Food Tax Too High?

Not if Improvements Wanted in Fayetteville, Says Joe Fennel

Within the past six months, the sales tax in Fayetteville increased by 2 percent, bringing the total to 8.125 percent for most goods and services, 10.125 percent at restaurants and 12.125 percent at hotels.

The 10.125 percent rate is higher than the sales tax rate at restaurants in New York City (8.25 percent), Los Angeles (8 percent) and New Orleans (9.5 percent).

But Joe Fennel, whose restaurant complex on Dickson Street brought in $3.6 million in sales last year, said Fayetteville’s 2 percent hotel-motel-restaurant (HMR) tax is essential to the downtown and Dickson Street areas.

The HMR tax brought in $2.5 million last year. Money from the initial 1 percent HMR tax that went into effect in 1977 paid for resurrecting the downtown square, helped fund the construction of the Walton Arts Center and is helping build the $8.2 million Town Center, which is scheduled to be finished in July. A second 1 percent HMR tax went into effect in 1995. Revenue from the two HMR taxes is split between the city’s Advertising and Promotions Commission and Parks and Recreation Department.

“I wouldn’t personally associate myself with it if I didn’t believe what we are doing is right,” said Fennel, who has been on the Fayetteville A&P Commission for the past seven years.

Fennel owns Jose’s Mexican Restaurant and Bordino’s, an Italian restaurant, which occupy the same Dickson Street building. Together, they rank as the No. 2 restaurant in the city behind Red Lobster in total sales. Because of the way he keeps record books, separate sales figures for the two restaurants aren’t provided to the city, and Fennel refuses to make that information public.

The sales tax increase will likely make no difference in restaurant sales, which have been increasing steadily in Fayetteville for years. Fayetteville’s restaurants had sales of $105.8 million in 2000, up 7.2 percent from $98.7 million in 1999.

Fennel jokes that he’s never had a customer complain about the HMR tax or ask him how much sales taxes are before ordering a meal.

Taxing Situation

The new rate makes Fayetteville the most sales taxing city in Northwest Arkansas and tied with two other cities as the second-most taxing in the state.

Hot Springs is the only Arkansas city with a higher total sales tax (10.625 percent) on prepared food. Sherwood and North Little Rock have the same rate as Fayetteville.

The total sales tax rate at restaurants in other Northwest Arkansas cities is 7.125 percent in Springdale and 8.125 percent in both Rogers and Bentonville.

Besides Fayetteville, Bentonville is the only other city in Northwest Arkansas that has a tax specifically on prepared food, but each of the four major cities in the area has a sales tax that applies to hotels and motels only. Bentonville charges an additional 1 percent sales tax on restaurants and 2 percents to hotels. Springdale charges hotels 1.5 percent. Rogers’ hotel tax is 2 percent. Revenue from those taxes is used for advertising and promotions in each city.

In addition to the regular state sales tax, Arkansas has a 2 percent sales tax that applies to hotels and motels and goes to fund advertising and promotions statewide.

The city of Fayetteville expects to get 39.1 percent of its revenue this year from sales taxes. Fayetteville’s 2 percent sales tax will bring in about $24.5 million, said Kevin Springer, senior financial analyst for the city. That’s in addition to $2.5 million that the 2 percent HMR tax will bring in and $9 million that Washington County will transfer to Fayetteville from a 1 percent countywide sales tax.

Historically, cities with additional taxes on restaurants and hotels are usually those with a strong tourism industry. Those taxes are frequently pitched as something that will primarily affect tourists. But HMR taxes also affect residents.

“Everybody eats out, not just tourists,” said Patrick Sheehy, manager of state legislative affairs for the National Restaurant Association in Washington, D.C. “It affects everybody.”

Washington County, where Fayetteville is located, draws about 1.22 million “visitors” per year, compared with 2.05 million in Garland County, where Hot Springs is the county seat (and a 5,500-acre national park exists within the city limits). The Arkansas Department of Parks and Tourism defines a visitor as someone who travels at least 100 miles one way and/or spends the night.

“We are a tourist destination, via the university,” Fennel said. “The University of Arkansas brings us a lot of tourists. The greatest thing about being in Fayetteville is the university.”

But, Fennel said, the UA doesn’t pay property taxes because it’s a state institution. So the city needs to collect that revenue in other ways such as HMR taxes.

Some people argue that high sales taxes in tourist towns hit visitors the hardest and frequently go to pay for things like city parks that visitors aren’t likely to use. In Fayetteville’s case, most visitors probably come to the city to attend events at the UA, and university students are also visitors in some respects.

With the Northwest Arkansas Mall and many other shopping centers, Fayetteville is the area’s retail center, so people who drive to the city from outlying areas are also paying the city’s HMR tax, and in effect, for improvements to the city.

Some experts say Arkansas’ tax system is “regressive,” as opposed to “progressive.” Sales taxes affect the poor more than property taxes, but Arkansas has less property taxes and more sales taxes than most other states.

“Sales tax in general targets more poor people,” said Gazi Shbikat, a research associate with the UA’s Center for Economic Research.

Although the rich pay more taxes, Shbikat said, the poor pay a larger percentage of their income in taxes.

Arkansas ranked 42 among the 50 states in “total tax burden” last year with 31.4 percent of the average adult resident’s income going to pay state, local and federal taxes, according the Tax Foundation, which monitors taxes nationwide. Arkansas’ rate was 2.4 percent below the national average. Connecticut’s total tax burden was the highest at 37.9 percent. Mississippi’s was the lowest at 31.0 percent.

Council to Consider HMR

On March 20, the Fayetteville City Council will consider a proposal to extend the city’s 2 percent HMR tax to convenience stores, carry-out pizza businesses and grocery store delicatessens.

If it passes, Fennel said the ordinance will also apply to caterers.

“It’s absurd to think that you can seat 1,000 people at the town center for a catered dinner and not collect taxes on it,” Fennel said. “It’s stupid to take those people out of the marketplace.”

Marilyn Johnson, director of convention and visitor development for the Fayetteville Chamber of Commerce, said the proposal will likely go before the council more than once before approval.

“I feel it’ll be the end of April before they get anything done,” she said.

The Chamber is under contract with the city’s A&P Commission to administer the HMR tax.

Currently, the tax applies only to hotels, motels and restaurants that serve food on the premises (restaurants with at least six seats for diners).

The A&P commission voted last year to amend the ordinance to include the additional businesses.

Johnson said six takeout pizza chains in the city already pay the HMR tax. Four pizza chains don’t — Eureka Pizza, Domino’s Pizza, Little Caesars and Papa John’s.

Johnson said she had no way to estimate how much the proposed change in the ordinance would affect annual tax collections.