Sales Tax Update B.J. Pritchett, CMI Pritchett Sales and Use Tax Consulting/ Arkansas Sales and Use Tax School Hot Springs National Park, Arkansas

Overview of ARKANSAS Sales and Use Tax

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ARKANSAS OVERVIEW • Complimentary Excise Taxes: > Gross Receipts > Compensating Use  Imposition of Tax: > Intrastate & Interstate Transactions > Tangible Personal Property > Specific Services

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ARKANSAS OVERVIEW UPDATES: Arkansas Department of Finance and Administration Taxpayer Resolution Officer P.O. Box 1272 Ledbetter Building, Room 2460 Little Rock, AR 72203 • 501-682-7751 - Monica Carmichael

• EMAIL: [email protected]

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ARKANSAS SALES & USE TAX • Sales & Use Tax is imposed on: • TANGIBLE PERSONAL PROPERTY and • SPECIFIC SERVICES

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TANGIBLE PERSONAL PROPERTY • Arkansas Rule GR-3 • Personal property which may be seen, weighed, measured, felt, touched or is in any manner perceptible to the senses.

• Intangible property is NOT taxable.

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SERVICES • Unlike tangible personal property SERVICES ARE SPECIFICALLY TAXED • If the service is not specifically taxed, the service is excluded from the tax base. • Major Categories of Specifically Taxed Services: 1) Lodging Services 2) 3) 4) 5)

Printing & Photography Tickets to Places of Amusement Luxury Services Various Services

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GROSS RECEIPTS TAX • Tax is imposed on Tangible Personal Property and Specific Services • It is an INTRASTATE Transaction Little Rock to Fayetteville Jonesboro to El Dorado

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ARKANSAS OVERVIEW

• What is a SALE? Definition: Any transaction resulting in the transfer of the title or possession, for a valuable consideration of tangible personal property or services regardless of the manner, method, instrumentality, or device by which such transfer is accomplished. It includes exchange, barter, lease, rental or giveaways. Example: SAMPLES

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COMPENSATING USE TAX • Act 487 of 1949 • Two types of use tax: > Consumer Use (SELF ASSESSED BY CONSUMER on purchases from out-of-state vendors) > Vendor Use (Registered out-of-state vendors)

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COMPENSATING USE TAX

• Imposed on STORAGE, USE or CONSUMPTION of a taxable item or service on which NO Legally Imposed Tax has been paid

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COMPENSATING USE TAX

• Applies to Purchases made from OUTSIDE the state of Arkansas but are subsequently stored, used or consumed in Arkansas. Example:

Mail Order Items Office Supplies

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LOCAL TAX RECOVERY PURCHASERS ARE RESPONSIBLE FOR RECOVERY OF LOCAL CEILING LIMITS over $2,500.00!! > You must pay the local tax first to the Vendor

> SO VENDOR COLLECTS FULL LOCAL TAX FROM PURCHASER

•

PURCHASER’S REBATE/REFUND: >

MUST FILE REBATE within 6 Months Using form ET-179A and Supplemental ET-179

or

>

Lose your Right to Recover the Local Tax Exceeding $2,500.00

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LOCAL TAX IMPOSITION LOCAL TAXES ARE IMPOSED WHERE THE ITEM IS DELIVERED! LOCAL TAXES FOR SERVICES ARE IMPOSED WHERE EVER THE SERVICE IS PERFORMED!

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WHAT’S THE DIFFERENCE? • STATUTES Statutes are the LAW

• RULES Rules are interpretations of the LAW by the STATE OF ARKANSAS

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Statute of Limitations • Three years (from the time the return was filed or two years from the time the tax was paid) {including Refunds}

• Six years (if understated tax by 25% or more) {Audits & Assessments but not Refunds}

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STREAMLINE SALES TAX • What is Streamline Sales Tax {SST}? • It was originally suppose to address only INTERNET SALES that escaped taxation. • NOW – it applies to all sales made over the Internet as well as any other sales made through conventional marketing.

