Leathers v. A & B Dirt Movers, Inc., 92-505

• Decision Date: 21 December 1992
• Docket Number: No. 92-505,92-505
• Citation: 844 S.W.2d 314,311 Ark. 320
• Parties: Timothy J. LEATHERS, Commissioner of Revenues, State of Arkansas, Appellant, v. A & B DIRT MOVERS, INC., Appellee.
• Court: Arkansas Supreme Court

Page 314

844 S.W.2d 314

311 Ark. 320

Timothy J. LEATHERS, Commissioner of Revenues, State of Arkansas, Appellant, v. A & B DIRT MOVERS, INC., Appellee.

No. 92-505.

Supreme Court of Arkansas.

Dec. 21, 1992.

Rick L. Pruett, Little Rock, for appellant.

Larry Graddy, Conway, for appellee.

HOLT, Chief Justice.

This case involves the question of whether the Appellee, A & B Dirt Movers, Inc. ("A & B"), should incur the Arkansas Gross Receipts Sales Tax on certain of their transactions involving the hauling of dirt. We find that it should and reverse.

A & B Dirt Movers, Inc. is engaged in the business of excavation and dirt hauling. The Appellant, Arkansas Department of Finance and Administration, conducted a sales tax audit of A & B covering six years and determined that certain transactions involving the transfer of title and possession of tangible personal property such as dirt, fill material and similar items, were occurring without payment of the Arkansas Gross Receipts Tax. Mrs. Henry, an auditor with Arkansas Department of Finance and Administration, went to A & B and reviewed the actual sales invoices which were prepared according to the month of the sale. Information on the invoices included the customers' names and addresses, type of transaction, date of transaction, number of loads hauled and the cost. According to Mrs. Henry, the invoices did not indicate the owners of the dirt from the beginning of the transaction to the end. As a result of this audit, A & B Dirt Movers, Inc. was assessed tax and interest in the amount of $8,919.45. No penalty was assessed because since this was A & B's first audit, the Department of Finance and Administration assumed they were not aware of the tax. A & B disagreed with the audit contending that it was in the business of providing a nontaxable service--hauling. The company claimed that although they charged for the excavation and hauling of dirt, the dirt was actually free. After exhausting its administrative remedies, A & B filed an action in the Faulkner County Chancery Court contesting the audit determination. After a nonjury trial, the chancellor found that the transactions were not taxable, and the Commissioner of Revenues brings this appeal.

In order to be subject to the Gross Receipts Tax, the dirt hauled must be considered tangible personal property that has been sold:

26-52-301 Tax Levied

There is levied an excise tax of three percent (3%) upon the gross proceeds or gross receipts derived from all sales to any person of the following:

(1) Tangible personal property.

Ark.Code Ann. § 26-52-301(1) (1992).

The Arkansas Gross Receipts Tax Regulations, promulgated by the Department of Finance and Administration in 1987, define the term "tangible personal property" as:

GR-3(I) The term "Tangible Personal Property" means personal property which may be seen, weighed, measured, felt, touched or is in any other manner perceptible to the senses.

The Gross Receipts Act provides the definition of a sale:

(3)(A) "Sale" is declared to mean the transfer of either title or possession ... for a valuable consideration of tangible personal property, regardless of the manner, method, instrumentality, or device by which the transfer is accomplished.

(3)(D) "Sale" shall not include the furnishing or rendering of services, except as otherwise provided in this section.

Ark.Code Ann. § 26-52-301(1) (1992), (emphasis added).

In holding that the audited transactions are not subject to the gross receipts tax, the chancellor made the following findings of fact:

A. The primary business purpose of A & B is excavation and dirt hauling;

B. The primary source of revenue of A & B is generated from the services it renders;

C. The Ferguson Monument case directs the Court's attention to the question of whether or not A & B does anything to the dirt at any time to change its character or enhance its value. A & B does nothing to the dirt to change its character or enhance its value. As delivery doesn't enhance the value of the dirt within the meaning of Ferguson, it is not subject to tax;

D. The Court referred to the title or name used by A & B as a factor in its decision, that name being A & B Dirt Movers, Inc.;

E. The price charged by A & B for its service remained the same price to the customer even if A & B paid for and passed through the cost of the dirt;

F. The Ferguson case is distinguished from this case because (1) Ferguson's primary purpose was that of selling a product and (2) Ferguson actually changed the form of the product prior to selling it to the customer, e.g. like changing water to ice, and A & B does not change the dirt in any manner;

