Arkansas Clarifies Sales Tax Exemption for Hazardous Waste

A recent Arkansas legal opinion showcases the potential consequences of assuming that the meaning of terms in a sales tax statute will match the common dictionary definition.

By Tina Chunn, SALT senior manager

Relying on commonly-understood definitions of terminology when making sales tax determinations can lead to confusion in interpreting the taxability or exemption for certain items. This misunderstanding could result in an incorrect application of sales tax to a transaction since the sale tax rules don’t necessarily define terms based on common dictionary definitions.

For example, Arkansas issued a legal opinion on May 2, 2016, regarding the exemption of hazardous waste disposal and whether certain items would be eligible for the exemption. [1] The taxpayer provides hazardous waste services and has vendors that remove certain types of items from the taxpayer’s clients. Specifically, the taxpayer was inquiring on the taxability of the removal of the following items for disposal: pharmaceuticals, aerosols, oxidizers, flammables, combustibles and crushed lamps. Arkansas ruled that the items were not exempt hazardous waste items and, therefore, the waste disposal services would be subject to the Arkansas gross receipts tax (“sales tax”).

Under Arkansas law, the collection and disposal of solid waste is a specified service subject to the sales tax. [2] However, Rule GR-9.6 provides that hazardous waste management in accordance with the provisions of the Arkansas Hazardous Waste Management Act (the “Act”) is not included in the definition of solid waste disposal. [3]

In this ruling, the department clarifies that it is not hazardous waste disposal that is exempted but rather hazardous waste management meeting the Act’s requirements. Under the Act, “hazardous waste management” means “the systemic control of the generation, collection, distribution, marketing, source separation, storage, transportation, processing, recovery, disposal, and treatment of hazardous waste.” [4] In other words, exempt hazardous waste management requires more than just disposal of hazardous waste.

In addition, the Act also requires those engaged in hazardous waste management to obtain a license issued by the Arkansas Department of Environmental Quality (“ADEQ”). Based on these provisions, the ruling concludes that unless the disposal is part of an overall license to engage in hazardous waste management, the exemption does not apply and the services will be treated as taxable solid waste disposal.

The ruling also notes that while certain materials listed above are potentially hazardous, not all hazardous items are included as hazardous waste subject to the Act. For example, asbestos is legally considered an air pollutant, but is not defined as hazardous waste under the Act. [5] The department also explains that not all lamps are hazardous, and that only crushed lamps meeting the hazardous waste definition could potentially be exempt within the management of hazardous waste.

The ruling further clarifies that even if some of the items specifically questioned in the ruling request were identified as exempted under this governing statute, the tax would still be imposed on the total amounts billed for these services if the billing included these exempted items in a bundled transaction with other solid waste disposal. Therefore, unless these exemption items are billed separately, then the exemption would not be applicable to the services provided.

This type of misunderstanding is common without adequate research of the governing provisions and definitions of key terms. Sometimes, as in this case, those defined terms are outside the sales tax rules, and in order to understand those terms, other experts may be needed. It is very important not to assume that the meaning of terms in a sales tax statute will match the common dictionary meaning; rather, it is crucial to verify the definitional requirements based on the laws and regulations for that specific jurisdiction in order to validate the treatment of any specific tax transaction. Aprio’s SALT team can assist you in understanding the sales tax rules and how they would apply to a specific transaction.

Contact Tina Chunn, SALT senior manager, at tina.chunn@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

 

This article was featured in the July 2016 SALT Newsletter. To view the newsletter, click here.

[1] Opinion No. 20160101.

[2] Ark. Code Ann. § Ark. Code Ann. § 26-52-316(a)(2) (Supp. 2015); and Arkansas Gross Receipts Tax Rule GR-9.6.

[3] Ark. Code Ann. §§ 8-7-201 through 8-7-227.

[4] Ark. Code Ann. § 8-7-203(8).

[5] Ark. Code Ann. § 8-4-309.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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