House committee rejects Amazon sales tax bill a second time, vote split along party lines again

A House panel on Thursday (Feb. 23) replayed almost verbatim a meeting from a week ago and ended up with nearly the exact same results – the rejection of the so-called Amazon bill that would allow Arkansas to collect state and local sales taxes from online retailers that do not have a physical presence in the Natural State.

In the crowded room of the House Revenue and Taxation Committee, Senate Bill 140 failed for the second time in an hour-long meeting that played out similarly to a week ago when Democrats on the panel attempted to insert a last-minute amendment that would divert $25 million from Internet sales to pay for local needs.

Sen. Jake Files, R-Fort Smith, said the attempt to revise his bill again by Democrats in the House committee would not be legally defensible. He said he also prefers any decisions on how to spend future state revenues go through the Legislature’s budget process under the Revenue Stabilization Act (RSA) that categorizes and prioritizes state spending.

“We can do this in RSA already, but I feel like this muddies the bill on a constitutional level,” said Files, who has emerged as one of the chief legislative architects of tax policy in the 91st General Assembly. “If this goes to a challenge and actually does get challenged, I think this makes it more difficult to defend because it looks like a redistribution of revenue rather than a policy decision.”

House sponsor Rep. Dan Douglas, R-Bentonville, was more forceful in defending legislation that has already been approved by the Senate. He told the House Democrats during the committee meeting that even if they won the fight to attach the amendment on SB140, it would not gain approval from fellow House members.

“The political reality is that it doesn’t get off the House floor,” he said. “I don’t believe, and I think most of you don’t either, that with the political sentiment for ‘no tax increases’ and putting limitations on where this money goes – it’s not going anywhere, it’s going to die.”

He then told Democrats peering at him from the long committee table: “There is an ol’ saying that we will cut off our nose to spite our face. I think that’s what we will be doing here.”

But Rep. Michael John Gray, D-Augusta, defended his amendment. He told the committee the new clause added to Files’ bill would set aside $25 million collected from new revenue collected from the online sales tax for rural fire and police grants, the Medicaid trust fund, education and afterschool funding, and the remaining half to a “miscellaneous agencies” account.

The only major change in the bill was amended language sought by Department of Finance and Administration (DF&A) officials that would raise the amount of sales tax collections from out-of-state retailers from $70 million to $110 million in order to reduce the state income tax rate in the 4.5% bracket.

“This is very similar to the amended bill we presented a week ago to designate a small portion of potential revenue that’s going to come out of a collection of this existing sales tax to specific needs,” Gray said.

However, it was another revision that would make changes to a law enacted two years ago in the way the state collects taxes from Internet sales that caused Republican members on the committee to take issue with the amendment. Paul Gehring, DF&A assistant director of revenue, told the committee that Gray’s amendment would change a 2015 law that would increase the amount of sales tax collection from Internet sales by $35 million.

“The excess sales tax over and above $110 million would be dedicated for purposes of reducing the 4.5% income rate,” Gehring said.

In responding to Gehring’s assessment of Gray’s amendment, Republican committee chair Rep. Joe Jett of Success said officials would need a “crystal ball” to forecast how much new revenue the state would see from the collection of sales taxes from remote online retailers outside the state of Arkansas – the key provision in Files’ bill.

“There’s really no way in knowing what kind of money we are talking about, is that fair to say?” Jett, a former Democrat, asked Gehring.

Gehring replied in the affirmative, and said state budget officials would not provide estimates to lawmakers on how much new revenue would be raised if SB140 or other similar legislation were enacted.

Afterward, Jett told the committee that pushing the state’s income tax rate down to 4.5% would require $300 million to $400 million in additional revenue to make the tax cut revenue neutral. Still, Gray defended his amendment and said his proposal was simply adjusting the method of collections to account for possible new revenue.

After the back-and-forth debate continued for several minutes, the House committee rejected Gray’s amendment in a close voice vote along political lines that Jett determined went in favor of the Republican members. And like last week, after testimony from several people in the audience speaking for and against the bill, the committee rejected Files’ bill and then expunged the vote so the Fort Smith senator could bring the bill back up in committee before the session ends.

After the meeting, Files said he hopes he can find common ground with House Democrats to move the bill out of the committee that is split 10-10 along party lines. He said he’s still concerned that setting aside $25 million for special needs based on revenue not already in state budget coffers would violate Arkansas law. Before moving forward to run his bill again, Files said he plans to meet with Gov. Asa Hutchinson to get some guidance on possible next steps.

“I think the governor’s office can provide some leadership here and help navigate this and hopefully bring us together on it.”

Last week, Files presented his bill to the committee only three days after online retail giant Amazon said it would begin collecting sales tax on Arkansas online purchases on March 1. The bill was originally approved by the Senate in a vote of 23-9 after Files told fellow lawmakers his legislation would allow the state DF&A to potentially capture between $30 million and $100 million in uncollected sales and use taxes.

Since Senate approval, the bill has been stuck in the House committee as Democrats and Republicans have come to a head on state tax policy. Democrats, who have won no major policy battles nearing the end of the 7th week of the session, are resolved to target a portion of state revenues to spend on special needs such as local fire and police departments, education and Medicaid. Republicans, led by Gov. Hutchinson, are intent on cutting taxes for taxpayers and revamping the state’s complex tax code.

In a phone conversation with Talk Business & Politics while attending the national energy summit in Washington, D.C., Hutchinson said he will visit with Files and House Democrats next week to discuss ways to resolve the committee standstill.

“There is broad support for this initiative in the Legislature, but you have some reluctance on the Democrat side because they’d like to see some of the revenue stream go to social programs they support,” the governor said. “And I think there’s a philosophical difference that whenever we increase state revenues, some, including myself, would like to see that go to reducing the income tax rate in Arkansas, and then there are others that see the need for additional spending and I think that’s part of roadblock now.”