Arkansas Legal Opinion Highlights the Treatment of Services Provided with the Sale of Property

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When a seller of goods also provides services in connection with its product sales, those services may be subject to sales tax even if such services would not be taxable when sold on a stand-alone basis. In addition, how the seller invoices for those goods and services may impact taxability.

By: Kristen Mantilla, State and Local Tax Associate at Aprio

If your business specializes in real estate, property management or property sales, you may be wondering how the services you or a third party provides during a sale are taxed. For sales tax purposes, a service may or may not be taxable depending on whether it was provided on a stand-alone basis or in connection with the sale of tangible personal property.

A recent Arkansas Revenue Counsel (ARC) Legal Opinion has shed more light on this matter, explaining the sales tax treatment of certain services provided by a commercial office furniture dealer.[1]

The taxpayer in question is a retailer of new and used office furniture, and it reached out to the state regarding the applicability of sales tax to certain services that it provides. Here are the ways in which certain activities associated with these services would be taxed:

  • Installation of New/Used Office Furniture: The opinion notes that, typically, a service is not taxable unless there is a specific provision in the law that makes the service taxable. In this case, Arkansas imposes a sales tax on the “initial installation, alteration, addition, cleaning, refinishing, replacement, and repair of . . . furniture . . . [and] . . . office machines and equipment.”[2] Initial installation is defined as “the first time setting up for use or service of the tangible property . . . except when the installation is provided in connection with the construction or substantial modification of a building.”[3] Therefore, as long as this is the first installation of the furniture, the installation charges will be taxable.

The taxpayer also provides these installation services to other out-of-state dealers in situations where the dealers hire the taxpayer to install furniture that they sold to their customers (i.e., the taxpayer invoices the dealer for this service, and the dealer may pass on those costs). The opinion makes clear that these services are taxable installation services and that the dealers would be considered the consumers of the service. In those cases, the taxpayer should charge sales tax on its invoice to the dealers.

  • Moving Furniture From One Location to Another: Charges for moving furniture to another location generally are not taxable. However, as noted above, furniture “replacement” is a taxable service; therefore, if the relocation services are part of replacing a piece of furniture in favor of another, then those services would be taxable.
  • Project Management Services: The opinion states that “project management” involves “checking the furniture order for accuracy, placing in order entry, following up on lead times from the manufacturer, coordinating the installation, supervising the installation, and following up on any punch list items until the project is complete.” The opinion notes that while there is no provision in Arkansas law that subjects project management services to sales tax, these services are necessary to complete the sale and installation of the furniture. Arkansas defines “sales price” as the total amount of consideration without deduction for “[a] charge by the seller for any service necessary to complete the sale.”[4] These services are not provided on a stand-alone basis, and therefore are necessary to complete the sale and included in the sales tax base.
  • Shipping and Freight: Although shipping and freight are not taxable as stand-alone services (i.e., carriers are not required to impose sales tax on shipping charges), when a taxpayer sells tangible personal property that is subject to sales tax, any delivery charge imposed by the seller on the invoice is also taxable, even if it’s separately stated.[5]

Finally, the ruling cautions the taxpayer that the way in which services appear on its invoices will impact its taxability. Any service that generally is not taxable could potentially still be taxable if it is part of a bundled transaction. A bundled transaction is the retail sale of two or more items in which the products are otherwise distinct and identifiable, and the products are sold for one nonitemized price.[6] Therefore, if the taxpayer sells the furniture and services for one nonitemized price, the entire transaction will be taxable. However, if the taxpayer provides an itemized list of the products and services, sales tax is imposed only on those items that are independently subject to tax.

The ARC opinion underscores the importance of understanding the relationship between the products and the services you sell, and how each state’s sales tax rules will apply to those services. Even services that are nontaxable on a stand-alone basis could be included as part of the taxable sales price if they are necessary to complete the sale.

Though the ARC opinion and rules around sales tax may be complex, the good news is that you don’t have to navigate them alone.

Aprio’s State and Local Tax (SALT) team has experience with these sales tax rules and can perform a taxability analysis on the products and services that you sell to consumers. With the help of our team, you can ensure that your invoices reflect the correct amount of sales tax to collect so that you don’t incur unexpected sales tax liabilities and penalties. What’s more, we constantly monitor these and other important state tax topics to make sure you don’t miss a beat.

Have questions around these sales tax rules and how they apply to your business? Reach out to our team today and keep an eye out for more significant developments in future issues of the Aprio SALT Newsletter.

Contact Kristen Mantilla, SALT Associate at kristen.mantilla@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 January 2021 SALT Newsletter.

[1] Arkansas Department of Finance and Administration, Revenue Legal Counsel Opinion No. 20200615 (December 3, 2020).

[2] Ark Code. Ann. § 26-52-301(3)(B)(i).

[3] Ark. Regs. GR-9.17(B)(1).

[4] Ark Code. Ann. § 26-52-103(19)(iii).

[5] Ark Code. Ann. § 26-52-103(19)(iii), Ark. Regs. GR-18(A).

[6] Ark Code. Ann. § 26-52-103(2)(A).

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