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Arkansas enacts legislation expanding sales tax nexus

Law also adopts single sales factor apportionment, advancing IRC conformity

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On April 9, 2019, Arkansas enacted legislation requiring certain remote sellers and marketplace facilitators to collect and remit sales or use tax beginning July 1, 2019.1 The legislation also imposes sales and tourism taxes on accommodations intermediaries. Furthermore, the legislation makes various corporate income tax changes that include the adoption of single sales factor apportionment, the extension of the net operating loss (NOL) carryforward period and a reduction in the tax rate. On April 10, 2019, Arkansas enacted separate legislation to advance the Internal Revenue Code (IRC) conformity date for a variety of provisions.2

Sales and use tax Nexus for remote sellers and marketplace facilitators Effective July 1, 2019, a remote seller3 or marketplace facilitator without physical presence in the state must collect Arkansas sales or use tax if, during the previous or current calendar year, it had aggregate sales of tangible personal property, taxable services, digital codes or specified digital products subject to Arkansas sales or use tax, or delivered to locations within the state exceeding: (i) $100,000; or (ii) 200 transactions.4

The legislation defines a marketplace facilitator as any person who facilitates sales by:

  • Listing or advertising tangible personal property, taxable services, a digital code, a digital magazine, or specified digital products for sale in a forum5
  • Either directly or indirectly through an agreement or agreement with a third party, collecting payment from a purchaser and transmitting the payment to the person selling the tangible person property, taxable services, a digital code, or specified digital products, regardless of whether the person receives compensation or other consideration in exchange for the person’s services in collecting and transmitting the payment.6

A sale made through a marketplace facilitator: (i) is a sale of the marketplace facilitator for purposes of determining whether a person satisfies the criteria listed above; and (ii) is not a sale of the marketplace seller7 for purposes of determining whether a person satisfies the criteria listed above.8 A marketplace facilitator is not liable if it fails to collect and remit the correct amount of tax, if the failure was due to incorrect or insufficient information provided to the marketplace facilitator by the marketplace seller.9

The requirement to collect and remit sales or use tax under this provision will not be enforced retroactively.10 The legislation also repeals the affiliate nexus provisions.11

Accommodations intermediaries Effective Oct. 1, 2019, the sales and tourism taxes imposed on the service of furnishing various types of accommodations to transient guests are expanded to include accommodations intermediaries.12

Corporate income tax Single sales factor apportionment For tax years beginning on or after Jan. 1, 2021, taxpayers will apportion business income to Arkansas by using a single sales factor, in place of the traditional three-factor formula with a payroll, property and double-weighted sales factor.13 Single sales factor apportionment also is adopted for financial institutions.14

NOL carryforward period Currently, Arkansas provides for a limited five-year NOL carryforward period,15 which is much shorter than the carryforward period allowed by most states. Under the legislation, the NOL carryforward period will increase to eight years for NOLs occurring in the tax year beginning Jan. 1, 2020,16 and to 10 years for NOLs occurring in tax years beginning on or after Jan. 1, 2021.17

Tax rate reduction The maximum corporate income tax rate is reduced. For the tax year beginning on Jan. 1, 2021, the maximum rate is reduced from 6.5% to 6.2%.18 For tax years beginning on or after Jan. 1, 2022, the maximum rate is further reduced to 5.9%.19

IRC conformity Contrary to the policy adopted by most states, Arkansas selectively conforms to various provisions of the IRC. For tax years beginning on or after Jan. 1, 2019, Arkansas has enacted the following conformity provisions related to corporate income tax:

  • From Jan. 1, 2007, to Jan. 1, 2019:
  • IRC Sec. 263A(a)-(h), regarding capitalization and inclusion in inventory costs of certain expenses20
  • IRC Sec. 274, relating to meals and entertainment expense deductions21
  • In the case of natural resources for which a depletion deduction is allowed under IRC Sec. 611, the provisions of IRC Secs. 611-613, 614, 616 and 61722
  • IRC Sec. 7872, regarding the taxation of unstated interest on a below-market loan.23

  • From March 30, 2010, to Jan. 1, 2019:
  • IRC Sec. 162, except subsection (n), relating to trade or business expenses.24

