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 72203-3278 Phone: (501) 682-2242 Fax: (501) 682-1029 http://www.state.ar.us/dfa RE: In the Matter of Sales Tax Assessment Docket Numbers: 15-323 and 15-324 : This letter is prepared in response to your request on behalf of your client,, for a revision of the Administrative Decision entered in the above-referenced matter on September 28, 2015. Your letter dated October 16, 2015 is considered a timely filed request for revision and this letter will constitute the final decision of the Arkansas Department of Finance and Administration ( Department ) under the provisions of Ark. Code Ann. 26-18-405. In your letter you seek a revision of the decision as it applies to the following issues: (1) Whether an assessment of tax to a taxpayer who improperly collected tax from its customers was appropriate. (2) Whether Taxpayer is a contractor whose receipts are excluded from gross receipts tax in their entirety. (3) Whether Taxpayer is entitled to an equitable resolution based on offsetting the proposed assessment by the assertion that DFA has unjustly enriched itself to the extent of approximately $ as a result of the Taxpayer s erroneous collecting of taxes from its customers since 1995. BACKGROUND ( Taxpayer ) is a corporation owned by. The Taxpayer fabricates stone and marble decorative solutions and has been in operation in Arkansas since. An audit was conducted by the Department in November 2014. The result of the audit was an assessment of gross receipts and use taxes. Based on your revision request and supporting brief, the Department s assessment of use tax is not in dispute. Instead, the Taxpayer seeks a revision of the Administrative Decision as to the gross receipts tax assessment.
Page 2 of 7 This was the Taxpayer s first time being audited and it was determined to be neither negligent nor intentionally disregarding the law. Therefore, no penalty was assessed. The administrative hearing was held in this matter on September 20, 2015. The Department s auditor and her supervisor were present as the state s witnesses., the owner s daughter-inlaw and bookkeeper, was present as the Taxpayer s witness. The auditor and her supervisor testified that after reviewing Taxpayer s invoices and other records from the audit period, the Taxpayer collected $ total state gross receipts tax from its customers, but reported and remitted only $. Additionally, $ was similarly collected for local taxes that were not remitted to the state. The total of $ is the basis for the sales tax assessment. testified that she understood that the Taxpayer operated as a contractor and the collection of tax was not necessary on contractor services. also testified that most, if not all, sales by the Taxpayer were contractor services. The raw materials and supplies necessary to produce the product being installed for its customers were purchased tax free with an exemption certificate. Because the basis for the assessment was the collection of tax that was not remitted to the state, the issue of whether the Taxpayer qualified as a contractor was not deemed relevant in the Administrative Law Judge s ruling. Following the hearing, on September 28, 2015, the Administrative Law Judge sustained the assessment and stated, The Sears-Roebuck case is directly applicable and demonstrates that a taxpayer cannot retain tax proceeds that it collects from its customers as an agent for the Department and argue that the proceeds should not have been collected as a defense to the subsequent assessment of the retained tax proceeds. Each issue you present in your request for revision will be addressed in turn below. (1) Whether an assessment of tax to a taxpayer who improperly collected tax from its customers and then failed to remit that tax was appropriate. Based on the information contained in your letter and supporting brief, it is necessary to determine whether Cook v. Sears Roebuck & Co., 212 Ark. 308, 206 S.W.2d 20 (1947) was applicable to the facts in this case. In the Sears case, 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 319-320, 206 S.W.2d at 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. After researching a number of similar cases where an improper tax was collected and allowed to be returned to the taxpayer, the common theme is that a tax collected from customers
Page 3 of 7 may be refunded to the taxpayer, but only in the event that it benefits the customers who originally bore the tax. Any other outcome results in unjust enrichment. See Thomson v. Rhodes- Jennings Furn. Co. et al., 223 Ark. 705, 268 S.W.2d 376 (1954). In the Rhodes-Jennings case, the Arkansas Supreme Court authorized a slight exception to the requirement that the taxpayer remit the collected tax to the state. In that case, the court determined that the tax could be held in escrow for ultimate repayment to the customer if the taxpayer prevailed in its argument that the assessment was improper. However, that was only authorized because the tax was collected from identified customers and under the terms of a formal agreement with those customers that required Rhodes-Jennings to refund the tax to the customer in the event the assessment against Rhodes-Jennings was not upheld. In considering your assertion that the Taxpayer s sales should never have been taxed, it is important to note that the Taxpayer kept and did not remit $ of the tax that was collected from its customers and did not refund the tax to its customers. In addition, the Taxpayer did not enter into any formal agreements with its customers to refund the tax or hold the tax in escrow for refund to its customers. 