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State Tax Audit Litigation for Auto Dealers: Arkansas Administrative Law Judge Decision

Happy couple buying a car in a showroom while men are shaking hands after reaching a successful deal.

The automotive industry is turbocharging America's economy by contributing over $272 billion in tax revenue. With sales tax being the second-highest source of sales and local taxes, it's safe to assume that auto dealers provide a large portion of sales taxes to state coffers. Sales tax is one of the key components of any motor vehicle transaction. The dealer must account for when selling to a customer.

With the surge in the purchase of new and used cars predicted to continue in 2022, dealers should expect state governments to increase the probing of their tax collection and remittance. Depending on the state, an auto dealer needs to pay attention to their physical and economic nexus requirements. They also must understand what the tax code in that state stipulates on the taxation of vehicles.

As sales tax audit defense experts, we understand the gravity of what it means when state tax departments spotlight a car dealership over its income sources and its sales tax filing. When these agencies suspect any inconsistencies, they tend to be very thorough while investigating potential tax fraud. However, the state doesn't have the final say until the taxpayer appeals their assessment.

Case Summary

A good example is the case between the Office of Field Audit under the Arkansas Department of Finance and Administration and an automobile dealership over sales and use tax assessment of owed tax plus interest. The dealership's main cause of contention includes the audit outcome received from the department's auditor. This conducted an audit covering the period of July 1, 2015, through to December 31, 2020.

According to the auditor's findings, the taxpayer owed the state of Arkansas sales tax and interest on the grounds that the dealer withdrew vehicles from stock assigned to unauthorized users and those issued with Dealer License Tags. Simply put, it means the dealership removed vehicles from their stock in trade to be used by their employees, which qualifies as gross receipts subject to sales tax as per the rule 006-05-92 (Arkansas Gross Receipts Rule).

In conclusion, the court ruled in favor of the auditor and the department since, under Arkansas law, withdrawal of a vehicle from the stock of auto dealers to be used by the dealership is considered taxable. Further, the withdrawal is only tax-exempt if it's for use by an authorized user. In this case, the taxpayer did not qualify.

State Sales Tax on Auto Dealers

The case in question clarifies one of the key aspects in regard to taxation of dealerships in Arkansas. As per the law, the sale and use of tangible property attract sales tax. This includes the withdrawal of tangible personal property or wares from stock for use by the business. However, dealerships receive special treatment for exemption from sales tax if the withdrawn vehicles transfer to qualified persons. For example, the dealer, manager, sales manager, or salesperson as an employee of the dealership.

As a general rule, sellers carry the burden of collecting and remitting sales tax to state tax departments. While running a dealership can be a profitable venture, it can expose the owner to run-ins with the law due to heavy regulations. From a sales tax perspective, states view dealerships as one of their major sources of revenue from their new and used cars and spare part sales. However, just a single transaction can trigger the state to conduct an audit. Indeed, an audit occurs if they suspect misreporting of sales taxes in the gross sale price.

Arkansas Tax Code

While the dealership is given a chance to defend their position during an assessment as laid down under the Taxpayer Bill Of Rights, the burden of proof lies with them where they tried to show the vehicles were not withdrawn from stock but were ready for sale at any time. However, this qualified as a taxable event because the dealership issued dealer license plates because the ineligible employees used the vehicles. On the upside, dealers can optimize the exceptions, exemptions, and VDA programs if they overlook the sales tax rules.

Regardless of the final ruling in the case, the taxpayer appeared fairly knowledgeable of the Arkansas tax code. This allowed them to defend their stance. For example, the auditor agreed with them that since there were no sales, the vehicles could not be assessed for sales tax under GR(12) (C) (1). This implies that dealers remain armed with code knowledge in case they enter into a dispute. Auditors or agents from state tax agencies must meticulously prove misstated sales taxes owed. While the law allows the chance to appeal the assessment, providing contradictory evidence is difficult and often requires a skillful professional.

Learn More About State Tax Audit Litigation for Auto Dealers

An expert would be better placed to handle the case at this stage, especially during the first interview. This also avoids the risks of over-providing information about the types of sales transactions, method of valuation, inventory, financing, and generally how the dealership is managed.

Sales Tax Helper has dealt with countless cases of clients who have been candidates for state sales tax audits. We will act as your representation to defend your dealership against any sales tax issues. Then, expertly engage the state to make sure you get a favorable assessment. To get started, give us a call today.

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