  • From Jan. 1, 2011, to Jan. 1, 2019:
  • IRC Sec. 280F(a)-(d), relating to the investment tax credit and depreciation for luxury automobiles and other property.25

  • From Jan. 1, 2017, to Jan. 1, 2019:
  • IRC Secs. 108 and 1017, regarding income from the discharge of indebtedness 26
  • IRC Secs. 167 and 168(a)-(j), regarding depreciation of property 27
  • IRC Sec. 170, regarding deductions for charitable contributions 28
  • IRC Secs. 351, 354-358, 361, 362, 367 and 368, regarding corporate organization, reorganization and recognition of gain 29
  • Subchapter M, IRC Secs. 851 et seq., related to regulated investment companies, real estate investment trusts, real estate mortgage investment conduits and financial asset securitization investment trusts 30
  • IRC Secs. 1361 et seq., regarding S corporations.31

The legislation also enacts an exclusion from gross income for IRC Sec. 118, regarding the recognition or nonrecognition for contributions to capital,32 and a deduction for IRC Secs. 174 and 280C, concerning the deduction of research and development costs, both as in effect on Jan. 1, 2019.33

Commentary Many states have now adopted sales tax economic nexus standards in response to the U.S. Supreme Court’s Wayfair decision. The Arkansas legislation closely follows the South Dakota law at issue in Wayfair by adopting the $100,000 of sales or 200 transaction thresholds. Arkansas also is following the recent state trend of adopting marketplace provider legislation.

Taxpayers should be cognizant of the variations in remote seller requirements for each state. South Dakota through Wayfair has provided a model for economic nexus laws, but it should not necessarily be considered a new “bright line” followed by every jurisdiction. While many states have decided to adopt the South Dakota provisions, some states are enacting sales thresholds greater than $100,000 or eliminating the transactions threshold. Also, some states only impose a sales tax collection requirement on remote sellers that meet both the sales and the transaction thresholds. Although South Dakota’s specific legislation satisfies the constitutional standards, there are no clear guidelines indicating when a threshold may be deemed unconstitutional. Furthermore, the growing number of marketplace provisions are inconsistent across states in terms of effective dates, definitions and collection requirements. Accordingly, multistate taxpayers should be sure to account for differences across jurisdictions in order to guarantee accurate compliance in such a dynamic and diverse legislative environment.

The corporate income tax amendments resulted from a lengthy evaluation of the state’s system of taxation, and while the change to a single sales factor is significant, the 2021 effective date provides taxpayers with some time to adjust. The two phased increases to the NOL carryforward period is welcome news to businesses that historically have had difficulty in utilizing NOLs in the state, though the eventual 10-year carryforward period still is less than the carryforward allowed in many states. A potentially mitigating factor for businesses is the planned reduction of the corporate income tax rate.

Arkansas’ method of selective IRC conformity is particularly complex because numerous provisions have different conformity dates. As discussed above, the legislation specifically conforms to some of the federal tax reform provisions enacted in late 2017 by H.R. 1, commonly referred to as the Tax Cuts and Jobs Act (TCJA).34 Arkansas has adopted some of these changes by advancing the conformity date to Jan. 1, 2019, for certain provisions. However, Arkansas has not adopted significant federal tax reform provisions concerning foreign income such as repatriation under IRC Sec. 965, global intangible low-taxed income (GILTI) and foreign derived intangible income (FDII). Furthermore, Arkansas does not conform to some federal tax reform changes to domestic provisions such as asset expensing under IRC Sec. 179 and the business interest deduction limitation under IRC Sec. 163(j). Taxpayers should continue to watch for future legislative action which may address these material TCJA conformity issues.


