Legislative Tax Committee Looks At History Of Exemptions

When House Revenue and Tax Chairman Rep. Davy Carter, R-Cabot, proposed a complete review of the Arkansas tax code, he may not have known what a history lesson he asked for.

At a Joint Revenue and Tax Committee meeting on Thursday (April 19), Department of Finance and Administration officials started with the origin of the state sales tax, which began during the Great Depression in 1935. The current sales tax law was enacted in 1941.

The use tax was developed later to cover out-of-state purchases by businesses who may have avoided paying Arkansas sales tax.

“I know this is about as exciting as watching paint dry… but it’s important,” Carter told committee members more than halfway through the 90-minute hearing.

Afterwards, he said he was pleased with the first meeting on the subject, but wasn’t completely sure where it would lead.

“I think it would be beneficial to have some periodic, set time, statutory time to back and review this sort of stuff.  Is there sunsets on some? Do we have mandatory reviews after 10 years or 8, I don”t know what the number is?  But just to put things on the books and never look at it again is not the right thing to do either, I don’t think.” Carter told reporters after the meeting.

Carter has convened hearings to review the overall tax code in anticipation of tax cutting proposals he expects to come forward in the 2013 session. Carter has said previously he hopes that his tax panel’s study could lead to income tax reform next year.

During the 90-minute hearing, DF&A officials walked through changes in the sales and use tax laws through legislative history and explained how exemptions impact state finances. They also chronicled how the finance agency audits citizens and businesses to make sure exemptions are not abused.

John Theis, Deputy Commissioner for Policy and Legal at DF&A, said that the used car tax is one of the exemptions that auditors find routine error rates, as high as 17-18% of all transactions.

Theis, a 31-year employee of DF&A, walked through 109 sales and use tax exemptions that range from motor fuel to farms, energy to food, and non-profits to manufacturers.

UPDATED EXEMPTION LIST
DF&A officials also provided an update to a 2009 list of all sales and use tax exemptions on the Arkansas books as of the most currently completed fiscal year 2011.

In total, sales and use tax exemptions total $1,060,218,774 and that number will likely climb as another $30,698,200 in exemptions went into effect in the current fiscal year which ends June 30, 2012.

The 2009 estimate included 121 sales and use tax exemptions that totaled an estimated $1.2 billion. Theis explained that fluctuating fuel or energy prices can impact the price tag for exemptions.

Also, Theis told state lawmakers that federal government exemptions would be untouchable for making changes. Current federal government sales and use tax exemptions total about $99 million. Examples include sales made to the U.S. government and its agencies.

Arkansas’ sales tax is 6% and it is one of 43 states that levies a sales tax. There are three broad categories of exemptions that cover entity-based, item-based and use-based exemptions.

A smaller fourth exemption exists called a “sale for resale” exemption, such as goods sold by wholesalers to retailers.  DF&A says it has no way to gauge the amount of money not collected through “sale for resale.”

Theis also told lawmakers that some exemptions can compete with one another and are not automatically coupled.

Carter plans to hold additional meetings to examine more of the exemptions outlined today and to study other aspects of the tax code, including income, property, and severance taxes as well as economic development incentives used to recruit business to Arkansas. He said the tentative date for the next hearing would be May 17.