1 Therefore, even if the tax was determined to be improper, the Sears and Rhodes-Jennings cases still stand for the proposition that the Taxpayer cannot keep the tax it collected. The Taxpayer must either demonstrate that it has refunded the tax to its customers or it must remit the tax to the Department. Even if the tax was determined to be improperly collected under the Taxpayer s argument that it performed nontaxable contractor services under Ark. Code Ann. 26-52-301(3)(B)(viii)(a) (Repl. 2014), it is important to note that the Taxpayer is still responsible for payment of sales and use taxes due on materials it purchased for use in performing those services. Arkansas Gross Receipts Tax Rule GR-21(D)(1) provides, in part: A business holding a sales tax permit should purchase all materials used in its construction, repair, and retail business exempt from sales tax as sales for resale. Any materials used in the performance of non-taxable services are not taxed to the customer; however, the business must self-assess, report, and pay sales tax as a withdrawal from inventory (stock) on the purchase price of the materials. Tax is due at the time the goods are withdrawn from stock. 1 In your request for revision, you asked, How could a customer prove the tax he or she paid in 2008 was not paid to the State of Arkansas until 2015? If the Taxpayer cannot answer that question, this indicates that the Taxpayer s records are not sufficient to permit the Taxpayer to determine which customer s tax was kept by the Taxpayer and which customer s tax was remitted for purposes of properly refunding the collected tax to its customers. Therefore, the rulings in the Sears and Rhodes-Jenning cases would dictate that the tax cannot be realistically returned to the customers and must be remitted to the state to prevent unjust enrichment.
Page 4 of 7 Any tax that might have been improperly collected from customers for contractor services could not be used to offset the tax on materials because the Taxpayer (not the customer) is statutorily responsible for the tax due. See Ark. Code Ann. 26-52-301(3)(B)(viii)(b) and GR-21. (2) Whether Taxpayer is a contractor whose receipts are excluded from gross receipts tax in their entirety. As noted above, even if the Taxpayer qualifies as a contractor whose services are excluded from gross receipts tax in their entirety, it does not change the fact that the tax it collected must be remitted to the Department absent refund to its customers. However, the Taxpayer has not provided sufficient evidence to permit the Department to determine whether all of the sales made by the Taxpayer during the audit period were taxable sales of tangible personal property or sales of contractor services. A review of the record indicates that the auditor testified that she did not assess tax on labor billed by the Taxpayer where labor was broken out on an invoice or where she could otherwise tell that an installation service had been performed. A review of the record further indicates that the Taxpayer s bookkeeper testified that approximately 90% of the products produced by the Taxpayer were installed by the Taxpayer. You provided no additional documentation with your request for revision that would provide additional evidence as to the sales made by the Taxpayer during the audit period. Therefore, based upon the available evidence, the auditor only assessed tax where the tax was collected and not remitted or where an invoice was not sufficient to determine whether a transaction was the taxable sale of tangible personal property or the sale of a contractor service. The Department bears the burden of proving that tax applies to a transaction by a preponderance of the evidence. See Ark. Code Ann. 26-18-313(d). Where an invoice reflects only charges for tangible personal property, the assessment of tax is proper until such time as the taxpayer is able to provide proof to refute that assessment by a preponderance of the evidence. See generally Ark. Code Ann. 26-18-313 (Supp. 2015). 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). A taxpayer cannot meet this burden of proof through scant documentation and self-serving testimony. Leathers v. A & B Dirt Movers, Inc., 311 Ark. 320, 844 S.W.2d 314 (1992). Therefore, based upon the evidence provided, the Taxpayer has not proven by a preponderance of the evidence that the sales it made during the audit period were contractor services that are excepted from tax under the provisions of Ark. Code Ann. 26-52-301(3)(B)(viii)(a). (3) Whether Taxpayer is entitled to an equitable resolution based on offsetting the proposed assessment by the assertion that DFA has unjustly enriched itself to the extent of approximately $ as a result of the Taxpayer s erroneous collecting of taxes from its customers since 1995. As stated above, the Taxpayer has not proven that the sales it made during the audit period were non-taxable contractor services. To the extent that the Taxpayer may have performed non-
