state of arkansas department of finance & … · (acct. no.: ) audit no. audit period: dec....

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STATE OF ARKANSAS DEPARTMENT OF FINANCE & ADMINISTRATION

OFFICE OF HEARINGS & APPEALS

ADMINISTRATIVE DECISION IN THE MATTER OF GROSS RECEIPTS (SALES) &

COMPENSATING USE TAX ASSESSMENT

(ACCT. NO.: ) AUDIT NO.

AUDIT PERIOD: DEC. 2010 THROUGH SEPT. 2015 DOCKET NOS.: 17-5391 (SALES TAX)2 17-540 (USE TAX)3

TODD EVANS, ADMINISTRATIVE LAW JUDGE

APPEARANCES

This case is before the Office of Hearings and Appeals upon written protest

dated March 27, 2017, signed by (“President”) on behalf of the

, the Taxpayer. The Taxpayer

protested the assessments issued by the Department of Finance and

Administration (“Department”).

A hearing was held in this matter on September 12, 2017, at 10:30 a.m. in

Little Rock, Arkansas. The Department was represented by Lauren Ballard,

Attorney at Law, Office of Revenue Legal Counsel (“Department’s

Representative”). Also present for the Department was Devon Toney, Tax

Auditor, (“Auditor”) and Guy Meneley, Audit Supervisor (“Audit Supervisor”). 1 All listed amounts do not represent concessions agreed to by the Department after the assessment. 2 This amount represents (Tax) and (Interest). 3 This amount represents (Tax) and (Interest).

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The Taxpayer was represented by , Attorney at Law –

(“Taxpayer’s Representative”) at the

administrative hearing. Also present for the Taxpayer was the President and

(“Cost Accountant”). The record was closed and this matter was

submitted for a decision on September 12, 2017.

ISSUE

Whether the Department’s assessment of certain transactions, after

concessions, are correct under Arkansas law. Yes.4

FACTS AND CONTENTIONS OF THE PARTIES

The Department provided a summary of several relevant facts in its

Answers to Information Request, stating as follows:

("Taxpayer'') is a printer and located in , Arkansas. The printer uses a method of

printing known as is a quick, high capacity form of printing that involves ink being

referred to as " The then the paper being printed. The printing plates are

often inked and washed clean by separate rollers. A visual diagram of this basic process is attached, along with a copy of the actual schematic of the Taxpayer's machine, as Exhibit l. The rollers and cylinders often wear down with time and must either be repaired or replaced. On November 9, 2015, the Department of Finance and Administration (“Department") conducted an initial audit appointment through its auditor Devon Toney ("auditor"). The auditor reviewed sales invoices, journals, purchase invoices, credit card statements, and fixed asset listings to determine unreported taxable purchases. The auditor worked with the Taxpayer to resolve some items. To continue the audit while allowing time for the Taxpayer to respond, the Taxpayer provided the auditor with a waiver and extension of the statute of limitations through January 31, 2017. A copy of the executed waiver is attached as Exhibit 2. After reviewing the relevant invoices, the auditor requested exemption certificates from the purchasers. The auditor was informed that the

4 This decision does not address any concessions agreed to by the parties.

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Taxpayer did not have copies of exemption certificates. Despite the Taxpayer's failure to retain these certificates, the auditor requested that the Taxpayer collect exemption certificates from the purchasers and, if valid, used the exemption certificates to qualify certain invoices for exemption. Of those presented, the auditor disallowed several exemption certificates as invalid. A copy of those exemption certificates is attached as Exhibit 3. The auditor maintained a listing of disallowed exempt sales with both the Taxpayer's and Department's respective positions on the invoices. A copy of the listing is attached as Exhibit 4. The auditor then compiled a final schedule of all sales and use tax assessed against the taxpayer. These final audit schedules are attached as Exhibit 5. Sales Tax. With respect to sales tax, the Department concluded that the Taxpayer should have collected sales tax on many invoices that it categorized as tax exempt. Of those, most exemptions were disallowed because the Taxpayer did not provide a tax exemption certificate from the purchaser claiming that the sales were sale for resale. In most of these sales, the purchaser was distributing the product free of charge. In some invoices, the exemptions were disallowed because the Taxpayer neglected to provide sufficient proof that invoices were written off as bad debt. Use Tax. With respect to use tax, the Department concluded that the Taxpayer should have remitted use tax on many out of state purchases, including rollers, printing and press cleaning supplies. The auditor allowed an exemption for printing

and plates.

HEARING TESTIMONY

The Auditor’s Testimony

During the administrative hearing, the Auditor testified that she

performed the relevant audit of the Taxpayer. She completed the audit by

reviewing sales and purchase journals, sales and purchase invoices, and credit

card statements. She stated that the Taxpayer is a printing company that

produces and for customers. During a plant

tour, she reviewed the printing process. The Taxpayer utilizes

5 The Taxpayer later conceded the printing

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The process utilizes rollers and however, the only

item that imparts ink onto the paper is the

The Auditor testified that the functions as the physical die or mold

of the print job. She argued that the rollers function as components of the

and distribute ink and water to the The rollers wear out

over time. She asserted that the replacement of rollers are taxable as

insubstantial replacements of components of the She stated that

the Taxpayer also utilizes an item referred to as a are used to

during the printing process, function as components of the

and wear out over time. The printing were deemed

exempt during the audit as the initial die or mold of the print job but the rollers

and were deemed taxable as replacement parts of the The

Auditor asserted that the rollers are not molds or dies because they do not create

or determine the shape of the print jobs.

The Auditor next stated that the motors and

are component parts of the and constitute taxable replacement

parts. During the audit, she did not remember reviewing invoices containing

printing plates. The Auditor concluded that chemicals used to cure or set the ink

were deemed exempt during the audit. However, she explained that cleaning

chemicals (such as autowash, easyclean, globalwash, wipes, and additional

chemicals) were used to clean the between jobs and do not become

an integral part of the finished process. She concluded that the cleaning

chemicals were taxable and not exempt under GR-55.1. She explained that

is used to connect two paper rolls prior to printing to create a

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continuous roll of paper. The Auditor stated that the is eventually

cut off, thrown away, and does not become a component part of the product sent

to customers. She argued that the should be taxable as tangible

personal property.

