Arkansas Supreme Court Rules on Sales Tax for Dealerships’ Inventory Withdrawals

The Arkansas Supreme Court published its decision in a case in which employees and relatives of the owners of two car dealerships temporarily used vehicles in stock before selling them to consumers. This practice triggered a dispute between car dealerships and the Arkansas Department of Finance and Administration (ADFA) about whether or not the dealerships owe sales and use tax.

Facts of the Case and Court Ruling

During the two car dealerships' routine audit, the ADFA determined that from 2015 to 2021, both dealerships assigned and allowed the use of vehicles to their employees and relatives of the owners. The ADFA concluded that this represented a withdrawal from stock subject to the gross receipts tax, also known as the sales tax.

In 2021, the dealerships paid the dues sales tax but also formally protested against the ADFA’s assessments. The ADFA’s Office of Hearings and Appeals, acting on the dealerships' appeal, confirmed the tax assessment by the ADFA.

The dealerships and ADFA fought legal battles before competent courts for the next two years, trying to prove the other side wrong. After several motions submitted by each party, the circuit court ruled in favor of the car dealerships, stating that the ADFA did not correctly apply the rules of the law and that it had substituted a general sales tax statute for the specific statute.

ADFA filed a timely appeal against this decision, and the case was brought before the Supreme Court of Arkansas to give its final ruling.

After carefully reviewing all evidence and statements from all parties, the Supreme Court concluded that dealerships' practice of allowing their employees and owner relatives to use stock vehicles did trigger taxable withdrawals from stock for sales and use tax purposes under Arkansas statute.

The Supreme Court held that although these cars remained available for sale and, in the end, were sold to customers; the Arkansas statute is clear that when businesses use any tangible personal property, like vehicles, that is a taxable withdrawal from stock and, as such, is subject to sales and use tax.

Conclusion

The Supreme Court case provides insight into how, in specific situations, taxable persons engage in taxable activities due to a lack of knowledge or simply neglecting the rule of law. Furthermore, this case shows how even routine audits performed by competent bodies, such as the Department of Finance and Administration, can lead to years of court proceedings to settle disputes, get final rulings on sales, and use tax-related issues.

Taxable persons should always double-check if their actions could trigger the sales and use tax. Neglecting this could result in penalties, fines, and interests.

Source: Arkansas Supreme Court - Case Case No. CV-23-450, Deloitte