House panel rejects Senate’s Amazon tax bill, Democrats foil proposal for now

An amended Senate bill that lawmakers credit with forcing Amazon to begin soon collecting sales tax for online purchases in Arkansas failed to move out of a House committee Tuesday (Feb. 14) as Democrats moved to kill the proposal for now.

Sen. Jake Files, R-Fort Smith, told reporters after nearly 75 minutes of debate in the House Revenue and Taxation Committee that SB140 will likely come to the committee again as lawmakers scramble to figure out what to do with an expected estimated tax bounty that some say could top $100 million.

“I think we probably have to talk to members of the committee here and see what it would take to get 11 of them to vote to get it out of the committee,” said Files, who has emerged as the chief tax policy architect during the legislation session.

Files presented his bill to the committee only three days after online retail giant Amazon on Friday said it would begin collecting sales tax on Arkansas online purchases starting next month. A week ago, the Senate approved SB140 by a vote of 23-9 after Files told fellow lawmakers his legislation would allow the state Department of Finance and Administration (DF&A) to potentially capture between $30 million and $100 million in uncollected sales and use taxes.

Under Files’ legislation, any online retailer without a nexus in the state that delivers or sells their wares in Arkansas still must remit sales and use taxes if they have gross revenues exceeding $100,000 or had at least 200 separate sales transactions. A similar proposal, HB1388 by Rep. Dan Douglas, R-Bentonville, has additional language that requires online retailers that do business in Arkansas to meet certain tax reporting requirements.

Tuesday’s committee hearing began with Files and House Democrats adding competing amendments to HB140 in light of Amazon’s decision to begin collection of sales taxes in exactly two weeks. In presenting his bill, Files and Douglas added an amendment to the Senate bill that would engross language from HB1388 requiring out-of-state ecommerce vendors to report yearly online purchases from Arkansas taxpayers to the DF&A.

‘PROBLEMATIC’ TAX REVENUE ESTIMATION
After the SB140 was amended, Rep. Michael John Gray, D-Augusta, attempted to add a clause to Files’ bill that would set aside $25 million collected from the new revenue from the online sales tax to the Medicaid trust fund, rural fire and police grants, education and afterschool funding and the remaining half to a “miscellaneous agencies” account. In discussing both amendments, several lawmakers went back-and-forth on whether Arkansas tax officials could force out-of-state ecommerce retailers to remit sales and use taxes to Arkansas. Other concerns also centered around the fact that DF&A has yet to conduct a fiscal impact study on how the new amendments would impact state tax collections, given there is still uncertainty as to how much new revenue the so-called “Amazon tax” would bring to the state budget.

Paul Gehring, DF&A assistant director of revenue, told the committee that both amendments were “problematic” because state officials were still unclear how much additional revenue the state will see once Amazon and other online retailers began remitting sales tax to Arkansas.

“To determine where those monies are coming from, certainly we already have retailers that are based out of state that are sending in sales taxes due to the (federal) streamline agreement, but to do a whole analysis of this proposed amendment, we would at least want to take a closer look at it,” said the DF&A tax policy expert.

After Gray’s amendment failed to attach to Files’ revised bill, the committee engaged in an hour-long debate that centered on state tax policy, including several comments from House Democrats that earlier tax cut bills already enacted into law by the Republican majority distributes state revenues to certain state needs.

In particular, Democrats peppered Files with questions about a military tax exemption that he sponsored that is now Act 79, signed into law by Gov. Asa Hutchinson on Feb. 1 as part of his overall $5.5 billion budget plan. That bill was criticized by many lawmakers for attaching last-minute amendments and tax breaks to pay for a $13.4 million income tax exemption for military retirees. Files and Rep. Reginald Murdock, D-Marianna, debated in detail the merits of adopting the Democrats’ amendment, which would target current areas where state funding is lacking.

“So senator, what we are doing if this happens and the funds come to this state, those are new funds we are getting so that is a new revenue stream,” Murdock said. “So, when you talk about broadening the (tax) base, what we are asking to do with those funds is to distribute them to five needy areas that everyone knows needs to be funded.”

Files told Murdock he didn’t disagree with his assessment, but added making plans to distribute state funds that have not yet been collected is a decision lawmakers will have to make at some point in the future.

“That is a policy decision that 51 of you guys (in the House), and 18 of us (in the Senate) have to agree with,” Files replied. “I do think that dedicating these directly in this fashion creates a ‘poison pill’ that I don’t think there is 51 votes in your chamber – and I’m not speaking for all members – but I would be surprised if it passed with this language added to it and that’s what I am trying to avoid.”

Later in the discussion, Rep. Bob Johnson, D-Jacksonville, asked Files to pull down his bill so DF&A officials could complete their fiscal impact analysis and allow House members to negotiate an amendment that would satisfy all parties. In the end, Gray’s amendment failed and Files closed for his bill and downplayed criticism from some fiscal conservatives in his own party that SB140 goes against free market principles.

“As it stands right now, free market does not apply because you can buy something in a store and pay a tax on it and walk out in your car and buy the same item and not pay a tax on it,” File said. “So, there is not a free market principle there of fairness.”

INTERNET TAX PROS AND CONS
Afterward, the House panel heard nearly 20 minutes of debate for and against Files’ bill from brick-and-mortar retailers, policy groups and local citizens that attended the standing room-only committee hearing.

Randy Lann, with the Arkansas Homefurnishings Association, told the committee that one local furniture owner remitted more than $4 million in sales and property taxes to the state of Arkansas last year. He said more than 50 furniture stores have gone out of business in Arkansas in the past two years due to unfair competition from online retailers.

“These stores are going out (of business) because the third generation owners coming in, they didn’t want to tackle the Internet sales because people are actually coming in and showing where they can get the same price by not paying a sales tax,” Lann testified. “That’s not fair. These folks are the backbone of your community. These are supporters – sorry to say these people out of state are not.”

Josh Waters, a Fayetteville attorney representing the Conduit for Action, called Files’ legislation an unconstitutional “new sales tax” that would burden Arkansas taxpayers. Waters also expressed concerns about the new language from HB1388 added to Files bill that would require out-of-state retailers to send information about online purchases to DF&A.

On their website, CFA called Douglas’ bill the “creepiest Arkansas legislation of 2017.”

“It is big brother legislation collecting information about your buying habits,” said the Arkansas group, which says its supports conservative policies that promote economic freedom.

Following the spirited debate, the House panel rejected Files’ bill in a defiant display by House Democrats who remained silent during the roll call. The “do-pass” recommendation failed 6-2. Nine members, all Democrats, did not vote and three committee members were absent. After the failed vote, Files expressed dismay by the actions of the Democrats.

“I am disappointed that some members chose not to vote at all. We are here to debate and take a position. For them not to take a position is disheartening and I think it doesn’t do service to the process,” Files said.

The Fort Smith senator said he plans to talk with members of the House committee to see what it would take to get 11 members to support his legislation and move it to the House floor. The House Revenue committee is chaired by former Democrat Joe Jett of Success, who joined the Republican Party ahead of the session. The committee is now equally divided with 10 members from each party.