Arkansas: Sediment removal not incidental to nontaxable inspection services

Recently, an Arkansas ALJ addressed whether a taxpayer was entitled to a refund of sales taxes paid on sediment removal services.

Podcast Transcript

Recently, an ALJ from the Arkansas Department of Finance and Administration Office of Hearings and Appeals addressed whether a taxpayer was entitled to a refund of sales taxes paid on sediment removal services. The taxpayer provided water utility services to Arkansas residents. As part of providing the water services, the taxpayer was required to have its water tanks inspected every five years. It was necessary for the inspector to remove sediment from the bottom of the taxpayer’s tanks to properly perform the inspection. The key issue was whether the entire service was exempt from sales and use tax as a nontaxable inspection service, or whether the taxpayer was required to pay sales tax on the component of the service related to sediment removal. The taxpayer’s position was that the sediment removal was incidental to the nontaxable inspection services and was akin to a painter cleaning a wall before painting. Under Arkansas law, collection and disposal of solid waste is a taxable service. “Solid waste” is broadly defined as "any garbage or refuse, sludge from a wastewater treatment plant, water supply treatment plant, or air pollution control facility, and other discarded material, including solid, liquid, semisolid, or contained gaseous material resulting from residential, industrial, commercial, mining, medical, agricultural, and restaurant operations, and community activities.”

Based on the definition of solid waste, the ALJ ruled that pumping and removing the sediment from the bottom of the taxpayer’s water tanks constituted the collection of solid waste. The ALJ reasoned that because the taxpayer was required to remove the sediment and inspect the water tanks every five years, the collection of solid waste was not incidental to the service of inspection. In a footnote, the ALJ noted that the Arkansas Supreme Court has consistently declined to create a divisible tax and allow the separation of the otherwise nontaxable charges that form component parts of a taxable transaction. The taxpayer also argued that because the sediment was left on the ground after removal from the tank, it was not “disposed of” and therefore was not taxable. The ALJ did not find this argument compelling; in its view, the use of "and" between the words "collection" and "disposal" in the statute indicated that sales tax is imposed on every aspect of the process of handling solid wastes (i.e., collection of waste was taxable and removal of that waste was taxable). The taxpayer’s refund claims were therefore denied. Please contact Michael Andruchek at 214-840-2467 with questions on Arkansas Administrative Hearing Decision, Dkt. No. 18-454.

To view past weeks of TWIST that you may have missed, please visit our TWIST homepage.

To receive the TWIST e-mail each Monday, make sure that State and Local Tax is checked off as one of your topics of interest on the KPMG Tax subscription site.