Regarding the sales tax audit and the exemption certificates, the Auditor

testified that the Taxpayer did not have any exemption certificates on file at the

beginning of the audit. She allowed the Taxpayer to acquire exemption

certificates over 120 days from its registered customers. Some of the customers’

exemption certificates or letters were disallowed by the Auditor because those

items lacked a valid sales tax permit number. Either no exemption certificates or

invalid certificates were provided by the

the

and the

The Auditor proceeded to discuss the transactions with specific customers.

She asserted that the did not possess a sales

permit. That customer did provide a signed exemption certificate to the Taxpayer

but did not provide an account number. She stated that

did not make an exemption claim regarding its purchases.

also issued an exemption claim letter to the Taxpayer but lacked

a sales tax permit during the audit period.

The Auditor further stated that the did not provide

an exemption certificate and did not possess a sales tax permit. The Auditor,

however, was told that (a customer possessing a

Arkansas sales tax permit) was the actual purchaser for those transactions. She

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asserted that the was billed for these transactions and was

the purchaser. The Auditor asserted that those transactions were also taxable.

provided an exemption claim letter but did not have a sales tax

permit during the audit period. She further testified that the

did not make an exemption claim for their purchases of

, and an

Additionally, the Auditor asserted that many of the printed materials that

are purchased by the Taxpayer’s customers are distributed for free to

and not resold. She provided the following examples of that are

simply given away to

( and –

(newspaper inserts or given away), and

the She stated that the associated

should not qualify as for purposes of Arkansas Gross

Receipts Tax Rule GR-48(F) (an exemption for sold by regular

The Auditor explained that she did not assess sales of

(provided by the to its customers

without an additional charge); however, she noted that customer provided a valid

exemption certificate to the Taxpayer.

The Auditor then explained that the bad debt deductions for the

and transactions were denied because the

Taxpayer has not shown that these items were deducted as bad debts. Early in the

audit, the Auditor was informed that the purchases were

donated to the organization as charitable contributions without a collection

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effort. Later in the audit, however, she was told that collection was attempted but

the items had not been written off as bad debts. She asserted that the governing

rules require that the items be reported and later written off as bad debts to be

removed from the assessment. Since the transactions had not been reported or

written off, she deemed these transactions to be taxable.

The President

The President testified that he has worked for the Taxpayer for eleven (11)

years, is extremely familiar with its printing process, and is involved in repair

decisions. He explained that the uses

to create ninety-nine-point-nine percent (99.9%) of the

remaining colors during the printing process. After printing, the printed material

ultimately goes through an oven to cure the ink. The Taxpayer utilizes

: a ( and a (

He testified that the rollers at issue are used to transfer the ink across

multiple rollers (referred to as the “ to an aluminum printing plate that

is attached to the plate cylinder. The rollers are cylinders. The rollers contain a

steel or hollow core with a rubber (or some other substrate) coating its exterior.

The rollers are stored on a consignment basis. When the rubber or nylon coating

for a roller is worn off, it is returned to the vendor for recoating and a stored

roller is cycled into production. The rollers are thus rotated with the vendor;

however, the Taxpayer does not necessarily own any particular roller core. Each

roller lasts for an uncertain length of time but are generally not replaced too

often. Some rollers are replaced at least once a month. If a core is damaged, the

Taxpayer must buy a new replacement core. He explained that the rollers ensure

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that the ink and water mixture is uniformly applied to the printing plate. While

the printing plates have to be replaced between jobs, the rollers typically will not

need to be replaced at that time. The rollers’ function is to flatten the ink to create

a thin film of ink that is ultimately applied to the upper and lower printing plates.

He asserted that the rollers shape or mold the ink to create a uniform print. The

rollers, however, do not make contact with the paper. In the rollers’ absence, the

President explained that the printing process would not work.

Describing the use of the printing ink, the President testified that the

printing ink is purchased in totes and pumped to fountain jets on and

The ink fountain contains a series of that are

opened and closed by the which controls the amount of each

ink type that is dispensed onto the first roller and ultimately onto the printed

paper. An opens and closes a The are

automatically controlled by the The

creates a preset that will be manually adjusted by the pressmen to correct any

print issues. The closed loop contains several

s that take photos of the printed product to ensure that the

printed material meets specifications. The sends its

information back to the and pressmen.

A had been used for years, but the system

was completely replaced with a new system in 2016 (outside the audit period)

and several components of the system were also replaced during the

audit period. Several items (such as lens trays and a computer system from

were replaced in March 2013, September 2013, and March 2014.

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Those transactions involved the replacement of an

that said was faulty. At this point, the President described the system

as being essentially gutted with replacement of the associated electronics. The

President explained that the camera was replaced with the track and motors that

move the camera. The computers, software, and other internal components were

also replaced along with many of the wires. He asserted that only the camera case

was reused. The charges from March, May, and August 2015 might

have been related to the replacement, but he does not know for sure.

After the rollers, the ink is eventually applied to a printing plate. The

President explained that the printing plate contains small indentions to repel or

attract ink. The water (containing a chemical called “ repels the oil-based

ink from certain places on the printing plate. A portion of the ink, water, and

will be transferred to the finished product. After ink is applied, the printing plate

provides a

Two types of are

utilized by the Taxpayer: on

and a on

Discussing the cleaning of the presses, the President testified that

must be manually cleaned. however, has nozzles that spray cleaning

chemicals onto the machine for cleaning between print jobs. A small amount of

the cleaning chemicals does remain on the finished product but most of those

chemicals are burnt off within the ovens. The cleaning chemicals do not have a

purpose in the final product. If all of the cleaning chemicals could be removed

from the final product, it would not affect the final product, because it is not a

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necessary component of that product. The cleaning chemicals; however, must be

used to clean the printer and ensure a clean print. Without the cleaning

chemicals, the press would have to be dismantled and cleaned between jobs.