G. In viewing the transfer of dirt from A & B's property, the Court determined that (1) A & B's primary motivation in purchasing the land was not to sell the dirt; (2) A & B's purchase of its land was not similar to a merchant purchasing inventory for future sale; (3) A & B's removal of dirt from its own land would improve the land and would not depreciate the land; and (4) A & B does not charge for the dirt, only the service of hauling;

H. The Court examined the various types of transactions and concludes that A & B is generally a delivery person for the customer or an agent of the customer;

I. The Court cannot distinguish between the hauling of dirt from A & B's own property versus the hauling of dirt from other property because A & B's stockholders could easily create a separate corporation that would eliminate any distinction to be made;

J. The defendant's witness testified that sales tax would or would not apply depending on whether or not A & B could prove with documented invoices the manner in which the particular transaction evolved. The Court finds no substantive distinction between (1) A & B paying for the dirt and passing the cost to the customer versus (2) the customer paying the owner of the dirt directly and therefore, finds that a transaction should not be considered to be taxable dependent upon whether or not it is supported by written invoices.

Ark.Code Ann. § 26-18-406(b)(1) (1992), provides that chancery courts are to review administrative tax decisions de novo. The statute gives this court jurisdiction to hear appeals of these tax cases once they have been adjudicated in chancery: "An appeal will lie from the chancery court to the Supreme Court of Arkansas, as in other cases provided by law." Ark.Code Ann. § 26-18-406(b)(2) (1992). As such, we review this case as we review all chancery court decisions, de novo. See Medalist Forming Sys., Inc. v. Malvern Nat'l Bank, 309 Ark. 561, 832 S.W.2d 228 (1992) ("While our review of chancery cases is de novo ... we do not reverse findings of fact unless the chancellor's findings are clearly erroneous.").

As this case involves a question of whether a gross receipts tax should be assessed against the taxpayer, we are deciding an issue involving the levy of a tax. Any doubts or ambiguities, in this regard, must be resolved in favor of the taxpayer. Dunhall Pharmaceuticals, Inc. v. State, 295 Ark. 483, 749 S.W.2d 666 (1988); City of Hot Springs v. Vapors Theatre Rest., Inc., 298 Ark. 444, 769 S.W.2d 1 (1989). The agency claiming the right to collect a tax bears the burden of proving that the tax law applied to the item sought to be taxed. Ragland v. Meadowbrook Country Club, 300 Ark. 164, 777 S.W.2d 852 (1989).

However, if the taxpayer's records are not clear, this burden shifts to the taxpayer to show why he should not be taxed. Arkansas Code Annotated § 26-18-506 (1992) provides:

(a) It is the duty of every taxpayer required to make a return of any tax due under the state tax law to keep and preserve available records as are necessary to determine the amount of tax due or to prove the accuracy of any return....

(d) When a taxpayer fails to preserve and maintain the records required by any state tax law, the director may, in his discretion, make an estimated assessment based upon information available to him as to this amount of tax due by the taxpayer. The burden of proof of refuting this estimated assessment is upon the taxpayer.

(emphasis added).

In making his determination that the transactions at issue were not taxable, the Chancellor premised his findings on the fact that "a transaction should not be considered to be taxable dependent upon whether or not it is supported by written invoices." This underpinning is wrong as a taxpayer has a legislatively imposed responsibility to keep good tax records, and A & B failed to do so. Thus, the burden was on A & B to refute the tax.

In his findings of fact, the Chancellor refers to Ferguson Monument v. Cook, 215 Ark. 373, 220 S.W.2d 808 (1949). However, as Ferguson involves the issue of whether labor costs should be included in the price of the product for taxation purposes, we do not find this case relevant and will not discuss it.

As the auditor testified, whether ownership was transferred in certain circumstances could not be determined by looking at A & B's records. The invoices reviewed in the audit contained the customer's name, address, type of transaction, loads hauled and a date. According to the auditor's testimony, she could not determine from the information on the invoices the owner of the property at the beginning and the owner at the end of the transaction.

The auditor further testified that she deleted items that she deemed taxable if A & B's owner, Mr. Nabholz, provided proof that they should be deleted. For example, if Mr. Nabholz had a contract or other documentation proving ownership of the dirt had not transferred from A & B to the customer, the auditor deleted the item. Without documentation to the contrary, the auditor assessed a tax on the transactions as sales of dirt.

To illustrate its position, A & B prepared exhibits one through six, summarizing the transactions at issue from A & B's viewpoint:

                Plaintiff's Exhibit One
                                            Material Owned By Customer and

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