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Arkansas Compensating Use Tax: 4 Top Tips

author photo of B.J. Pritchett

The introduction to Arkansas Sales and Use Taxes continues with this post – which will review Arkansas Compensating Use Tax.

Arkansas initially passed only a Gross Receipts {Sales} Tax which had been permanently instituted by 1941. It only took the state government and in-state vendors eight years to realize the devastating effect of tax planning by taxpayers. Taxpayers realized they could purchase the same items across state lines and not have to pay the Gross Receipts Tax.

Arkansas passed the Compensating Use Tax law in 1949 as a complementary tax to the existing Gross Receipts Tax. The Compensating Use Tax is imposed on the consumption, storage, use or distribution of a taxable item purchased from out-of-state but subsequently consumed, used, stored or distributed in the state of Arkansas. The Gross Receipts and Compensating Use Tax Rates are the same.

There are two elements of the Compensating Use Tax:

Consumer Use Tax – This is a self-assessed direct payment of tax to the state of Arkansas on out-of-state purchases ONLY! The purchaser buys a taxable item from out-of-state and consumes, uses, stores or distributes the out-of-state item within the borders of the state of Arkansas.

Vendor Use Tax – This element of the Compensating Use Tax is when a vendor has established nexus (tax connection) with the state of Arkansas and is subject to Arkansas laws for the imposition of the Use Tax. The vendor is liable for the collection and remittance of the use tax; however, if the vendor did not charge the full state and local tax on the item, the purchaser must pay the difference.

Arkansas holds the purchaser liable for Compensating Use Tax. While the out-of-state vendor maybe registered to collect and remit the use tax, if the vendor does not collect the correct measure of use tax, the purchaser will be liable for the tax due.

Example: Taxable Item shipped from out-of-state vendor to Arkansas purchaser in Wherever, Arkansas which has a tax rate of 6.5% State and 1% City and 1% County Tax. The Vendor charges Arkansas State tax of 6.5% but neglects to collect the local city and county taxes.

Answer: The purchaser must now remit the difference {city and county local taxes} on their next Consumer Use Tax Return.

Please keep in mind that the Arkansas Sales and Use Tax Returns do not have a separate line item on the returns for additional use taxes due. So in order to compensate (pun intended) for the lack of a separate line item, the purchaser must now take the transaction and convert the difference into the form.

Compensating Use Tax Tip #1: Always calculate the state and local tax where ever the item is delivered. Arkansas joined the Streamline Sales Tax Agreement in 2008. Arkansas is now a destination state.

Compensating Use Tax Tip #2: Make sure you know where your customer is located! For example – if they are located in Salem, Arkansas – is that the Salem in Fulton County, the Salem in Lee County, the Salem in Pike County, the Salem in Saline County – or the Salem in Ouachita County? (Apparently, Arkansas does not have a law stating you can’t have the same city name as one that is already in existence!) Similarly – Conway City is NOT located in Conway County – and Garland City is NOT located in Garland County.

Compensating Use Tax Tip #3: Never add tax to an out-of-state vendor’s invoice. When an out-of-state vendor has not charged the proper tax, adding tax to the invoice does not save you from being assessed by the Arkansas tax auditors. Besides, think about it logically, the vendor probably has software that automatically assessed whatever tax rates were initialized in the automated programming and as such will not make an adjustment and the tax you just added to the invoice will never be reported or reach the state of Arkansas. A better solution is to cross the entire tax off the invoice and short pay the invoice. Remit the use tax directly to the state of Arkansas. As the purchaser, you are liable for Compensating Use Tax on Out-of-State Purchases.

Compensating Use Tax Tip #4: Never remit tax on IN-STATE VENDOR PURCHASES. In-State vendor purchases are a Gross Receipts tax issue. Call or contact the in-state vendor and request an amended or revised invoice with the proper state and local Gross Receipts taxes.

If you have questions about Arkansas sales and use taxes, I invite you to post a question or comment below. Of course, don’t be surprised if I ask you five questions in return as knowing the facts always helps to identify the correct tax decision.

About the Author: B.J. Pritchett, CMI, is the owner of Pritchett Sales & Use Tax Consulting and the Arkansas Sales and Use Tax School based in Hot Springs National Park, Arkansas. Learn more about her by visiting her author bio page.

Comments or questions may be submitted by using the on-page "Comment" feature, subject to disclaimer at bottom of page. Additional contact options (and Consultation Requests) are also available on B.J.'s associated Firm Profile page.

Other recent “Arkansas (AR)” posts by B.J. Pritchett, CMI:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

29 Responses to Arkansas Compensating Use Tax: 4 Top Tips

  • Posted by Ariel on December 7, 2017 8:19am:

    We have nexus in Oklahoma and Arkansas. When a new facility opens up in Arkansas, the equipment is worked on and used in Oklahoma first before it is sent to Arkansas. Would we have to pay use tax for the equipment sent to Arkansas?

