Arkansas Rules that Sale for Resale Exemption Lost on Goods Given to Customer at No Charge
A sale for resale exemption allows a business to purchase goods without paying sales tax because the sales tax will be collected on the sale to the end user. But what happens when a good purchased under the exemption is ultimately not sold?
By Jeff Glickman, SALT partner
When a business that purchases goods gives its vendor a “sale for resale” exemption certificate, it is indicating to that vendor that sales tax does not need to be collected because the business plans to sell that good to its customer (who may or may not be the end user). Ultimately, it is the intent of the sales and use tax system to impose tax on the sale of taxable goods and services to the end user. The sale for resale exemption avoids having the end user charged sales tax based on the price of the good that includes sales tax previously paid in the distribution chain – a principal referred to as sales tax pyramiding. But what happens when a good that was purchased by the business under a sale for resale exemption is not ultimately sold?
The business owes sales/use tax, as determined by a recent Arkansas Department of Finance and Administration (DFA) ruling.  The taxpayer in that case purchased certain tools and tool repair parts from vendors and provided those vendors with sales for resale exemption certificates. The taxpayer in some cases then sold those tools to its customers, but in many cases, the tools were provided to customers at no charge (the taxpayer retained ownership) under an agreement that the customer purchase a certain amount of other goods from the taxpayer. In addition, the taxpayer provided repairs for the tools at no charge. The taxpayer’s invoice reflected $0.00 for the tools/repairs. Upon audit, the taxpayer was assessed tax based on the purchase price that the taxpayer paid its vendor for the tools/repair parts.
Under Arkansas law, a “sale” means “the transfer of either the title or possession…for a valuable consideration…”  In addition, a “withdrawal from stock” is defined as “the withdrawal or use of goods…from an established business…for consumption or use in the established business or by any other person.”  The regulations expand on the withdrawal concept as follows:
If a seller has a retail permit and purchases goods from its suppliers without paying tax to those suppliers claiming the “sale for resale” exemption and the seller withdraws the merchandise from stock and gives the merchandise to customers or other third parties, or uses the merchandise itself, then the value of this merchandise is a part of the seller’s gross receipts or gross proceeds and the seller must remit the tax on the purchase price of the goods paid by the seller. 
The taxpayer argued that there was valuable consideration provided in this case because the agreement requires that the customer to continue to purchase a certain level of goods from the taxpayer. The DFA rejected that argument, noting that a prior Arkansas Supreme Court case defined “consideration” to mean “conferring a pecuniarily measureable benefit on one party or imposing a pecuniarily measurable detriment on one other.”  Ultimately, the DFA refused to apply the taxpayer’s expansive concept of consideration and concluded that the tools and tool repair parts were subject to tax as withdrawals from stock.
Businesses that purchase taxable goods/services under the sale for resale exemption must keep track to make sure that those goods/services are ultimately resold and are not used by the business or otherwise provided to a third party in a transaction that does not qualify as a “sale” (i.e., without consideration). Otherwise, the business will need to self-assess and remit tax on the purchase price paid for those goods/services. However, some states may provide certain exceptions to that general rule. For example, Georgia allows an item purchased with a sale for resale certificate to be used by the business for demonstration without blowing the sale for resale exemption. 
Aprio’s SALT team can assist businesses with understanding the applicability of the sale for resale exemption and the circumstances under which that exemption could be lost based on subsequent improper use.
This article was featured in the September 2016 SALT Newsletter. To view the newsletter, click here.
 Ark. Department of Finance & Administration Hearing Decision, Docket Nos. 16-498 & 16-499 (8/9/2016).
 Ark. Code § 26-52-103(19).
 Ark. Code § 26-52-322.
 Ark. Gross Receipts Tax Rule GR-18(D)(1).
 Holbrook v. Healthport, Inc. et al., 2014 Ark 146 (2014).
 O.C.G.A. § 48-8-39.
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