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Corporate Tax Reform Comes to Arkansas

3 min readBy: Nicole Kaeding, Jeremy Horpedahl

On Friday, legislators in Arkansas introduced Senate Bill 576, which would dramatically increase the competitiveness of Arkansas’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code. Based on recommendations from the Arkansas Tax Reform and Relief Legislative Task Force, the bill would overhaul Arkansas’s corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. code.

The bill includes several key reforms to the corporate income tax. First, the bill would repeal the state’s throwback rule. Arkansas uses a double-weighted sales formula to apportion corporate income, but it also uses a throwback rule, meaning that firms with “nowhere income” must “throw it back” into their state calculations, increasing their state tax liability. The bill couples throwback repeal with a move to a single sales factor apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. structure.

Additionally, this bill would dramatically expand Arkansas’s net operating loss provisions. Arkansas is an outlier among states, allowing firms to carry forward their losses for only five years. The bulk of states allow carryforwards for 20 years. Net operating losses are incredibly important for start-up firms and firms with volatile incomes. Net operating losses ensure that firms are taxed on their actual income, not an overinflated income level due to discontinuity between calendar years and tax years. Senate Bill 576 would expand net operating losses to 20 years, bringing Arkansas in line with other states.

According to the Tax Foundation’s State Business Tax Climate Index, these changes will improve Arkansas’s tax competitiveness from 46th to 44th overall. Arkansas’s corporate income tax structure would improve from 40th to 30th with these changes. If we add in the previously passed individual income tax cuts, the state’s overall score improves to 43rd.

Ideally, Arkansas would also consider lowering its corporate income tax rate, another task force recommendation. Hopefully, future General Assemblies will adopt this recommendation.

As we’ve argued in the Arkansas Democrat-Gazette, in many ways, Arkansas’s tax code has fallen behind by standing still. The state has been surpassed by competitors, such as Georgia, Kentucky, and Missouri, in implementing tax reform. Arkansas needs to improve its code to be competitive.

The bill also makes changes outside of the corporate income tax. Namely, the bill would adopt the so-called Wayfair checklist” regarding the taxation of remote sellers. Frequently mischaracterized as a tax increase, codifying the “Wayfair checklist” ensures proper administration of the state’s tax code. Now, remote sellers would be required to collect and remit sales taxes in Arkansas if they have more than $100,000 in sales or 200 transactions.

Arkansans have always legally owed use tax on remote purchases, including those made on the internet. But federal case law prohibited Arkansas from forcing out-of-state sellers to collect and remit the tax on consumers’ behalf. Instead, Arkansas consumers had to fill out a Consumer Use Tax form, but very few did. Following the U.S. Supreme Court’s Wayfair decision, Arkansas can now require certain remote sellers to collect the tax, and this bill would ensure that Arkansas follows those guidelines.

The Arkansas General Assembly continues to consider recommendations made by the Arkansas Tax Reform and Relief Legislative Task Force. This package of recommendations would significantly improve the state’s tax code.