Arkansas Dealership’s Use of Vehicles in Inventory Triggered Sales Tax Assessment

By: Jeff Glickman, SALT Partner

At a glance 

• The main takeaway: An Arkansas Supreme Court opinion explains that if a business purchases goods intended for resale that are held in inventory, then the withdrawal of that inventory for use, even if temporary, can give rise to tax liability.  
• Assess the impact: Businesses that purchase items with a resale certificate for storage in inventory must pay close attention to the rules in the state where the inventory is located to make sure that they do not unintentionally use an item that could trigger a sales and use tax obligation.
• Take the next step: Aprio’s State and Local Tax (SALT) team can help your business understand what types of inventory withdrawals and uses may or may not be exempt, so you do not incur unexpected liabilities and penalties.  

Schedule a free consultation today to learn more!

The full story

It is a well-settled rule that no sales tax is imposed when a business purchases items that are placed into inventory to be resold. This is commonly referred to as a “sale for resale” and reflects the general sales tax principle that tax should not apply to a sale until purchased by someone who will consume or make use of the item. State sales tax rules generally place restrictions on when an item may be withdrawn from inventory for use without payment of tax. For example, many states allow an item from inventory to be withdrawn without payment of tax if it is used for demonstration purposes.

Nonetheless, if an item in inventory is withdrawn and its subsequent use does not meet one of the state’s exceptions, the business may be liable for sales and use tax at that time, even if the business intends to and does, in fact, subsequently sell the item. A recent Arkansas Supreme Court decision addressed this issue in the context of an automobile dealership.

A closer look at the case

In this case, the taxpayer operated automobile dealerships and purchased cars for resale that were placed in inventory. Arkansas allows dealers to obtain “dealer’s extra license plates” to be used “only by the dealer, manager or salesperson of the dealer” and only for the following purposes:

1. To drive to and from work;
2. For business or personal trips inside or outside the dealer’s county of residence;
3. To transport the vehicle; or
4. To demonstrate the vehicle.

During a sales tax audit by the Arkansas Department of Finance and Administration (ADFA), the ADFA found that the taxpayer had assigned vehicles with dealer tags to four unauthorized individuals. As a result, the ADFA concluded that those unauthorized uses resulted in a taxable “withdrawal from stock” and assessed sales tax.

Unpacking the ruling

Under Arkansas’ sales tax statutes, sales and use taxes are levied on a “withdrawal from stock,” which is defined as “the withdrawal or use of goods, wares, merchandise, or tangible personal property . . . from the stock in trade of the established reserves of an established business for consumption or use in the established business or by any other person.”  

The taxpayer made several arguments, all of which the court rejected. First, the taxpayer asserted that the statute requires that the item be permanently withdrawn from inventory, and that in this case, these cars were always intended to be and were actually sold to the dealership’s customers.  However, the court reasoned that the plain language does not require that the withdrawal be permanent, and it was clear that the unauthorized users had made use of the cars for personal transportation, including running errands and driving on vacation.

Second, the taxpayers pointed to another sales tax statute that specifically requires sales tax on the purchase of a vehicle to be paid on or before the time for registration, and that this rule should trump the withdrawal statute. The court disagreed, noting that each rule requires tax to be paid on a different event, one being the withdrawal from inventory and the other being upon a sale to a customer. The court stated that an item “may be involved in many transactions during its lifetime that will trigger sales tax liability.”

Finally, the taxpayer argued that the punishment for misuse of the dealer tags should solely be the fines/penalties that are levied by that statute. The court was not convinced and explained that the two statutes are not mutually exclusive and that both can apply to the same event.

The bottom line

Businesses that purchase items with a resale certificate for storage in inventory need to pay close attention to the rules in the state where the inventory is located to make sure that they do not unintentionally make use of an item that could trigger a sales and use tax obligation. Even temporary use that does not meet an applicable exemption can give rise to liability.  

Aprio’s SALT team has experience with these issues and can help your business understand what types of inventory withdrawals and uses may or may not be exempt. Our assistance can help to ensure that your business remains in compliance with its sales and use tax obligations and that you do not incur unexpected liabilities and penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.    

1. Arkansas Dep’t of Finance and Administration v. Trotter Ford, Inc. et al., No. CV-23-450 (Sup. Ct. Ark. March 28, 2024).
2.  AR Code § 27-14-1704.  Violation of these rules can result in various fines and other penalties.
3.  AR Code § 26-52-322(a) and (b)(1).
4.  AR Code § 26-52-510