Compensating Use Tax is a purchaser’s issue whether it is under a Consumer Use Permit or a Direct Pay Permit. So what’s the difference?
1) Consumer Use Permit Holder:
When a business establishes a bright line physical presence in the state of Arkansas, they generally begin as a Gross Receipts and Consumer Use permit holder. Now the benefits of being a Consumer Use permit holder are very good, as the state of Arkansas holds the in-state vendor as the “taxpayer”.
If items are purchased in-state, the vendor is liable to collect and remit the tax. This means as a Consumer Use permit holder, the customer/purchaser does not need to worry about paying the Gross Receipts/Sales tax if the Vendor did not charge any tax.
Please be sure to read for contractual language on the invoice (front or back) stating the following:
“Customer is liable for all Federal, State and Local Taxes due.”
If this statement is on the invoice, should the vendor be audited and requests payment of the tax, that contractual language allows the Vendor to collect the tax from the customer/purchaser. Keep in mind, the three (3) year statute of limitations. If the in-state vendor is audited, the customer/purchaser is only liable for those months that are still open for statute of limitations purposes.
a) What if the customer/purchaser pays tax on behalf of the in-state vendor?
If the customer/purchaser pays consumer use tax, this is an overpayment of tax. The customer/purchaser cannot pay the tax on behalf of the in-state vendor since the customer/purchaser is NOT the taxpayer.
b) What if the customer/purchaser provides an exemption certificate?
In-State Vendors must receive an exemption certificate in order NOT to charge tax to the customer. If an exemption certificate is provided, please write in the description of the exemption certificate the SPECIFIC INVOICE NUMBER; do not allow a “general statement” such as “packaging supplies”. That description is like providing a blanket tax exemption certificate, which places the customer/purchaser with the burden of either exemption or taxation.
Arkansas Department of Finance and Administration (DFA) would then list the item as a taxable item on the customer/purchaser’s tax audit. It would be placed as a Gross Receipts Tax – “Withdrawal from Stock”.
2) Direct Pay Permit Holder:
A mutual agreement is made between the manufacturer and the state of Arkansas, allowing the manufacturer to take the burden of taxation from In-State Vendors as well as Out-of-State Vendors and pay the appropriate measure of tax on purchases. However, the manufacturer may allow a Vendor to charge the tax rather than try to figure out what the tax base is. A good example of this is the telecommunication charges.
a) Advantages to being a Direct Pay Permit holder in the state of Arkansas:
There are some reasons why (for example) a manufacturer would want to be a Direct Pay Permit, as the company will be able to address each line of an invoice for taxability. Additionally, when sales/use taxes are controlled under a Direct Pay Permit, the company is more likely to be able to control the profit it makes.
Advantages to being a Direct Pay Permit Holder include:
- Participate in Arkansas Economic Development Commission (ADEC) incentive programs
- Every invoice is reviewed for taxation.
- Errors made in paying tax can be adjusted in the workpapers instead of filing amended returns. (Just make sure you keep all the adjustments with the workpapers –
Example: Journal Entries – Pull original invoice and any adjustments made to the workpapers with the workpapers – It saves time hunting down the original journal entry and its support.)
- Local taxable is consistent tax rate. (Taxable invoices will be allowed to be capped at $2,500 on the supporting workpapers.)
- Reduced State Tax Rate for Repairs to Production Machinery is available.
- Reduced State Tax Rate for Utilities (Natural gas and electricity – However, the business must apply for the Certificate of Approval to take the reduced state tax rate for utilities.)
- Reduced State Tax Rate for Food (purchases of coffee, tea, water, Gatorade, powdered drink mixes, etc.)
b) Disadvantages to being a Direct Pay Permit Holder include:
- You are guaranteed to be audited.
- You cannot blame the in-state vendor for errors on your excise tax return.
- If you paid the vendor the tax and also paid the tax to the state of Arkansas, DFA will say, “You have to go to the vendor for any refunds of tax on the invoice.” However, you may get the tax back on the tax paid to the vendor, if reported as the total amount of the invoice.
- Your records must be available for review. If they are on a storage disk, the auditors may request the physical copies.
Compensating Use Tax should be reported by every entity under Consumer Use or Direct Pay Permits.
Other recent “Arkansas (AR)” posts by B.J. Pritchett, CMI:
- Consumer Use Tax vs Direct Pay in Arkansas: Key Differences
- Arkansas Waivers of Statute of Limitations: No, Thank You - Unless…
- Arkansas Local Taxes - Understanding the Local Tax Cap
- Arkansas Statute of Limitations - and How It's Unique
- Arkansas Compensating Use Tax: 4 Top Tips