SB362 to Phase Out InvestArk and the Tax on Manufacturing Repair Parts and Services

A proposal is underway for major simplification of Arkansas sales and use taxes on manufacturing: SB362 would phase out both the InvestArk investment incentive program and the sales tax on partial replacements and repairs of manufacturing machinery and equipment. Manufacturers should consider whether they can apply for one more InvestArk project by June 30, 2017, after which InvestArk will cease taking new applications and will begin to wind down.

In recent years the InvestArk investment tax credit program came under fire as a major economic development incentive that is not tied to growing new jobs. InvestArk, however, provided vital relief from a state sales and use tax that heavily burdens in-state manufacturing, including the taxation of partial replacements and repairs of manufacturing machinery and equipment. SB362, which was introduced on February 17, would simplify this situation by phasing out both InvestArk and the sales tax on maintenance and repair parts and services for manufacturing equipment.

The sunset on InvestArk would occur by ending new applications after June 30, 2017. InvestArk projects that are approved before then or that are presently in effect would operate under the current framework providing a 7% investment tax credit that can offset up to 50% of a taxpayer's sales and use tax liability. The net effect would be a gradual decline in InvestArk credits use as credits are generated in the next 4-5 years and utilized during that period and up to 5 years of carrryforwards.

The offsetting elimination of the sales tax on manufacturing equipment repair parts and services will be implemented by expanding the partial replacement and repair refund of Arkansas Code Annotated section 26-52-447. That section provides for a refund equivalent to a 1% rate reduction on manufacturing machinery and equipment replacement part purchases and service relating to the initial installation, alteration, addition, cleaning, refinishing, replacement, or repair of such machinery and equipment. The current effective state-level rate after the refund is 5.5%. That would drop to 4.5% in July 2018, 3.5% in July 2019, 2.5% in July 2020, 1.5% in July 2021, and a complete exemption beginning July 2022. Once completely exempt from state tax, such purchases also would become exempt from local sales and use taxes.

SB362 also would broaden the mechanisms for claiming the benefit of the reduced rates during the phaseout: Effective upon enactment, a direct pay or limited direct pay permit holder could self-refund by filing a monthly sales and use tax report or by later filing an amended return. Effective July 1, 2018, taxpayers without a direct pay permit or limited direct pay permit could begin claiming the refund on their monthly reports.

Consistent with the phaseout of the tax on replacement and repair parts, the major maintenance and repair projects incentive of section 15-4-3501 would cease taking new applications after June 30, 2022. SB362 also would repeal the deadwood Economic Investment Tax Credit Act of section 26-52-701 et seq., which ceased taking new applications in 2003.

Prospects for the legislation are promising. The bill is sponsored by Senator Lance Eads and Representative Andy Davis, and it has 21 cosponsors--almost a quarter of the General Assembly. Given the likelihood of passage, manufacturers should consider whether they can apply for one more InvestArk project before the June 30 deadline. Under the bill's emergency clause, the legislation would be effective immediately upon approval by the governor.

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