    • Posted by Author photo of B.J. Pritchettbjpritchett on December 7, 2017 8:44am:

      What type of business do you have - retail, manufacturing, services? Exemptions may apply.

      • Posted by Ariel on December 7, 2017 8:58am:

        Banking.

        • Posted by BJ on December 7, 2017 9:04am:

          Yes, you would need to pay Compensating Use Tax for the equipment sent to Arkansas. The next question would be at what taxable base - Original cost less depreciated value - Book Value.

  • Posted by Laura on October 6, 2017 1:54pm:

    When taking a vehicle to another state to be repaired and the company did not charge sales tax on labor, but did charge tax on parts. Do we need to pay the sales tax on our return for the labor that was not taxed?

    • Posted by Author photo of B.J. Pritchettbjpritchett on October 6, 2017 3:40pm:

      Arkansas became a member of the Streamline Sales Tax Project and as such adopted their rules; however, while adopting the SST rules they also went in and changed the law on Labor to include the words "and taxable services".

      The moment the state of Arkansas changed the law to include taxation of services, this made out-of-state labor subject to Compensating Use Tax. Generally speaking, if the other state taxed the labor and materials, the other state has the first right of taxation. Since the other state only taxed the materials, Arkansas now has the right under the Compensating Use tax to pick up the out-of-state labor.

      Please pay USE TAX on the labor and NOT SALES TAX as the invoice is from an out-of-state vendor and not an in-state vendor.

  • Posted by Jay on October 2, 2017 8:44am:

    As an auto repair shop owner with an Arkansas sales and use tax permit, I understand I am to collect sales tax on parts and labor sold in my shop. One of my suppliers in a neighboring town continues to charge sales tax to me for parts that I buy for resale or use to complete repair jobs. My supplier's city tax is 1% lower than mine... I am charged 9.5% sales tax for items from my supplier and I must charge 10.5% sales tax. All invoices clearly reflect tax collected. Can I recover the sales tax that I paid from the amount collected by me upon resale when filing my monthly return? Is there a line on the monthly return that I use to report sales tax I've paid? Am I doing this all wrong?

    • Posted by Author photo of B.J. Pritchettbjpritchett on October 2, 2017 9:22am:

      Jay - Sorry to hear the agony of Vendors who do not understand how the Arkansas sales tax system works. I trust you provided the Vendor with the ST-391 Sale for Resale Exemption Certificate which can be found at:
      http://www.dfa.arkansas.gov/offices/exciseTax/salesanduse/Documents/ExemptionCertificate.pdf

      In order to correctly receive a refund from Arkansas DFA, you would do one of two actions:
      1) Request the Vendor to refund the sales tax charged on the invoice to you
      2) Request the Vendor to sign Section 3 of the Refund Claim Form
      Found at:
      http://www.dfa.arkansas.gov/offices/exciseTax/salesanduse/Documents/RefundClaimFormandInstructions.pdf

      Then fill out Sections 1 and 2 of the refund claim form with copies of the invoices and a cover letter stating what has happened.

      Unfortunately, there is no other remedy except the two mentioned above. There is no line for removal of tax paid to vendor.

  • Posted by G. on August 7, 2017 10:27am:

    When is an Arkansas resident supposed to remit the Compensating Use Tax? I am new to Arkansas and cannot find a reference on their site. Calling the State also did not help.

    Thank you.

    • Posted by Author photo of B.J. Pritchettbjpritchett on August 7, 2017 11:24am:

      The individual consumer use tax return is located on dfa.arkansas.gov's website at the following link:
      http://www.dfa.arkansas.gov/offices/exciseTax/salesanduse/Documents/cu1.pdf

      Of course, you and I may be the only ones reporting every year as the state of Arkansas does not inform the taxpayers on a regular basis of their obligations to pay tax on their out-of-state purchases. In-State Vendors are liable for the Gross Receipts/Sales Tax. Purchasers are liable for the Compensating Use Tax. Let me know if you need any further information. Thank you for asking your question.

      • Posted by G. on August 7, 2017 8:05pm:

        Thank you. I think I am going to start out filing monthly and see how that works. My CPA literally told me "Oh, no one ever pays that," then I met a guy who had been audited. HE's paying it - now. I have no interest in paying it that way. Obviously you don't either.

  • Posted by G. on August 7, 2017 10:27am:

    When is an Arkansas resident supposed to remit the Compensating Use Tax? I am new to Arkansas and cannot find a reference on their site. Calling the State also did not help.

    Thank you.

