Arkansas Supreme Court Finds Auto Dealerships Liable for Sales Tax When They Provide Vehicles for Their Employees’ Use
A recent decision from Arkansas’ highest court reversed a circuit court decision and found that when auto dealerships allowed employees and their families to use vehicles, it subjected the dealerships to sales tax, despite the fact that the vehicles remained available for sale to the public and, in fact, were subsequently sold to unrelated third parties. Arkansas Dep’t of Finance and Admin. v. Trotter Ford, Inc. et. al., 35CV-22-238 and 35CV-22-240 (Ark. 2024).
The Facts: Auto dealerships allowed two employees and two employee family members to use vehicles with dealer license tags. The Arkansas Department of Finance and Administration (“ADFA”) audited the dealerships, finding that the individuals to whom the cars were assigned did not qualify as authorized users for dealer tags under Arkansas law and that the assignment and use of the vehicles constituted “withdrawals from stock” requiring the payment of sales tax. The dealerships protested the assessments issued by the ADFA, and an administrative law judge sustained the assessments. The dealerships then appealed that ruling and filed motions for summary judgment. The circuit court granted the dealerships’ summary judgment motions and reversed the assessments, reasoning that, because sales tax is triggered by a consumer on the purchase of a motor vehicle on or before the time for registration, and because the sales tax is collected from the buyer at the time the automobile license is issued, no tax is due because no title was transferred and no application for a license had been sought. ADFA appealed to the Supreme Court of Arkansas from the circuit court’s orders.
The Decision: The Court focused on Arkansas Code Section 26-52-322 (“Withdrawal from stock—Definition”) which subjects tangible personal property “withdraw[n] from stock” to the gross receipts (i.e., sales) tax. “‘[W]ithdrawal from stock’ means the withdrawal or use of…tangible personal property from an established business…for consumption or use in the established business or by any other person.” As a result, the “narrow issue” before the Court was “whether the use of the vehicles constitutes ‘use’ within the meaning of ‘withdrawal from stock’” under the statute. The Court found that the statutory language was unambiguous and under its plain meaning, the vehicles were used and therefore were subject to tax. The Court rejected the dealerships’ argument that the statute requires a permanent withdrawal from stock or consumption of the property and found that because the vehicles were provided as part of the dealerships’ compensation packages to their employees, and because the benefits of the vehicles were enjoyed without restriction, the vehicles were used and therefore withdrawn from stock under the plain language of the statute.
The Dissent: The dissent sought to look beyond the plain language of the statute and “give effect to the intent of the legislature.” The dissent focused on a different statute, Arkansas Code Section 26-52-301, which applies the gross receipts tax to sales of tangible personal property. The dissent argued that under the plain language of that statute, the tax does not come due until there is a sale, and that there was no “sale” when the employees and their families were permitted use of the vehicles. The dissent further highlighted that the vehicles in question remained in the dealerships’ active inventory and were, in fact, later sold and taxes were paid on the gross receipts that were generated. The dissent criticized the majority: “[i]t is absurd to call the use of these vehicles a withdrawal from stock. By the majority’s reasoning, it is a withdrawal without actual withdrawal.”
This update is one in a series of updates written for the April 2024 edition of The BR State + Local Tax Spotlight.