When a job is stopped, the are still set and pouring ink, resulting in a “major

mess” that must be cleaned between jobs. The function of the cleaning chemicals

is to remove excess ink from the rollers and before, during, and after a

print job.

Discussing the the President explained that the

is sticky on both sides and is used to combine two rolls of paper to ensure a

continuous print. The should be thrown away; however, it has been

accidently left on printed materials received by customers. The

should not be part of the final product.

Discussing the UV lamps, the President testified that the UV lamps

contained in the June 2011 invoice are utilized in the UV

coating system to apply a or finish to

That finish is a chemical coating that becomes a component part of the

finished product. The President stated that the UV lamps help to cure that

coating. The lamps are installed at between the .

He asserted that the UV lamps do not apply the chemical but are a mold

or die due to their curing activity.

The Cost Accountant

The Cost Accountant testified that the is also where the

becomes involved. She was of the opinion that replaced every

component of the except the box that holds the camera on

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the track. She said that the replacement was accomplished in a piecemeal fashion

while tried to repair the existing

Discussing the sales tax exemption claims, the Cost Accountant testified

that the Taxpayer prints for the which

was originally picked up but later removed by the Auditor. The prints

a regular that is solely sent to of that For the

she stated that the Taxpayer prints a

( that is only received by paying of the

organization. The application on the

website states that the is included with the

payment of The Taxpayer directly mails the to that

The Cost Accountant requested an exemption certificate

from the and was informed by that customer

that should be exempt as a sale which is resold on

based on the advice from their accountant. Their accountant also

informed the that a sales tax permit was not necessary because it only

performed exempt sales. The signed an

exemption certificate for the Taxpayer but did not register for a sales tax account.

The later applied for a permit but had not

received it by the time of the hearing.

Discussing other customers, the Cost Accountant testified that

provides a for various state

Currently, the Taxpayer directly prints the for the

The Cost Accountant stated that the cost of the

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is included in each The Taxpayer also prints a

which is also included in the She further

testified that produces several including

and She asserted that the cost of

these is included in the for of the

Arkansas and The Cost Accountant was not

aware of any separately stated charge for the She

thinks, at one time, charged for the from its

however, she does not have any paperwork to confirm that fact. The

Cost Accountant further testified that stated that their

attorney instructed them not to register for sales tax because it was selling the

items on a She also spoke with that attorney who confirmed

this statement. would not provide an exemption certificate.

Though the is billed for their purchases, the Cost

Accountant stated that is the actual customer

for the sales because

provides the draft to be printed and makes the order. She does not discuss the

transaction with the She stated that

possesses a sales tax permit and provided an exemption certificate.

She also explained that the does not have a permit and

could not provide an exemption certificate. The Taxpayer prints

and the newsletter for that customer. The Cost Accountant explained

that both of these are only provided to that pay

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If had provided an exemption certificate

prior to the audit, the Cost Accountant said that she would have relied on that

document and not charged sales tax to the customer. The Cost Accountant

additionally testified that prints which is

sold in grocery stores or by Though the Taxpayer has requested an

exemption certificate, that customer has only provided a copy of their sales tax

permit.6 The purchases an

and cards from the Taxpayer. The Taxpayer directly mails those items to the

Discussing the bad debt deduction, the Cost Accountant explained that the

Taxpayer does not expect the to pay its bill. She

explained that a disagreement erupted between the Taxpayer’s owners over

whether the transactions were gifts or should be paid. The Cost Accountant

testified that she did invoice the and try to collect the amount owed.

During a subsequent telephone call with the customer, she stated that the

refused to pay the bill, thinking it was a donation. The

owed more than as of August 1, 2016. The original invoices were dated

from 2013 and 2014. The Taxpayer did not report the items as bad debts for sale

tax purposes to her knowledge. The Cost Accountant further testified that the

Taxpayer has reported these amounts as bad debts for income tax purposes.

After a general discussion of the burdens of proof in tax proceedings and a

discussion of the applicable law, each contested category of the protested 6 A copy of this permit is not present in the record, Exhibit 3 to the Department’s Answers to Information Request does include a letter from this customer, which states that its publication are sold by a That letter, however, does not provide a sales tax account number.

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transactions shall be addressed with a summary of the parties’ legal arguments, a

legal analysis, and associated conclusions.

CONCLUSIONS OF LAW

Burdens of Proof

Ark. Code Ann. § 26-18-313(c) (Supp. 2017) provides, in pertinent part, as

follows:

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. § 26-18-

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. § 26-18-313(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

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exemption, deduction, or credit, the doubt must be resolved against the

application of the tax, exemption, deduction, or credit. Ark. Code Ann. § 26-18-

313(f)(2) (Supp. 2017).

Tax Assessment

I. Sales Tax Issues

After a general discussion of the law governing the application of Arkansas

sales tax, the protested items shall be addressed in turn. 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. § 26-52-301 (Supp. 2017). Printing services of all kinds are

specifically enumerated taxable services. Ark. Code Ann. § 26-52-301(4) (Supp.

2017). Initially, the Taxpayer’s services generally qualify as printing services.

Consequently, its services are taxable unless an exemption is shown to apply.

Generally, the liability for collection and remittance of sales tax is upon the

seller. Ark. Code Ann. § 26-52-508 (Supp. 2017). 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. § 26-52-517(a)

(Supp. 2017). 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. § 26-52-517(e) (Supp. 2017).

If a seller fails to obtain sufficient information from a purchaser making an

exemption claim, a safe harbor is present. Ark. Code Ann. § 26-52-517(g)(2)(A)

(Supp. 2017). Under that subsection, the seller is granted an additional one

hundred and twenty (120) days from the date of the Department’s request for

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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. § 26-52-517(g)(2)(B)

(Supp. 2017).