    • Posted by Author photo of B.J. Pritchettbjpritchett on August 7, 2017 11:24am:

      The individual consumer use tax return is located on dfa.arkansas.gov's website at the following link:
      http://www.dfa.arkansas.gov/offices/exciseTax/salesanduse/Documents/cu1.pdf

      Of course, you and I may be the only ones reporting every year as the state of Arkansas does not inform the taxpayers on a regular basis of their obligations to pay tax on their out-of-state purchases. In-State Vendors are liable for the Gross Receipts/Sales Tax. Purchasers are liable for the Compensating Use Tax. Let me know if you need any further information. Thank you for asking your question.

      • Posted by G. on October 6, 2017 3:59pm:

        Thank you so much for spending your valuable time to answer our questions - the online regulations can be very confusing at times.

      • Posted by G. on October 6, 2017 3:59pm:

        Thank you so much for spending your valuable time to answer our questions - the online regulations can be very confusing at times.

  • Posted by Robert on July 5, 2017 5:30am:

    Do I need a separate tax "exemption" certificate to purchase goods & services for re sale or does my sales & use permit automatically allow me exemption?

    • Posted by Author photo of B.J. Pritchettbjpritchett on July 5, 2017 5:01pm:

      Your Sales Tax Permit allows you to purchase goods "sale for resale" but you must fill out an Arkansas Exemption Certificate ST-391

  • Posted by Brandon on May 2, 2017 1:59pm:

    I have a restaurant in Arkansas. If I have a table that has an unsatisfactory meal and there is a 100 percent discount for that meal do I pay sales tax? If so, on the retail price or the wholesale price?

    • Posted by Author photo of B.J. Pritchettbjpritchett on May 2, 2017 3:19pm:

      If the meal is provided free of charge, the restaurant still owes tax on the original meal. It is as though it was a giveaway. All grantors of giveaway items/meals must pay the tax on the cost of the meal.

  • Posted by Kimberly on February 22, 2017 7:23pm:

    Hello, I have a retail storefront in Arkansas. I purchase goods from out of state for resale. Do I need to report and pay use tax on these goods? Your help would be very appreciated. Thanks for your time.

    • Posted by Author photo of B.J. Pritchettbjpritchett on February 23, 2017 2:25pm:

      Yes Kimberly, you need to pay the Consumer Use Tax on your Excise Tax Return ET-1. The third section stating Consumer Use Tax is for ONLY Out-of-State Vendors who did not charge Arkansas Tax when the item was shipped or delivered into Arkansas. In-State Vendors are liable for any In-State purchases. Never EVER report In-State Vendors on your USE TAX RETURN. If, however, you erroneously provided an In-State Vendor with a Valid Exemption Certificate, then you would issue yourself a SALES INVOICE and report it under your GROSS RECEIPTS TAX as a "withdrawal from stock".

      • Posted by Kimberly on February 27, 2017 5:31pm:

        Thanks for your reply but I am still unclear. I am reselleing these out of state goods which are purchased at wholesale and then collecting sales tax on them at the point of purchase in the state of Arkansas not online. I report these sales on the gross receipts section of my excise tax report. If I am meant to pay use tax as well how is this benefiting me as an Arkansas business. These items would then be taxed twice. I am paying tax as a retailer and my customers are paying a tax. Very confusing. Thanks for your time.

        • Posted by Author photo of B.J. Pritchettbjpritchett on March 1, 2017 11:47am:

          Please forgive me Kimberly - I misread your statements of facts. When you purchase items from out of state for sale inside the state of Arkansas, you will claim a "sale for resale" under Arkansas Rule GR-53 and collect the tax from the customer.

          Any other purchases made from out-of-state and consumed, used or stored in Arkansas are subject to Consumer Use.

  • Posted by Lee on February 9, 2017 8:38pm:

    I have an erosion control business in Oklahoma but also do work in arkansas on state highway right of way, seeding, mulching, etc. Now arkansas says i must pay back sales taxes because I am considered a landscaper, which I am not. What can I do?

    • Posted by Author photo of B.J. Pritchettbjpritchett on February 23, 2017 2:26pm:

      Lee - Arkansas has been after businesses like yours this past year. And yes, they do have a Statute and Rule that taxes the work you perform. See the following

      ARKANSAS RULE:
      GR-9.2. SERVICES SUBJECT TO TAX – LAWN CARE AND LANDSCAPING:
      A. Any person engaged in the business of providing lawn care of nonresidential
      property or landscaping services of both residential and nonresidential property is
      required to collect and remit sales tax on the gross receipts derived from these
      services. The business is required to obtain a sales tax permit. All materials that
      remain in or on the customer’s property should be purchased tax exempt as a sale
      for resale. Examples are fertilizer, weed killer, grass seed, sod, plants, trees, or
      shrubs. Materials used or consumed by the business may not be purchased exempt.
      Examples are gasoline, oil, cleaning materials, uniforms, tools, mowers or other
      equipment used or consumed by the business.

