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Arkansas Compensating Use Tax: 4 Top Tips

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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. If you’d like to contact B.J. directly please send email to: b.pritchett@sbcglobal.net or 501-922-4327.


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