Mar 12, 2018
From KPMG TaxWatch
In a recent case, the Arkansas Supreme Court addressed whether a fast-food retailer that provided free meals to managers owed use tax on the cost of the raw food ingredients or the retail value of the prepared meals.1 Under Arkansas law, and consistent with most states, a retailer that purchases goods for resale and later withdraws the goods from inventory for the retailer’s own use, is required to report and remit use tax. Per an Arkansas statute, the measure of the use tax is the “value of any goods, wares, merchandise or tangible personal property withdrawn” from inventory. However, the statute did not provide any authority on whether “value” meant the wholesale value or the retail value. The Department’s regulations provided different rules depending on whether the goods withdrawn from inventory were “purchased” or “manufactured or processed.” Specifically, if the withdrawn goods were processed or manufactured, use tax was owed on the sales price of the products, rather than the value of the raw materials used to manufacture or produce the products. If the withdrawn goods were purchased goods, then use tax was owed on the purchase price of the goods.
Before the court, the fast food restaurant essentially argued that its manager meals were not “processed” or “produced” and so the regulatory provisions requiring tax to be remitted on the retail sales price did not apply. The court did not find this argument persuasive, noting that taxpayer was creating or producing meals and was providing those complete meals, rather than individual ingredients, to its managers. Furthermore, in the court’s view, it would be an absurd result if the restaurant was required to determine the true value of the raw ingredients that went into a manager meals (e.g., one bun, one slice of tomato, one uncooked hamburger patty, etc.) and then remit use tax on that amount. In fact, the court noted that the taxpayer had not done that itself when it remitted use tax―it simply remitted use tax on 32 percent of the retail price charged to customers. Interestingly, two justices dissented and would have ruled, as did the circuit court, in the taxpayer’s favor. Please contact Brandon Fulmer at 214-840-2497 with questions on Walther v. FLIS Enterprises, Inc.
1 The court also declined to the Department of Finance and Administration’s argument that the court could dismiss the case on sovereign immunity.
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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.