Further, the Arkansas Supreme Court has explained that the Arkansas

General Assembly is sole arbitrator of policy decisions within Arkansas and it

would be inappropriate for an administrative agency or court to refuse to enforce

a state law as it reads based on a policy disagreement. Snowden v. JRE

Investments, Inc., 2010 Ark. 276, 370 S.W.3d 215. Consequently, any arguments

by the Taxpayer’s Representative that governing statutes reach a harsh or unfair

result and equitable remedies should be granted in the alternative must be

rejected.

a. Sale for Resale Exemption

In his Answer’s to Information Request, the Taxpayer’s Representative

asserted that the Auditor agreed that the Taxpayer’s sales were exempt as sales

for resale because she exempted any transactions where the customer provided a

valid resale certificate.7 He proceeded to argue that the transactions still qualified

7 Based on the record, it appears that this statement represents a misunderstanding of the Auditor’s analysis. Here, it appears that the Auditor excluded these transactions because the customers provided a qualifying exemption claim. As stated above, a qualifying exemption claim shifts the tax burden from the seller to the purchaser even if the exemption claim is later determined to be improper. Consequently, the removal of these transaction from the audit does not necessarily mean that the Auditor concluded that the purchases qualified for the sale for resale exemption.

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as sales for resale even if the Taxpayer’s customers did not possess sales tax

permits so long as the subsequent resale of the items qualified as exempt

sales under Arkansas Gross Receipts Tax Rule GR-48(F). He argued

that requiring the Taxpayer’s customers to obtain a sales tax permit to purchase

items for resale (when he concluded that the subsequent resales were exempt)

was too burdensome and improperly taxed transactions that were otherwise

exempt.

During the administrative hearing, the Department’s Representative

argued that the provided sales tax exemption certificates were invalid due to the

absence of sales tax permit numbers. Even if the certificates were valid, she

argued that the exemption certificates could not be applied to relieve the

Taxpayer of liability because the and were given

away to of their and not resold. Consequently, she argued

that sale for resale exemption could not be applicable to the items purchased as

required by Ark. Code Ann. § 26-52-517(g)(2)(B) (Supp. 2017).

During the administrative hearing, the Taxpayer’s Representative noted

that, if the customers failing to provide an exemption certificate had provided

one, the Auditor would not have assessed the transactions (like the

invoices). Consequently, he reasoned that it was irrelevant whether

the transactions actually qualified for the sale for resale exemption. He again

asserted that it was unfair to require the Taxpayer’s customers to obtain sales tax

permits since he concluded that their sales should qualify as exempt

under Arkansas Gross Receipts Tax Rule GR-48. He acknowledged

that the Taxpayer must collect Arkansas sales tax in the absence of an exemption

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certificate under the law; however, he argued that application of the law in this

matter was improper because it resulted in taxation of transactions that were

otherwise exempt. He explained that the Taxpayer’s position could be

characterized as a plea for equitable relief.

One narrow exemption is implicated by the arguments raised by the

parties with respect to these transactions: the sale for resale exemption. Ark.

Code Ann. § 26-52-401(12)(A) (Supp. 2017) grants a narrow exemption for sales

for resale, stating as follows:

Gross receipts or gross proceeds derived from sales for resale to persons regularly engaged in the business of reselling the articles purchased, whether within or without the state if the sales within the state are made to persons to whom gross receipts tax permits have been issued as provided in § 26-52-202.8 [Emphasis supplied].

Under the governing statute, a customer may not claim the sale for resale

exemption unless that customer has attained a sales tax permit. Consequently, in

the absence of a sales tax permit, the transaction cannot qualify as a sale for

resale and the Taxpayer’s exemption claim cannot satisfy the requirement

contained at Ark. Code Ann. § 26-52-517(g)(2)(B)(ii) (Supp. 2017) (stating that

the exemption must be potentially applicable to the items being purchased).

Though the Taxpayer’s Representative asserted that this seems unfair or

burdensome for customers, those arguments do not allow this Office to overlook

the express statutory requirement that customers must possess a sales tax permit

8 The requirement that the purchaser must possess a sales tax permit is repeated in Arkansas Gross Receipts Tax Rule GR-53(A), a subsection of the governing regulation.

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to qualify for the sale for resale exemption. 9 The analysis of the relevant

transactions shall proceed with the understanding.

i.

In his protest, the Taxpayer’s Representative asserted that this transaction

should be exempted as a sale for resale. In his Answers to Information Request,

the Taxpayer’s Representative explained that the fee for the monthly at

issue is included in the for the . He

asserted that no exemption certificate should be required based on his analysis

stated above. In her Answers to Information Request, the Department’s

Representative asserted that, though this customer made an exemption claim by

letter, this ( was not resold but given away to

of the and did not qualify as a regular under

Arkansas Gross Receipts Tax Rule GR-48. Consequently, she reasoned that the

Taxpayer cannot demonstrate that the sale for resale exemption could be

available for the purchased item, under Ark. Code Ann. § 26-52-517(g)(2)(B)

(Supp. 2017). No sales tax account number was contained in the provided

exemption certificate.10

Here, the Auditor has explained that the

did not possess a sales tax permit during the audit period.11 The Taxpayer has not

shown that the sale for resale exemption could apply to these transactions by a

9 The issue of whether or not the Taxpayer’s customers’ transactions qualify as exempt

under Arkansas Gross Receipts Tax Rule GR-48(F) even though the are not separately billed to the shall not be addressed in this decision as it is rendered moot. 10 See Exhibit 3 to the Department’s Answers to Information Request. 11 The Cost Accountant’s testimony also supported this statement.

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preponderance of the evidence. Thus, the transaction does not qualify as a sale

for resale and the Taxpayer’s exemption claim cannot satisfy the requirement

contained at Ark. Code Ann. § 26-52-517(g)(2)(B)(ii) (Supp. 2017). Consequently,

the Department’s assessment of these transactions is sustained.

ii.


should be exempted as a sale for resale or as services not subject to tax. In his

Answers to Information Request, the Taxpayer’s Representative explained that

the fee for the at issue is included in the

for the He asserted that no exemption

certificate should be required based on his analysis stated above. In her Answers

to Information Request, the Department’s Representative asserted that the

Taxpayer cannot be relieved of its tax liability for these transactions because the

Taxpayer has not shown that this customer made a sales tax exemption claim at

the time of the transaction or during the audit.