      B. The business will collect state and local sales tax on the total consideration for
      landscaping services or nonresidential lawn care, whether provided as part of a
      general contract for building construction or as a separate agreement with the
      landowner. The business will collect the tax from the party with whom it contracts
      for the service, including general contractors, on the total contract cost including the
      cost of plant materials. A business which has its own nursery is not required to
      report tax on plant material withdrawn from stock, but will collect tax on the sale of
      the material to its customers.

      C. DEFINITIONS.
      1. “Landscaping” means the installation, preservation or enhancement of ground
      covering by planting trees, bushes, shrubbery, grass, flowers and other types of
      decorative plants. “Landscaping” does not include site preparation, cutting and
      filling, leveling, tree trimming or tree removal, or clearing a site of bushes and
      trees. “Landscaping” does include sodding, seeding and planting, as well as
      installing items such as landscape timbers, edging, planters, or similar items.
      Landscaping performed on highway easements and right-of-ways is taxable.
      Landscaping is taxable whether it is done for decorative purposes or nondecorative
      purposes such as erosion or sediment control.

      2. “Lawn care” means the maintenance, preservation or enhancement of ground
      covering of nonresidential property and does not include planting trees, bushes,
      shrubbery, grass, flowers and other types of decorative plants. Lawn care
      includes the following: mowing or raking the yard, chemical spraying, fertilizing,
      weed control or weed-eating, maintaining the ground cover in beds by adding
      additional rock, gravel, tree bark or other material used to provide ground cover
      in beds or in other places in the area to be maintained, and general lawn
      maintenance. Tree trimming or tree removal is not lawn care.

      3. “Residential” means a single-family residence used solely as the principal place of
      residence of the owner or occupant. Apartment buildings, condominiums, and
      duplexes are nonresidential property for purposes of this exemption. A singlefamily
      dwelling leased to the occupant is residential property for purposes of this
      exemption.

      Source: Ark. Code Ann. § 26-52-301(3)(D)

  • Posted by Darrell on March 9, 2016 12:45pm:

    The following states apply their own individual variations:

    Arkansas: Neither installation nor repairs of “nonmechanical” materials and fixtures attached to realty (including plumbing and lighting fixtures) is taxable. The first-time installation of mechanical or electrical equipment (such as air conditioning units, elevators, and ceiling fans), or carpeting, is also exempt. Any subsequent labor needed to replace or repair the latter items will be taxable.

    The first and 2nd sentences seem to contradict themselves. Which is true? Light fixture and ceiling fan are, for all intents and purposes, the same thing.
    I guess my question is: Would I have to charge sales tax on electrical service work?

    • Posted by Author photo of B.J. Pritchettbjpritchett on July 13, 2016 12:20pm:

      The contractor who works on real property (except for flooring, locks and electrical devices in existing buildings) will have to pay tax on all materials used in the real property service.

      Arkansas Rule GR-21 is your source for Non-Taxable Services by Contractors. Arkansas Rule GR-9 is for Taxable Services in general.

      The difference between these two rules are the objects on which the service is performed. There are specific examples for HVAC Contractors and Electrical Contractors in the Arkansas Rule GR-21.

      It also helps to know what Arkansas considers as Real Property and what is considered to be Tangible Personal Property. Arkansas has identified elevators to be tangible personal property. Source: Arkansas Supreme Court Case - Otis Elevator.

      While some issues appear to be part of real property such as a ceiling fan with a light fixture, if the two items are not separately stated (material/labor) from each other, the entire transaction becomes taxable. Light fixtures are specifically listed under Arkansas Rule GR-21 as a Non-Taxable Service by a Contractor. While under Arkansas Rule GR-9 repairs to motors of all kinds - ceiling fan motor - is subject to tax.

      Your question of: "Would I have to charge sales tax on electrical service work?" depends on the OBJECT you are working on. Your best source of knowing what is an is not subject to tax is to read these two rules.

  • Posted by Bob on November 3, 2015 2:54pm:

    I have a business in Okla. A company in Arkansas has asked for my services which is equipment repairs. Do I charge them tax. If yes at what rate.

    • Posted by Author photo of B.J. Pritchettbjpritchett on November 6, 2015 7:30pm:

      Equipment repairs are taxable in Arkansas under Arkansas Rule GR-9 "Repairs to Machinery of All Kinds". You will need to know the physical address in order to use the Arkansas Local Lookup Tool on the Arkansas Web Site:
      http://www.arkansas.gov/dfa/excise_tax_v2/st_zip.html

      Personally, once I found the appropriate local tax rate for the customer I would print out the web site page and attach it to my records so that upon audit by the state of Arkansas I have evidence of using their own web site for the proper tax rate.
      Please feel free to contact me again anytime you have an Arkansas question.

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