26-18-406 (Supp. 2015). OFFICE OF HEARINGS & APPEALS DATED: July 27, 2016 10