Here, the Auditor has testified that this customer did not make an

exemption claim regarding its purchases. Additionally, it is not shown that the

customer possessed a sales tax permit during the Audit Period. The Taxpayer has

not shown that the sale for resale exemption applies to these transactions by a

preponderance of the evidence. Consequently, the Department’s assessment of

these transactions is sustained.

iii.



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the Taxpayer’s Representative explained that the fees for the annual at

issue are included in the for the relevant

12 He asserted that no exemption certificate should be required

based on his analysis stated above. In her Answers to Information Request, the

Department’s Representative explained that this customer stated that it is a

company responsible for producing (

and for its

clients. She asserted that, since customers provide the

without cost to their the items do not

qualify as sales for resale, and the items do not qualify as regular

under Arkansas Gross Receipts Tax Rule GR-48. Consequently, she reasoned that

the Taxpayer cannot demonstrate that the sale for resale exemption could be

available for the purchased item, under Ark. Code Ann. § 26-52-517(g)(2)(B)

(Supp. 2017). No sales tax account number was contained in the exemption claim

letter.13

Here, the Auditor testified that this customer did not possess a sale tax

registration during the Audit Period.14 The Taxpayer has not shown that the sale

for resale exemption could apply to these transactions by a preponderance of the

evidence. Thus, the transaction cannot qualify as a sale for resale and the

Taxpayer’s exemption claim cannot satisfy the requirement contained at Ark.

12 These transactions are dissimilar from the other discussed in this opinion in that the do not pay for these The printing costs are paid by

in exchange for the This transaction structure would appear to undercut the statement that the purchase and resell these to their 13 See Exhibit 3 to the Department’s Answers to Information Request. 14 The Cost Accountant’s testimony also supported this statement.

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Code Ann. § 26-52-517(g)(2)(B)(ii) (Supp. 2017). Consequently, the Department’s

assessment of these transactions is sustained.

iv.



the Taxpayer’s Representative asserts is the

actual customer for this transaction, is registered for the Arkansas sales tax, and

provided a qualifying exemption claim. If the is deemed to

be the actual customer, he argued that the fee for the annual at issue is

included in the annual for the organization. He asserted that

no exemption certificate should be required based on his analysis stated above.

In her Answers to Information Request, the Department’s Representative

asserted that, though claims to be the actual

customer, all invoices are addressed to the and that is the

actual customer. Further, she asserted that the is distributed free of

charge, does not qualify as a sale for resale, and, thus, remains taxable.

Here, the Auditor testified that the was billed for

the relevant transaction and was listed as the customer on the related invoices.15

Based on this evidence, the was the customer for these

transactions even though the Cost Accountant felt that

should be considered the real purchaser due to its control over the

transactions.

15 The Cost Accountant’s testimony also supported this statement.

23

The Auditor further testified that the did not

possess a sales tax permit during the Audit Period.16 The Taxpayer has not shown

that the sale for resale exemption could apply to these transactions by a

preponderance of the evidence. Thus, the transaction cannot qualify as a sale for

resale and the Taxpayer’s exemption claim cannot satisfy the requirement

contained at Ark. Code Ann. § 26-52-517(g)(2)(B)(ii) (Supp. 2017). Consequently,

the Department’s assessment of these transactions is sustained.

v.



the Taxpayer’s Representative asserted that this relevant publication is resold at

retail and the Taxpayer would attempt to obtain a qualifying exemption claim

prior to the administrative hearing. In her Answers to Information Request, the

Department’s Representative asserted that, though the customer claimed its

( and are sold on

by a third party ( that statement is incorrect and

the are actually distributed free of charge. Consequently, she

reasoned that the Taxpayer cannot demonstrate that the sale for resale

exemption could be available for the purchased item, under Ark. Code Ann. § 26-

52-517(g)(2)(B) (Supp. 2017). No sales tax account number was contained in the

exemption claim letter.17

Here, the Auditor testified that did not possess a sales tax

permit during the Audit Period. The Taxpayer has not shown this assertion to be 16 The Cost Accountant’s testimony also supported this statement. 17 See Exhibit 3 to the Department’s Answers to Information Request.

24

incorrect. The Taxpayer has not shown that the sale for resale exemption could

apply to these transactions by a preponderance of the evidence. Thus, the

transaction cannot qualify as a sale for resale and the Taxpayer’s exemption claim

cannot satisfy the requirement contained at Ark. Code Ann. § 26-52-

517(g)(2)(B)(ii) (Supp. 2017). Consequently, the Department’s assessment of


vi.

In his Answers to Information Request, the Taxpayer’s Representative

explained that the fee for the at issue is included in the annual

for the organization. He asserted that no exemption certificate

should be required based on his analysis stated above. In her Answers to

Information Request, the Department’s Representative asserted that the

Taxpayer cannot be relieved of its tax liability for these transactions because the

Taxpayer has not shown that this customer made a sales tax exemption claim at

the time of the transaction or during the audit.

Here, the Auditor has testified that this customer did not make an

exemption claim regarding its purchases. Additionally, it is not shown that the

customer possessed a sales tax permit during the Audit Period. The Taxpayer has

not shown that the sale for resale exemption applies to these transactions by a



b. Bad Debt Deduction

In his protest, the Taxpayer’s Representative asserted that no tax should

be due on these transactions since the customers did not pay the assessed

25

invoices. In his Answers to Information Request, the Taxpayer’s Representative

asserted that several invoices were not paid, were

not donated, and were written off as bad debts. Additionally, he asserted that

collection was attempted regarding these debts. He concluded that these

transactions qualified for the bad debt deduction. In her Answers to the

Information Request, the Department’s Representative asserted that the

Taxpayer has not shown that these items are eligible for the bad debt deduction

under Ark. Code Ann. § 26-52-309 (Repl. 2014).

