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Arkansas Tax and Incentives Update

Will the FLIS Enterprises Case Be a Refund Opportunity for Sales Tax on Withdrawals from Stock?

Matt Boch - Thursday, June 01, 2017

A case is pending in the Arkansas Court of Appeals with significant implications for restaurants specifically and, potentially, for any manufacturers who make withdrawals from stock for finished goods. Taxpayers should evaluate their current positions and consider potential refund claims.

The case is FLIS Enterprises, Inc. v. Walther, CV-17-240. The taxpayer is a Burger King franchisee that gave free meals to its restaurant managers. Giving free meals away is a withdrawal from stock that is subject to tax. See Ark. Code Ann. § 26-52-517(b); Rule GR-18(D).

The Department of Finance and Administration's position has been that taxpayer-produced goods that are withdrawn from stock should be taxed at their retail value, not the value of their component parts. This approach is reflected in Rule GR-18(D)(2). As applied to restaurant meals, that would mean taxing the menu price of the meal instead of the ingredients' prices.

FLIS contends that the tax base is the combined price of the ingredients. The core of its argument is based on the plain statutory language that in the event of a withdrawal from stock, "the purchaser is solely liable for reporting any tax which should have been paid at the time of purchase." Ark. Code Ann. § 26-52-517(b).

FLIS prevailed in the Circuit (trial) Court. A copy of the Order is available here. The court was persuaded by the statutory language. And it distinguished the restaurant business as not being manufacturing and thus outside the ambit of rule GR-18(D)(2). The Department has appealed its loss, and the case is now being briefed before the Court of Appeals, no. CV-17-240.

Taxpayers in the restaurant business need to review their own positions and consider whether they have any potential refund claims or potential compliance exposure. Another option restaurants or similarly-situated taxpayers might consider going forward is selling the meals at a nominal price instead of giving them to employees (recall the old offers of a cell phone for a cent with a service contract).

More broadly, manufacturers might consider whether to make refund claims. While the Circuit Court Order distinguished manufacturing from the restaurant business, the statutory language about taxation based on the tax that should have been paid at the time of purchase is the same. If FLIS is upheld, the opinion could open doors to tax claims well beyond those of the restaurant industry.


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