Arkansas business taxpayers should be concerned about SB293, which would dramatically change administration of certain sales tax refunds and rebates to require disclosure to local cities and counties. This would substantially erode taxpayer confidentiality protections and the additional compliance costs will likely cost taxpayers millions of dollars. Concerned taxpayers may wish to contact their legislators without delay — the bill is scheduled to be heard by Senate Revenue & Tax tomorrow, February 24.
Arkansas allows local jurisdictions to raise revenue through local sales and use taxes for many different purposes. These taxes are administered by the Arkansas Department of Finance and Administration as part of the state sales and use tax. So, like most other states, Arkansas's only point of contact for sales tax administration is DFA. Local governments have limited visibility about the details of administration of their taxes, and they sometimes have concerns when revenue is off by a large amount due to a credit or refund.
SB293, which is sponsored by Sen. Bill Sample, the Chair of Senate Revenue & Tax, would inject local involvement in three sales tax rebate or credit programs:
- The local tax base cap of $2,500 provided by Ark. Code Ann. § 26-52-523;
- The manufacturing partial repairs and services reduced rate provided by Ark. Code Ann. §§ 26-52-447 and 26-53-149; and
- The construction contractor rebate for newly imposed taxes provided by Ark. Code Ann. §§ 26-52-427 and 26-53-138.
For these programs, SB293 would do two things:
- Authorize disclosure by DFA to a local government of confidential tax information regarding a taxpayer that obtained a credit, rebate, or refund under one of these programs; and
- Require a taxpayer to report the claiming of one of these credits, rebates, or refunds directly to affected local governments when claimed (with draconian penalties if they fail to do so).
SB293 raises four main concerns:
Loss of confidentiality: There are no apparent confidentiality protections for the information provided to a local government by the taxpayer or DFA. Presumably the information would be subject to Freedom of Information Act (FOIA) such that confidential sales tax information about equipment or service purchases could wind up in newspapers. Even if there were confidentiality requirements, local governments may have trouble maintaining confidentiality against leaks to local gossip and rumors. Depending on the information involved, in the worst case the taxpayer's detailed purchasing data or supplier invoices might be disclosed.
Compliance costs: Requiring a taxpayer to file one or more duplicative returns to local governments whenever a rebate or credit is claimed — often on a monthly basis — will likely result in tens of thousands (maybe hundreds of thousands) of additional filings and millions of dollars of additional compliance costs for businesses to bear. (In addition, the disclosure requirement does not make sense for the manufacturing partial repairs and services rebate, since it does not affect local revenue until it becomes a full exemption in July 2022.)
Risk of local sales tax administration: What would a local government do with the information received? It could lobby DFA to deny the rebate, particularly if a large amount is involved. Local governments also have been recognized as having independent rights of action directly against taxpayers, see Hotels.com, L.P. v. Pine Bluff A&P Comm'n, 213 Ark. 392, and so actions directly against taxpayers are conceivable. Such additional local enforcement efforts are not needed — DFA already is quite strict on allowing credits, rebates, and refunds.
Doesn't solve the problem of local revenue variability: The purported reason for SB293 is variability in local sales tax revenues. That is not solved by SB293. A more effective way to do that would be to allow a locality to amortize a large refund over multiple months instead of having it hit all at once.
Concerned taxpayers may wish to contact Senator Sample, other members of Senate Revenue & Taxation, or their local legislators.