During the administrative hearing, the Taxpayer’s Representative

explained that the Taxpayer had to pay sales tax on accrued transactions that

were not paid. He argued that, even though the law requires the Taxpayer to

report bad debts before the deduction is allowed, the Taxpayer’s failure to

complete this requirement was a technical violation and requested the removal of

the assessment of these transactions as equitable relief.

Ark. Code Ann. § 26-52-309 (Repl. 2014) allows a deduction for bad debts,

stating as follows, in relevant part:

(a) (1) A taxpayer is allowed a deduction from taxable sales for a bad debt. (2) Any deduction taken under this section that is attributed to a bad

debt shall not include interest. (b) The federal definition of “bad debt” in 26 U.S.C. § 166, as in effect on

January 1, 2007, is the basis for calculating a bad debt deduction under this section except that the amount calculated pursuant to 26 U.S.C. § 166 shall be adjusted to exclude: . . . .

(c) (1) A bad debt may be deducted on the sales and use tax return of a taxpayer for the tax period during which: (A) The bad debt is written off as uncollectible in the taxpayer's

books and records; and (B) The taxpayer is eligible to deduct the bad debt for federal

income tax purposes if the taxpayer or seller kept accounts on a cash basis or could be eligible to be claimed if the taxpayer or seller kept accounts on an accrual basis.

26

(2) For purposes of this subsection, a taxpayer who is not required to file a federal income tax return may deduct a bad debt on a sales and use tax return filed for the period in which the bad debt is written off as uncollectible in the taxpayer's books and records if the taxpayer would be eligible for a bad debt deduction for federal income tax purposes if the taxpayer were required to file a federal income tax return.

During the administrative hearing, the Taxpayer’s Representative

presented a three-page exhibit regarding the

transactions. The first page totals the customer’s invoice balance as of August 1,

2016, providing a balance of The second page lists the

account as a “Doubtful Acc”. Finally, the third page totals the customer’s

outstanding invoices as of July 31, 2016, providing a balance of

Here, the Auditor testified that the Taxpayer has not shown that the

relevant transactions were deducted as bad debts. Additionally, the Cost

Accountant has explained that there exists a disagreement between the

Taxpayer’s controlling families whether the

transactions are properly characterized as bad debts or charitable donations. She

also testified that the and the transactions were

reported as bad debt for income tax purposes.

Based on the record, the Taxpayer has not proven that it qualifies for the

bad debt deduction with regard to these transactions. Initially, significant doubt

is present whether the were actually bad debts. The

Cost Accountant explained that the Taxpayer’s controlling families disagreed on

whether the transactions are properly characterized

as bad debts or charitable donations. The Cost Accountant’s description of the

27

collection activities was limited to a billing and a phone call, after which the

matter appears to have been dropped. The collection activities seem minimal

and undercut the assertion the invoices were seriously treated as bad debts

by the Taxpayer. Additionally, though the Cost Accountant asserted that the

and transactions were deducted as bad debts for

income tax purposes, no documentation from the actual income tax returns

has been presented to verify this statement.18

The Taxpayer simply has not shown that the bad debt deduction should

apply to these transactions by a preponderance of the evidence. Though the

Taxpayer’s Representative has proposed that certain requirements should be

waived for this deduction, the deduction’s requirements cannot be waived for the

reasons stated within the sale for resale discussion above. Consequently, the

Department’s assessment of these transactions is sustained.

II. Use Tax Issues

Arkansas Compensating (Use) Tax generally applies to the privilege of

storing, using, distributing, or consuming tangible personal property and taxable

services within the State of Arkansas that were purchased outside this state. Ark.

Code Ann. § 26-53-106 (Supp. 2017). A purchaser is generally liable for Arkansas

Use Tax unless a seller pays the tax on the purchaser’s behalf. Ark. Code. Ann. §

26-53-123 (Supp. 2017). Generally, the protested items represent tangible

personal property and are subject to Arkansas use tax unless the Taxpayer

demonstrates that an exemption applies.

18 It is uncertain how the three-page hearing exhibit supports a finding that the transactions were actually deducted for income tax purposes.

28

a. Dies

The Taxpayer has argued that several items qualify as dies under Ark.

Code Ann. § 26-53-114(c)(3)(B)(ii) (Repl. 2014). 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. § 26-53-114(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). Under the governing regulation and statute, an exempt die

need not be attached to a piece of machinery so long as the item still constitutes a

part of a unit of machinery. Further, the term “distinctive” has been interpreted

as a word of limitation. This Office has previously determined that characteristics

such as flat, smooth, or shiny are descriptive of conditions of the surface of a

product and do not qualify as distinctive textures or finishes.

Additionally, while purchases of dies and their component parts qualify for

the exemption under Arkansas Gross Receipts Tax Rule GR-56, the repairing of a

die remains taxable under GR-56(D). With this background in the governing law,

the protested transactions shall be analyzed.

i. Rollers


asserted that, if printing plates qualify as dies19, the rollers should also qualify as

dies because they perform “essentially the same function” as printing plates by 19 Printing plates are expressly listed as an example of a die under Arkansas Gross Receipts Tax Rule GR-56(G)(5).

29

transferring the ink directly to the printing plates. In her Answers to Information

Request, the Department’s Representative asserted that the rollers only directly

act on other parts of manufacturing machinery and equipment and are used to

either roll ink or water onto the printing plate. Consequently, she reasoned that

the rollers do not qualify as dies because the rollers do not impart a

predetermined or distinctive shape, pattern, texture, or finish to the finished

product. During the administrative hearing, the Department’s Representative

additionally argued that, even if the rollers qualified as dies, the resurfacing of

the rollers would remain taxable as die repairs.

