A recent decision in Arkansas could cost auto dealerships who allow their employees to use vehicles that are up for sale on their lots.

In a case brought against Trotter Ford by the Arkansas Department of Finance and Administration (ADFA), the state’s highest court reversed a circuit court decision that auto dealerships who allowed employees and their families to use vehicles, it subjected the dealerships to sales tax even if they remained available for sale.

The case centered around Trotter allowing four people—two employees and two employee family members—use of vehicles with dealer license tags. When the ADFA audited the dealerships, the agency found that individuals to whom the cars were assigned did not qualify as authorized users for dealer tags under Arkansas law and that the assignment and use of the vehicles constituted “withdrawals from stock” requiring the payment of sales tax.

Arkansas Court Case

The dealerships protested the assessments, sending the case to an administrative law judge who sustained the assessments. The dealerships then appealed that ruling and filed motions for summary judgment.

The circuit court granted the dealerships’ summary judgment motions and reversed the assessments, reasoning that, because sales tax is triggered by a consumer on the purchase of a motor vehicle on or before the time for registration, and because the sales tax is collected from the buyer at the time the automobile license is issued, no tax is due because no title was transferred and no application for a license had been sought.

The ADFA appealed to the Supreme Court of Arkansas from the circuit court’s orders, which ruled in their favor in a 5-2 decision. According, to a story from the website JD Supra, the court’s majority focused on the state’s tangible personal property “withdraw[n] from stock” to the sales tax.

Majority Ruling

“‘Withdrawal from stock’ means the withdrawal or use of…tangible personal property from an established business…for consumption or use in the established business or by any other person,” the court wrote.

The issue was whether the use of the vehicles constitutes ‘use’ within the meaning of ‘withdrawal from stock’ under the statute. The court found that the statutory language was unambiguous and under its plain meaning, the vehicles were used and therefore were subject to tax.

The majority court rejected the argument that the statute requires a permanent withdrawal from stock or consumption of the property. They argued that because the vehicles were provided as part of the dealerships’ compensation packages to their employees, and because the benefits of the vehicles were enjoyed without restriction, the vehicles were used and therefore withdrawn from stock under the plain language of the statute.

Dissent Calls Ruling “Absurd”

The dissenting members scolded their colleagues, writing “it is absurd to call the use of these vehicles a withdrawal from stock. By the majority’s reasoning, it is a withdrawal without actual withdrawal.”

The minority opined the court should look beyond the plain language of the statute and “give effect to the intent of the legislature.” Their argument focused on a different statute which applies the gross receipts tax to sales of tangible personal property.

The focus of their argument was, under the plain language of that statute, the tax does not come due until there is a sale, and that there was no “sale” when the employees and their families were permitted use of the vehicles and that the vehicles in question remained in the dealerships’ active inventory and were, in fact, later sold and taxes were paid on the gross receipts that were generated.