Arkansas Rules Leased Pallets Do Not Qualify for Resale Exemption

In November 2023, the Arkansas Tax Appeals commission released a ruling in a case that involves a taxpayer who filed petitions seeking relief from the denial of proposed refund claims related to sales and short-term rental taxes on pallets. The taxpayer, name redacted in the opinion, had a use agreement with a supplier, name also redacted, for pallet usage. Though the supplier did not transfer ownership under the agreement, any pallet that was not returned to the supplier or was returned damaged was treated as “Lost Equipment” and the taxpayers were charged a fee for not returning the pallet. The taxpayers claimed a sales for resale exemption on these unreturned pallets, arguing that they resold the pallets as packing material to customers and the pallets were returned to the supplier based on separate agreements with their customers.

However, the Tax Appeals Commission found that the taxpayers were not entitled to sell the pallets because they did not own them. The taxpayer also neither claimed nor proved they had re-leased the pallets to their customers. Though the taxpayer claimed the pallets were returned under separate agreements, they did not provide any evidence to support their claims. The Department of Finance and Administration (DFA) successfully argued that since the pallets were not integral to the completeness of the item, they did not fall under the exemption created by Ark. Code Ann. §§26-52-202, 26-52-401(12)(A) and GR-53(C)(1). In order to do this, the DFA provided the agreement between the taxpayers and the supplier, which included provisions for pallets to be returned by the taxpayers, making them non- integral according to tax regulations. Further, the DFA pointed out that if the taxpayer did not own the pallets, they could not sell them, and if they were not selling them, a resale exemption would not apply.

Regarding short-term rental tax, the taxpayers argued they paid a flat rate per pallet, but the commission emphasized that the initial rental term determined whether it was a short-term rental, not the payment method. The taxpayers couldn’t provide evidence supporting the less-than-30-day rental term as required.

In conclusion, taxpayers should note how much of this case rested on the taxpayer’s ability, or lack thereof, to support their exemptions. Taxpayers need to be aware of the language in their contracts and the tax implications. In this case, because the taxpayer’s direct contract with the pallet supplier established an ability to return pallets, and a short-term lease, the claims of resale or the possibility of keeping pallets longer than 30 days could not be substantiated, resulting in exemptions being denied. (Sanford, Joseph A., Presiding Commissioner, Tax Appeals Commission Docket No. 23-TAC-01864 (consolidated), Decision Date 11/20/2023)

Posted on February 16, 2024