During the administrative hearing, the Taxpayer’s Representative argued

that the rollers qualify as dies by imparting a physical characteristic to the ink (a

component part of the finished product).20 He explained that the vast majority of

the protested invoices involved the refinishing of rollers, but some transactions

do involve the replacement of roller cores. Addressing the recovering of the

rollers, he stated that the rollers are actually completely redone by stripping and

replacing the outside covering (not simply repaired in house). He asserted that

the roller transactions are more analogous to an inventoried replacement of the

rollers.

Here, the record demonstrates that the rollers function is more akin to an

ink delivery system. Additionally, the rollers do not impart a predetermined and

distinctive pattern to the printed material since those items do not make contact

with printed material. To the extent that the rollers assist in the flattening of the

ink, this Office has previously determined that flat does not qualify as a

20 This argument was also asserted in the Taxpayer’s Protest.

30

distinctive shape, pattern, texture, or finish. Further, the vast majority of the

transactions at issue involve the resurfacing of rollers whose current surface is

worn out, which is properly characterized as a taxable repair to a roller’s surface.

Repairs to the rollers’ surfaces would remain taxable regardless of whether the

rollers qualified as dies.

Based on the record, the Taxpayer has not shown that the transactions at

issue qualify for the exemption contained in Arkansas Gross Receipts Tax Rule

GR-56 by a preponderance of the evidence. Consequently, the Department’s

assessment of these transactions is sustained.

ii.


asserted that the controls the transfer of ink through the

rollers. He reasoned that this system should likewise qualify as a die since it

functions as a component part of the that ultimately imparts a

predetermined pattern or finish to the printed paper. In her Supplemental

Answers to Information Request, the Department’s Representative argued that

this system does not function as a die because it does not impart a predetermined

and distinctive shape, pattern, texture, or finish to the product but directly acts

on other components of manufacturing machinery and equipment.

During the administrative hearing, the Taxpayer’s Representative asserted

that, even though the components of this system were replaced in separate

transactions over a six to eight-month period, the whole system was eventually

replaced. If the transaction is not exempt as a substantial replacement of exempt

31

manufacturing machinery, he asserted, in the alternative, that the system should

be exempt as a die because the system controls the .

An exemption does exist for substantial replacement of certain

manufacturing machinery and equipment, which includes quality control

equipment that tests the quality of the manufactured product during

manufacturing. See Arkansas Gross Receipts Tax Rule GR-55(I).

Though the Cost Accountant testified that the major components of the

relevant were replaced. She stated that this replacement was

completed in a piecemeal fashion while a vendor attempted to troubleshoot

problems with the existing The record shows that the

was replaced through a series of separate transactions and not as

a single transaction that initially intended to replace that system. Each

transaction, when viewed separately, does not represent a substantial

replacement of the Consequently, the Taxpayer has not

demonstrated that the replacement of the qualified as a

substantial replacement of manufacturing machinery and equipment under Ark.

Code Ann. § 26-53-114(a)(2) (Repl. 2014).21

In the alternative, the Taxpayer’s Representative argued that the

should qualify as a die if it is not a substantial replacement of a

manufacturing machinery and equipment. The function is

to measure the quality of the finished product and to create a preset for the

21 It should be noted that, based on the President’s testimony, it is still uncertain whether the

transactions from March, May, and August 2015 were related to this replacement. Since those transactions are otherwise taxable and no exemption claim is

demonstrated, the Department correctly assessed those transactions as well even if they are not related to the replacement.

32

dispensing of ink in various concentrations, which is ultimately transported and

applied to the printing plate by the rollers. The however,

does not impart a predetermined and distinctive pattern to the finished product

and does not make contact with the printed material. The system simply

functions in conjunction with other components of the Based on

the record, the Taxpayer has not shown that the qualifies for

the exemption contained in Arkansas Gross Receipts Tax Rule GR-56 by a

preponderance of the evidence.

Consequently, the Department’s assessment of these transactions is

sustained.

iii. UV Light

During the administrative hearing, the Department’s Representative

asserted that the UV lamps only assist in drying a chemical on the finished

product and do not impart a unique characteristic to the products. Consequently,

she reasoned that the lamps do not qualify as dies. The Taxpayer’s Representative

argued that the UV lamps are integral to the UV coating process by curing the

finish. Even though the lamps do not physically touch the coating, he asserted

that the lamps impart a finish upon the

Here, the UV lights do not apply the finish to the Taxpayer’s

products but cure or dry the coating that was already applied. The drying of the

finish does not impart a predetermined and distinctive finish to the material

since that finish was already applied prior to the UV lights.

Based on the record, the Taxpayer has not shown that UV lights qualify for

the exemption contained in Arkansas Gross Receipts Tax Rule GR-56 by a

33



iv.


stated that the should qualify as dies because they function as

component parts of the which ultimately imparts a predetermined

pattern or finish to the printed paper. In her Supplemental Answers to

Information Request, the Department’s Representative argued that these

do not function as a die because they do not impart a predetermined and

distinctive shape, pattern, texture, or finish to the product but directly act on

other components of manufacturing machinery and equipment. During the

administrative hearing, the Taxpayer’s Representative asserted the

function as dies by controlling the supply of ink dispensed during a print

job.

Here, the function is to dispense ink in various

concentrations, which is ultimately transported and applied to the printing plate

by the rollers. The do not impart a predetermined and distinctive

pattern to the finished product and do not make contact with the printed

material. These items simply function in conjunction with other components of

the

Based on the record, the Taxpayer has not shown that the

qualify for the exemption contained in Arkansas Gross Receipts Tax Rule GR-56

by a preponderance of the evidence. Consequently, the Department’s assessment

of these transactions is sustained.

34

b. Cleaning Chemicals

In her Answers to Information Request, the Department’s Representative

noted that cleaning chemicals are expressly taxable under Arkansas Gross

Receipts Tax Rule GR-55.1(C)(2)(c). During the Administrative Hearing, the

Department’s Representative again argued that the cleaning chemicals are

expressly excluded from the manufacturing chemical exemption under GR-

55.1(C)(2)(c) and does not qualify for the example contained in GR-55.1(C)(2)(a).