 
1 Act 822 (S.B. 576), Laws 2019. This legislation was enacted in response to the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. 138 S. Ct. 2080 (2018). In this case, the Court rejected the physical presence requirement for purposes of sales and use tax nexus, finding that South Dakota’s economic nexus statute satisfied the substantial nexus standard under the U.S. Constitution. For a discussion of this case, see GT SALT Alert: Wayfair Ruling Overturns Quill Physical Presence Requirement.
2 Act 870 (H.B. 1953), Laws 2019.
3 A “remote seller” is a person, other than a marketplace facilitator, that does not maintain a place of business in Arkansas and that through a forum sells tangible personal property, taxable services, a digital code, or specified digital products, the sale or use of which is subject to Arkansas sales or use tax. ARK. CODE ANN. § 26-52-103(40).
4 ARK. CODE ANN. § 26-52-111(a).
5 A “forum” is a physical place or electronic location where sales occur, including a store, booth, publicly accessible Internet website or catalog. ARK. CODE ANN. § 26-52-103(35).
6 ARK. CODE ANN. § 26-52-103(36).
7 A “marketplace seller” is a person that has an agreement with a marketplace facilitator under which the marketplace facilitator facilitates sales for the person. ARK. CODE ANN. § 26-52-103(37).
8 ARK. CODE ANN. § 26-52-111(b).
9 ARK. CODE ANN. § 26-52-111(f). However, this provision does not apply if the marketplace facilitator and the marketplace seller are related.
10 ARK. CODE ANN. § 26-52-111(c).
11 ARK. CODE ANN. § 26-52-110.
12 ARK. CODE ANN. §§ 26-52-301(3)(A); 26-63-402(1). An “accommodations intermediary” is a person other than the owner, operator or manager of a room, suite, condominium, townhouse, rental house or other accommodation. “Furnishing” means brokering, coordinating, making available for, or otherwise arranging for the sale or use of a room, suite, condominium, townhouse, rental house or other accommodation by a purchaser. Note that the legislation also changes the taxation of car wash services. Effective Oct. 1, 2019, a sales tax exemption is provided for the sale of: (i) tangible personal property, specified digital products, or a digital code by or to a car wash operator for use in an automatic car wash, a car wash tunnel, or a self-service bay or as part of an ancillary service; (ii) services to a car wash operator; and (iii) ancillary services by a car wash operator. ARK. CODE ANN. § 26-52-401(40)(A). The sales tax exception for coin-operated car washes is repealed. ARK. CODE ANN. § 26-52-301(3)(B)(ii). However, car wash operators exempt from sales tax must pay a monthly fee on the water that they use from a public water system. ARK. CODE ANN. §§ 26-57-1601 – 26-57-1605.
13 ARK. CODE ANN. §§ 26-5-101.Art.IV.9; 26-51-709.
14 ARK. CODE ANN. § 26-51-1401(b).
15 ARK. CODE ANN. § 26-51-427(1).
16 ARK. CODE ANN. § 26-51-427(1)(B).
17 ARK. CODE ANN. § 26-51-427(1)(C).
18 ARK. CODE ANN. § 26-51-205(a)(1), (2), (b)(1), (2). This maximum rate is imposed on net income exceeding $100,000.
19 ARK. CODE ANN. § 26-51-205(a)(3), (b)(3). This maximum rate is imposed on net income exceeding $25,000.
20 ARK. CODE ANN. § 26-51-439(a).
21 ARK. CODE ANN. § 26-51-423(b).
22 ARK. CODE ANN. § 26-51-429. In computing the depletion allowance deduction for oil and gas wells, the computation of the deduction is controlled by IRC Sec. 613A, as in effect on January 1, 2019 (previously, January 1, 2011).
23 ARK. CODE ANN. § 26-51-443(b).
24 ARK. CODE ANN. § 26-51-423(a)(1).
25 ARK. CODE ANN. § 26-51-436(3).
26 ARK. CODE ANN. § 26-51-404(b)(10).
27 ARK. CODE ANN. § 26-51-428(a). Note that Arkansas does not adopt bonus depreciation (as allowed in IRC § 168(k)). Also, Arkansas continues to adopt IRC Sec. 179, relating to expensing of property, as in effect on Jan. 1, 2009.
28 ARK. CODE ANN. § 26-51-419(a)(1).
29 ARK. CODE ANN. § 26-51-412(d).
30 ARK. CODE ANN. § 26-51-440(a)(1).
31 ARK. CODE ANN. § 26-51-409(a).
32 ARK. CODE ANN. § 26-51-404(b)(30).
33 ARK. CODE ANN. § 26-51-460.
34 P.L. 115-97. For a discussion of this Act, see GT Alert: Tax Reform Law Transforming Business and Tax Planning.


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