Input sought for sales tax exemption report

On March 20, the Arkansas Legislative Tax Reform and Relief Task Force released 43 sales tax exemptions chosen for additional study. The exemptions on the list are being examined to consider whether they are justified or should be eliminated or changed.

As a result, task force deliberations have intensified with increased concern of potential tax increases for businesses and individuals. The list is not the final recommendation of the task force, and interested parties will have the opportunity to provide public comment on exemptions at the April 24 meeting.

The “Tax Reform and Relief Act of 2017” (TRRA) cut Arkansas income tax by $50 million. TRRA also created the Arkansas Tax Reform and Relief Task Force, consisting of 16 legislators who were charged with identifying areas of potential tax reform and recommending legislation. The Task Force will provide a final report to Gov. Asa Hutchinson by Sept. 1, which will be used for tax reform in the regular legislative session in January 2019.

Arkansas tax law contains hundreds of exemptions and taxpayer benefits, which some believe should be reduced or eliminated to lower tax rates. Revenue gained from sales tax exemptions that are reduced or eliminated could offset other tax decreases. Gov. Hutchinson has announced his priority is to reduce the top 6.9% individual income tax rate to 6% to bring the Arkansas closer in line with economically competing states.

The Task Force has met 17 times since May 22, 2017. The tax system was divided into three parts for study: sales and use tax and excise taxes; corporate and individual income tax; and property tax. Consultants, Washington D.C.-based think tanks, and staff from Arkansas Department of Finance and Administration presented findings to the task force, in addition to a comprehensive study by Arkansas Bureau of Legislative Research.

The 43 exemptions on the recommendation list will impact several categories of taxpayers – including exemptions for sales of items to businesses that are considered “business inputs.” Business inputs may include sales of manufacturing machinery and equipment and sales of livestock feed and seed to farmers. In addition, several of the exemptions are for sales of consumer items sometimes classified as “human necessities,” such as food (groceries) and prescription drugs.

“Fuel tax” is also included for review. Repealing the sales tax exemption on gasoline and diesel would impact both business and consumers. It had previously been mentioned as a potential source of revenue for highway funding.

The Task Force plans to follow the same procedure for further study of excise taxes, corporate and individual income tax, and property tax.

Taxpayers interested in the sales tax recommendations should act quickly if they want their opinion considered by the task force. Link here for a PDF of the complete list of sales tax recommendations.
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Editor’s note: Tim Leathers serves as vice president of consulting for inVeritas, a global public affairs firm. He retired as Arkansas’ commissioner of revenue in 2016. The opinions expressed are those of the author.