She also argued that the cleaning chemicals lack continuing utility and do not

qualify as manufacturing equipment.

During the administrative hearing, the Taxpayer’s Representative argued

that the cleaning chemicals qualify as manufacturing chemicals 22 and are

analogous to the example presented a t GR-55.1(C)(2)(a) in that the

cleaning chemicals ensure that the Taxpayer’s final product is not contaminated

by errant ink. He further argued that the disagreement between the two

sections of the governing rule (one disallowing cleaning chemicals and the

other allowing cleaning chemicals necessary for USDA compliance) should be

resolved in favor of granting the exemption to his client and overlooking the

express exclusion to the exemption contained in GR-55.1(C)(2)(c).

An exemption does exist for chemicals consumed or used by “producing,

manufacturing, fabricating, processing, or finishing articles of commerce at

manufacturing or processing plants or facilities in the State of Arkansas . . ..”

Ark. Code Ann. § 26-52-401(35)(A) (Supp. 2017). Sales tax exemptions

must be applied uniformly to Arkansas Use Tax. Ark. Code Ann. §

22 This argument was also asserted in the Taxpayer’s Protest and Answers to Information Request.

35

26-53-112(2) (Supp. 2017). Addressing this exemption, Arkansas Gross

Receipts Tax Rule GR-55.1(C)(2)(c) specifically provides, however:

“Substances used to fuel, cool, heat, lubricate, clean, protect, maintain, operate,

repair, or otherwise affect machinery or equipment used in a manufacturing or

processing facility, or the facility itself, are not exempt.”

That regulation, however, also provides that: “sanitization chemicals used

to meet USDA standards for machinery and equipment used in processing meat

and poultry for human consumption” are exempt as manufacturing chemicals.

Arkansas Gross Receipts Tax Rule GR-55.1(C)(2)(a).

Here, the cleaning chemicals do not qualify for the example under

Arkansas Gross Receipts Tax Rule GR-55.1(C)(2)(a). Additionally, the cleaning

chemicals do qualify for the exclusion contained in GR-55.1(C)(2)(c). Further,

exemptions must be construed in limitation of their application and uncertainty

regarding the application of an exemption must be resolved by denying the

exemption. Ark. Code Ann. § 26-18-313(b) and (f)(2) (Supp. 2017). Considering

the rules of construction and burdens of proof, the Taxpayer has not proven

entitlement to the exemption by preponderance of the evidence, and, thus, the

Department has correctly denied the Taxpayer’s exemption claim with respect to

the cleaning chemicals.

During the Administrative Hearing, the Taxpayer’s Representative also

argued that the cleaning chemicals should qualify as exempt manufacturing

equipment.23 The Arkansas Supreme Court has explained that certain chemicals

may qualify as exempt manufacturing equipment under Ark. Code Ann. § 26-53-

23 This argument was also asserted in the Taxpayer’s Answers to Information Request.

36

114(c)(3)(B)(ii) (Repl. 2014). Specifically, the Court noted that the relevant

chemicals must be used directly in manufacturing, serve as instruments or tools

with some degree of complexity, and possess continuing utility. Weiss v. Chem-

Fab Corp., 336 Ark. 21, 984 S.W.2d 395 (1999).

Here, the testimony explained that the cleaning chemicals are used to

clean the machine between print jobs and are not reused for other print jobs.

Based on this information, the cleaning chemicals lack continuing utility, a

necessary element, and, thus, cannot qualify as exempt manufacturing

equipment. The remainder of the elements shall not be analyzed as those issues

are rendered moot. The Department has correctly denied the Taxpayer’s

exemption claim.

Consequently, the Department’s assessment of these transactions is

sustained.

c.

In her Supplemental Answers to Information Request, the Department’s

Representative argued that this item does not qualify as a sale for resale because

the does not become an integral part of the finished product but is

discarded as waste.

The sale for resale exemption 24 does apply to certain items used by

manufacturers. The governing statutory subsection provides as follows:

(i) Goods, wares, merchandise, and property sold for use inmanufacturing, compounding, processing, assembling, or preparing forsale can be classified as having been sold for the purposes of resale or thesubject matter of resale only in the event the goods, wares, merchandise,

24 As stated above, sales tax exemptions apply equally to use tax.

37

or property becomes a recognizable integral part of the manufactured, compounded, processed, assembled, or prepared products. (ii) The sales of goods, wares, merchandise, and property not conforming to this requirement are classified for the purpose of this act as being “for consumption or use”; . . ..

Both “recognizable” and “integral” are defined in the governing rule as follows:

a. "Recognizable" means capable of being recognized in the finished product. The capability to recognize the effect of goods, wares, merchandise, or property upon the finished product is insufficient to establish that the goods, wares, merchandise or property has been resold.

b. "Integral" means essential to the completeness of the finished product. Arkansas Gross Receipts Tax Rule GR-53(C)(1). Here, the President has testified that the is thrown away and

should not be sent to the Taxpayer’s customer. This record shows that the

is not an integral part of the Taxpayer’s finished products, and, thus,

does not qualify for the sale for resale exemption. Consequently, the

Department’s assessment of these transactions is sustained.

Interest

Interest must be assessed upon any tax deficiencies for the use of the

State’s tax dollars. See Ark. Code Ann. § 26-18-508 (Repl. 2012). Consequently,

the assessment of interest on the assessed transactions (after adjustments

necessitated by any concessions by the Department) is sustained.

DECISION AND ORDER

After adjustments necessitated by concessions agreed to by the

Department, the remainder of the assessments are 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

38

Ark. Code Ann. § 26-18-405 (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 72203. A revision

request may also be faxed to the Assistant Commissioner of Revenues at (501)

683-1161 or emailed to [email protected]. 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. § 26-18-406 (Supp. 2017).

DATED: November 9, 2017

state of arkansas department of finance & … · (acct. no.: ) audit no. audit period: dec....

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