Arkansas Denies Refund Claim for Reimbursement of Material Cost to Construction Contractor

The Arkansas Department of Finance and Administration denied a refund claim filed by a taxpayer who had accrued consumer’s use tax on payments to their construction contractors to reimburse them for materials. In their claim, the taxpayer requested a refund for tax they had accrued on payments made to reimburse their service provider for purchases of materials used in various construction projects. The reimbursements included the sales tax that the contractor originally paid on the materials. The taxpayer also asserted that the tax on materials used in construction contracts is payable by the contractor, and therefore they did not have a tax obligation on their payments for materials.

After an appeal, the Office of Hearings & Appeals re-affirmed the department’s original position, denying the refund claim on two fronts. First, the services provided by the construction contractor included the installation of electrical devices and landscaping under the state’s definitions, which are both taxable services, meaning that the purchases did not fall under the state’s rules for taxes in nontaxable construction contracts. Second, the use tax is accrued on the complete taxable sales price of taxable services and property purchased out of state, and the definition of taxable sales price specifically does not allow a deduction for taxes or other expenses imposed on the seller that are passed on to the purchaser.

The taxpayer also asserted that the accrual of tax on materials where sales tax had already been paid by the contractor constituted double taxation by the department. The Office of Hearings & Appeals found that the taxpayer had not provided proof of double taxation, and the original tax paid on materials was on different transactions, different taxpayers, and potentially under different jurisdictions than the use tax at issue.

When purchasing construction services from a contractor, it is vital to know not only what is taxable in your state, but what can make parts of a construction contract that may otherwise be nontaxable fall under the state’s sales and use tax laws definition of taxable. What services fall under the definition of real property construction services, how the materials and labor for these services are billed, and who is liable for tax and which stage of the purchasing and installation process can all have an effect on what your obligations are as the consumer. (Docket No. 23-475, Arkansas Department of Finance and Administration, Office of Hearings and Appeals, March 16, 2023)

Posted on March 25, 2023