Page 5 of 7 taxable contractor services both within and without the audit period and remitted tax to this agency for those services, there are two reasons why it would be improper to offset the assessed liability with taxes that have previously been remitted by the Taxpayer. First, assuming the Taxpayer performed non-taxable contractor services for its customers and improperly collected and remitted tax on those services, the customers would be entitled to a refund of the collected tax and the customer s tax dollars could not be converted to the Taxpayer s use as that would be another form of unjust enrichment prohibited under the Sears case. Second, the voluntary payment rule would apply to prevent any type of offset, equitable or otherwise, from applying to the facts of this case. The Arkansas Supreme Court stated in City of Little Rock v. Cash, 277 Ark. 494, 644 S.W.2d 229 (1982) that it has always followed the common law rule prohibiting the recovery of voluntarily paid taxes. The Cash court, quoting from Thompson, Comm'r v. Continental Southern Lines, Inc., 222 Ark. 108, 257 S.W.2d 375 (1953), stated the general rule as follows: Appellee seeks to recover voluntary payments made of taxes. This cannot be done. Cooley in The Law of Taxation, Ch. 20, 1282, gives this rule: It is well settled that if the payment of a tax is a voluntary payment, it cannot be recovered back, except where a recovery is authorized by the provisions of a governing statute regardless of whether the payment is voluntary or compulsory. (Vol. 3 at p. 2561); and further, Where voluntary payments are not recoverable, it is immaterial that the tax or assessment has been illegally laid, or even that the law under which it was laid was unconstitutional. The principle is an ancient one in the common law, and is of general application. Every man is supposed to know the law, and if he voluntarily makes a payment which the law would not compel him to make, he cannot afterwards assign his ignorance of the law as a reason why the State should furnish him with legal remedies to recover it back. Ignorance or mistake of law by one who voluntarily pays a tax illegally assessed furnishes no ground of recovery. (Vol. 3 at page 2564). In Weiss v. Chavers, 357 Ark. 607, 184 S.W.3d 437 (2004), the Arkansas Supreme Court stated as follows: We have consistently followed the common-law rule that prohibits the recovery of voluntarily-paid taxes, except where a recovery is authorized by a statute without regard to whether the payment is voluntary or compulsory. [Emphasis added and citation omitted]. * * *
Page 6 of 7 In Mertz v. Pappas, 320 Ark. 368, 896 S.W.2d 593 (1995), we explained the rationale behind the voluntary-payment rule. Specifically, we explained: When taxes are paid to a government they are deposited into that government s general revenues and ordinarily are spent within that tax year. However, when the government is put on notice that it may be required to refund those taxes, it can make the appropriate allowance for a possible refund. If we were to allow refunds for taxes voluntarily paid in previous years, it would jeopardize current and future governmental operations because current and future funds might be necessary for the refund. [Citation omitted and internal citations omitted]. Id. at 614 615, 184 S.W.3d at 441. Ark. Code Ann. 26-18-507 provides the sole mechanism for recovery of voluntarily paid taxes. Specifically, a taxpayer who has paid tax in excess of the amount due must file an amended return or verified claim for refund. Under Ark. Code Ann. 26-18-306(i), a claim for refund or amended return must be filed within three years of the date the return was due, or two years from the date the tax was paid, whichever occurs later. Where a taxpayer claiming entitlement to a refund has acted as an agent of the state in collection of a tax, as the Taxpayer has done in this case, Ark. Code Ann. 26-18-507(d) precludes refund until such time as the taxpayer has repaid the tax to the person from whom the tax was collected. Thus, for the above reasons, it is clear the Taxpayer is not entitled to any form of setoff even if it could establish by a preponderance of the evidence that it has collected and remitted tax throughout the years on non-taxable contractor services. CONCLUSION Allowing Taxpayer to retain money collected from its customers but not remitted to the Department would result in an unjust enrichment. The Taxpayer has not proven by a preponderance of the evidence that its invoices for the services it performed and where the auditor assessed tax were non-taxable contractor services. The Taxpayer is not entitled to any offset or credit for taxes collected and remitted in relation to sale of non-taxable services beyond the relief afforded to it under state law.
Page 7 of 7 The administrative decision is sustained. This concludes your administrative remedies under the Tax Procedure Act. Relief from this decision may be sought according to the procedure set forth in Ark. Code Ann. 26-18-406. Sincerely, Tim Leathers Deputy Director and Commissioner of Revenue