Arkansas Tax Legislation Update: Governor's Tax Cuts, Digital Goods, and More

With the legislative session in full swing, some updates on Arkansas tax legislation:

Governor's Low Income Tax Cuts (HB1159 and SB115)

Governor Hutchinson's $50 million tax cut for the lower tax brackets is on track for a smooth passage. The companion bills HB1159 and SB115 are the vehicle for these cuts. Recall that Arkansas not only has progressive income tax rates, but also progressive income tax bracket schedules. The three bracket schedules are for taxpayers with incomes under $21,000, with incomes between $21,000 and $75,000, and with incomes over $75,000. The middle group saw most of the benefit from the 2015 tax cuts. Under the pending 2017 legislation, taxpayers with incomes under $21,000 will see across-the-board rate reductions and taxpayers with incomes in the middle class bracket schedule will see a slight rate reduction on their first $4,299 of income. The tax cut would go into effect in 2019.

These low-income tax cuts disappointed some legislators who had hoped for bigger, across-the-board tax cuts. To address these concerns, the legislation calls for a task force to find ways to reform the Arkansas tax code ahead of the 2019 session.

The companion bills were passed by their respective chambers on January 23. The passage of this legislation is expected to be straightforward. Yesterday (Jan. 24), the House also rejected a competing bill for an earned income tax credit (EITC), HB1161, which was sponsored by Representative Warwick Sabin.

Military Retirement Tax Exemption & Proposed Digital Goods Tax

The military retirement benefits tax exemption proposed by the Governor (and also supported by Lt. Governor Tim Griffin), HB1162 and SB120, is also moving forward but has seen a change in its proposed revenue raising offsets. The bill would provide income tax exemptions for military retirement and survivor benefits. To pay for the tax exemption, revenue would be raised by increasing sales tax on candy and soft drinks from the low food rate to the higher general rate, by taxing unemployment benefits, and, in the original proposal, by eliminating a partial sales tax exclusion on manufactured housing. As now amended, the revenue raisers are raising taxes on candy and soft drinks, taxing unemployment benefits, and taxing digital goods. The proposed taxation of digital goods (digital audio works, digital audio-visual works, and digital books) follows the Streamlined Sales Tax framework.

This legislation is still in committee in both chambers and is expected to move forward as the session progresses.

E-Fairness Economic Nexus Legislation

Senator Jake Files has introduced SB140, which is an economic nexus bill in the style of South Dakota's 2016 legislation that is currently being litigated. It would require seller tax collection if sales into Arkansas exceed $100,000 or 200 transactions in the previous calendar year or the current calendar year. It would authorize the state to bring a declaratory judgment action and hold enforcement of the law in abeyance pending resolution of the declaratory judgment action. This bill is still in committee.

Corporate Return Filing Date Conformity

A bill pushing back the Arkansas corporate return date from March 15 to April 15, to match the federal change, has passed the House and is pending in the Senate (where it was recommended for passage today by the Revenue & Taxation Committee). This change would have applied in any event for tax years beginning in 2017; this bill moves up the effective date to tax years beginning on or after January 1, 2016, i.e., those coming due in a few months. HB1156 is sponsored by Representative Joe Jett.

Comments are closed