Another border issue

guest commentary by David Potts

By now everybody should know tax increases are in their future. When thinking about tax increases people usually think about Federal income taxes rather than the myriad of state taxes to which they are subjected. But states budgets have been stressed by the recent recession and state governments are looking for money too.

This past week I bumped into a long time friend that sells larger ticket consumer products in Arkansas. The subject of the conversation gravitated toward Arkansas taxes, specifically sales tax. A large number of people buy the products my friend sales, but not from him, but from out-of-state competitors so they can avoid paying Arkansas sales tax.

Many times the companies that sell these products don’t operate in Arkansas and therefore don’t collect Arkansas sales tax. The buyers believe that since the seller didn’t collect sales tax then no tax is due, that the sale is non-taxable. What these buyers don’t know is that according to Arkansas law, they are subject to sales tax on their purchase. Actually, it’s not called sales tax in this context, it’s called use tax.

My friend was telling me about an employee of the Arkansas Department of Finance and Administration who said he bought a particular product via mail order to avoid paying Arkansas sales tax. The state employee was not a clerk, he held a position where he should have known about Arkansas’s tax requirements — but he didn’t. Most people in Arkansas don’t know about the use tax; how much it is, how to pay it, or when they owe it.

Arkansas law says, "if tangible personal property is purchased for  consumption in Arkansas from the seller in another state and delivery is made in Arkansas, then such sale is subject to Arkansas compensating  use tax. The out-of-state seller may be required to collect Arkansas tax. If the out-of-state seller does not collect Arkansas tax, it becomes the responsibility of the Arkansas customer to remit compensating use tax directly to the Department."

Most people don’t realize it becomes the responsibility of the Arkansas customer (them) to remit the tax directly to the state of Arkansas if the seller doesn’t collect the sales tax.

The purpose of the tax, of course, is to raise revenue for the state. The justification for the tax is to protect Arkansas businesses from unfair competition with out-of-state businesses that otherwise wouldn’t charge sales tax when they sell to Arkansas residents. How important does Arkansas believe it is for the State to protect Arkansas businesses? It was just a few years back that I believed they had a total of three people responsible for enforcing the use tax provisions of the law for the whole state.

The requirement to pay use tax has been law since 1949. Businesses in Arkansas are generally aware of Arkansas’ use tax requirements because state auditors examine their books and records for compliance on a regular basis. Non-business owners, on the other hand, generally aren’t knowledgeable about the use tax requirements until a letter from the Arkansas Department of Finance Administration shows in their mailbox dunning them for the use tax due on their out of state purchase.

For example, I had a client purchase furniture in another state directly from a manufacturer. Since the furniture manufacturer shipped the furniture to Arkansas, he wasn’t required to collect sales tax in his state. Eventually the furniture manufacturer was audited. The end result was my client received a letter from the Arkansas Department of Finance and Administration asking for the unpaid use tax. My client is honest and would have paid the tax voluntarily and timely if he had known it was required. His purpose of buying the furniture out of state was not to avoid sales tax; he just got a great deal. Like the great majority of Arkansas consumers, he wasn’t aware of Arkansas’ compensating use tax laws.

If you want to be compliant with Arkansas’ use tax law, in a nutshell this is what you have to do. If you purchase products from companies located out of state and the products are shipped into Arkansas and these companies don’t collect sales tax on the purchase, you probably owe use tax to Arkansas. Arkansas requires you to report and pay the use tax monthly if the use tax exceeds $25. For anything less than $25 you can report annually. Here is the link to obtain the Individual Consumer Use Tax Report.

About Potts
David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.

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