Arkansas lawmakers OK remote sales tax bill on second pass, compromise car wash ‘water fee’

A House committee on Tuesday (April 2) gave a do-pass recommendation to the final piece of a four-part legislative package aimed at overhauling Arkansas’ burdensome tax code.

Senate Bill 576 by Sen. Bart Hester, R-Cave Springs, was approved in a voice vote by the House Revenue and Taxation Committee with Rep. gayla McKenzie, R-Gravette, the lone legislator to oppose the compromise bill that has gone through several iterations since it breezed through the Senate last Thursday.

Hester and co-sponsor, Rep. Dan Douglas, R-Bentonville, told the committee that SB 576 was the final bill that came out of recommendations made by the bicameral Tax Reform and Relief Task Force before the session. That same legislative panel recommended that lawmakers put forth a bill to modify current law that imposes sales taxes on most car washes, except those that are coin-operated.

However, the House Tax committee rejected an earlier version of SB 576 last Friday that would remove the exclusion on coin-operated car washes, and further levy a 6.5% water fee on all car washes in lieu of a sales and use tax. The amended 33-page proposal presented to the committee on Tuesday would cut that monthly water fee in half.

“I was tasked by the task force to look into the car wash issue,” Hester said of his compromise bill that has a $2 million impact on state revenues. “What I found is it is a very difficult issue as we have learned and heard from many car wash owners over the past few months. The intent here, in my opinion, is to try and make it as fair as possible.”

Hester further explained that he brought SB 576 to the table at the end of the 92nd General Assembly due to Gov. Asa Hutchinson’s $97 million tax cut for the state’s top income bracket approved by the legislature in February and other key tax bills and priorities taking precedent earlier in the session.

Among other things, the multi-pronged measure would require out-of-state remote sellers that do not have a physical presence in the state to collect and remit Arkansas sales and use taxes. That measure would add $35.4 million to state budget coffers, including a $24.5 million spike in general revenue, a DFA analysis shows.

SB 576 would also extend net operating losses (NOL) for Arkansas businesses from five to 10 years. Under current tax rules, business losses can only be offset against future earnings for up to five years. Arkansas State Chamber officials said the NOL change, if enacted into law, should reduce the risk of double taxation for businesses that go through up-and-down cycles.

The bill also adopts a single sales factor apportionment corporate tax model that would allow companies headquartered in Arkansas, particularly manufacturing, retail, wholesale, and banking entities, to shift part of their tax burden to out-of-state subsidiaries. Proponents of this change said it incentivizes in-state investment and job creation.

Lastly, Hester’s bill will decrease the corporate income tax rate from 6.5% to 5.9%. All of the tax proposals that came out of the legislative task force were hammered out over a two-year period following the 2017 session. At the time, after the legislature enacted Hutchinson’s $50.5 million tax cut for the state’s working poor, the task force was impaneled to simplify the state’s multi-layered tax code and create a more favorable tax climate for Arkansas businesses and individual taxpayers.

The section of the bill that would require out-of-state remote sellers with more than $100,000 in annual sales to collect and remit Arkansas sales and use taxes will allow Arkansas to put new e-commerce dollars into state budget coffers.

At the end of the 2017 session, similar legislation was rejected after a fierce debate on the Arkansas House floor. However, the U.S. Supreme Court issued a ruling in late June 2018 in the case South Dakota v. Wayfair Inc., upholding that state’s requirement that large-scale online sellers without a physical “nexus” in the state must collect and remit sales and use taxes.

Since the high court’s ruling, by a thin 5-4 margin, several states have announced plans to begin collecting sales taxes from online retailers. Put together, Arkansas State Chamber of Commerce/Associated Industries of Arkansas President and CEO Randy Zook said the provisions in SB 576 would make Arkansas’ tax rate and business climate more competitive with surrounding states.

“This is the number one priority in the session for the members of our organization,” said Zook, citing statistics that Arkansas’ so-called “tax climate” ranks 46th of the 50 states. “This bill, the four parts that comprise the corporate tax aspects, will move us in the right direction.”

Hester’s proposal will now go to the House floor for a vote later this week. If approved, it will have to go back to the Senate because of the compromise amendment added to the bill that will now tax all Arkansas car washes at the same level. SB 576 was earlier approved by Senate on March 26 by a margin of 27-3.