Arkansas: Manufacturing Exemption Does not Apply to Custom Goods

Listen to a brief overview of state tax developments this week, including Arkansas, or read full Arkansas development below.

Detailed Arkansas Development

An Arkansas Administrative Law Judge (ALJ) recently upheld a use tax assessment issued by the Department of Finance and Administration (Department) on equipment used by a taxpayer to manufacture goods. Under Arkansas law, a sales and use tax exemption applies to purchases of machinery and equipment used directly in manufacturing “articles of commerce.”  The term “articles of commerce” is not defined by statute, but an Arkansas regulation defines the term to exclude “custom items which are produced for specific customers in response to special orders and which are not readily marketable to the general public.” On audit, the Department asserted that because some of the goods manufactured by the taxpayer were custom items, it did not qualify for the exemption.  The Department also noted that the taxpayer manufactured items for its own use. In response, the taxpayer asserted that the regulatory definition of “articles of commerce” conflicted with statutory language, that prior case law in the taxpayer’s favor was being ignored, and that Arkansas law did not include language indicating that a given percentage of manufactured items must be produced for sale to the general public before the exemption will apply. The ALJ rejected all of the taxpayer’s arguments, largely on the basis that the Department had the authority to interpret the statute and its interpretation must govern unless clearly wrong. The ALJ concluded that the duly-promulgated regulation was controlling authority, and the taxpayer was not manufacturing articles of commerce. Please contact Michael Andruchek at 214-840-2467 for more information on Administrative Decision Dkt. Nos. 19-261 & 19-262.

This Week's Developments

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Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US