While Arkansas Department of Finance and Administration generally tolerates retailers not collecting sales tax as a separately stated amount, sellers need to understand the risk of being required to absorb the tax and pay it out-of-pocket instead of treating the sale as tax-included pricing and backing out the tax from the tax base of gross receipts. Hearing nos. 16-209, 16-210, 16-211 (May 8, 2017) illustrates this risk: A restaurant that also sold mixed drinks claimed a tax-included pricing approach, but this was rejected by the Department, likely effectively increasing the tax imposed by 50%.
There is no question that Arkansas Code Annotated section 26-52-508(c) provides that a seller "shall" collect sales tax from the buyer. The Department nonetheless generally is willing to let sellers not collect sales tax from customers as separately-stated amounts. Not separately collecting tax, however, raises a question of whether the seller must pay tax on its entire gross receipts and thus absorb the tax, or else treat the price as tax-included and back out the tax from its sales tax base.
For the restaurant at issue, the stakes were especially high: the cumulative taxes imposed on mixed drinks at the restaurant (likely in Little Rock) totaled 33%. The question of tax-on-tax thus threatened to increase the restaurant's sales tax liability by an additional 50% beyond what it had originally paid on the transactions.
In upholding the assessment, the administrative law judge relied on statutory language defining taxable "gross receipts" and providing a deduction only for separately-stated taxes legally imposed on the consumer. See Ark. Code Ann. § 26-52-103(13)(B)(iii). The judge also noted the insufficiency of the taxpayer's books and records to support tax-included pricing.
The implication of this hearing for other taxpayers is that attempting a tax-included pricing approach is essentially a matter of administrative grace. If a seller wants to use tax-included pricing, it should take the utmost care in having detailed and accurate books and records showing the tax components of its transactions, and even then it still has some legal risk. A seller may also want to consult with its tax adviser about attempting to get guidance or assurance from DFA that the seller's tax-included pricing will be respected on audit.