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STREAMLINE SALES TAX

• OVERALL PROBLEMS with SST • NOT ALL STATES ARE PARTICIPATING • YOU WILL HAVE TO FILE BASED ON YOUR NEXUS WITH THOSE WHO DO NOT PARTICIPATE

• YOU WILL HAVE TO FILE SST WITH THOSE WHO DO PARTICIPATE

STREAMLINE SALES TAX • Company Registrations in ARKANSAS Under STREAMLINE SALES TAX:

2,306 companies have registered Revenue Collected $66,344,708.41 Time Frame: January 2006 – August 2014

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EXEMPTIONS and EXCLUSIONS • Exemptions are specifically identified in the statutes and rules • Exclusions are not mentioned in the taxable or exempt listings within the statutes Examples: Accounting Services Consulting Services

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EXEMPTIONS and EXCLUSIONS • Certain Classes of Purchasers • State, City, County Governments are TAXABLE • Churches and Non-Profit Organizations may be TAXABLE

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BASIC EXEMPTIONS Exemptions Based on USE

• • • • • •

RESALE AGRICULTURAL MANUFACTURING POLLUTION CONTROL ISOLATED SALES OTHER

RECENT ARKANSAS DEVELOPMENTS

RECENT ARKANSAS DEVELOPMENTS • Last revision of RULES was 10/06/08 • HOWEVER, not all the Acts of 2007 were incorporated into the State’s latest publication • The Acts of 2009, 2011, 2013 have not been addressed

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2013 Legislative Changes • Effective July 1, 2014 • Act 1404 – Establishes a partial refund of 1% of the state sales and use tax paid on the purchase of machinery and equipment or replacement parts purchased to modify, replace or repair existing manufacturing machinery and equipment. The refund also applies to the purchase of the labor used to install or repair the eligible equipment. In order to claim the refund the taxpayer must obtain a direct pay permit from DFA.

2013 Legislative Changes Section 1 of Act 1404 of 2013 • Act 1404 – ONLY for Direct Pay Permit Holders and ONLY APPLIES TO THE STATE TAX!!!! • Includes: > Labor to install, add to, repair, replace, >

refinish, clean, alter (Production Machinery) Repair/Replacement Parts for Production Machinery and equipment

• Excludes (DOES NOT SAY THIS IN THE LAW): > Consumables/Maintenance (regular hourly or weekly changes – gear oil, etc.)

such as lubricating machinery,

• Effective Date: July 1, 2014 (INVOICE DATE)

2013 Legislative Changes Section 2 of Act 1404 of 2013 • Act 1404 – ONLY for Direct Pay Permit Holders and ONLY APPLIES TO THE STATE TAX!!!! • ADEC Incentive Program at $3,000,000 • Must fill out application for financial incentive • Must be $3,000,000 in repair/replacement or partial replacement of production machinery & equipment • Must be approved by ADEC Director • Must have a Beginning and Ending Date • Taxpayer must show a Positive Return in Dollars (enhanced or retained productivity or sales or employee compensation. Or taxes paid or any other quantifiable information “Extending useful life and ROI”)

• Taxpayer must show need to stay competitive in market

2013 Legislative Changes • Effective July 1, 2014 = Electricity/Natural Gas: • Act 1411 – State Reduced Rate is as follows: Tax rates for manufacturers in NAICS Codes 31-33: 1.625% Beginning July 1, 2014 Tax Rates for Manufacturers NAICS Code 31-33 and Cotton Gins Code 115111: 1.625% July 1, 2014 through June 30, 2015 .625% July 1, 2015

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2009 Legislative Changes • Act 1208 – Clarification of Law Molds & Dies Definition of Molds adds new language including frames, cavities and forms that determine the physical characteristics of the finished product or its packaging material at ANY stage of mfg. It also extends the definition to include testing equipment at ANY stage of mfg process. (It states it is effective as of 04/07/09; however, it was not a change in law)

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10/06/2008 REVISED RULES

• GR-18. A. DELIVERY CHARGES. • Delivery charges are part of the gross receipts or gross proceeds on which the tax must be collected and remitted unless the charges are billed directly to the purchaser by a carrier other than the seller. • 1. If the tangible personal property being shipped is exempt from sales and use tax, the delivery charges are also exempt from tax. • 2. If a shipment includes tax-exempt property and taxable property, the seller must pay the tax imposed only on the percentage of the delivery charge allocated to the taxable property. To determine the percentage, the seller may use either of the following options: • a. A percentage based on the total sales price of the taxable property compared to the total sales price of all property in the shipment; or • b. A percentage based on the total weight of the taxable property compared to the total weight of all the property in the shipment.

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10/06/2008 REVISED RULES

• GR-55.1.C.2.a. – Exemptions from tax – Chemicals used in Manufacturing: • • • •

Examples of Exempt Chemicals: Mold release chemicals; Nitrogen used to prevent oxidation in an annealing process; Cutting/cooling oil applied to metalwork in process during milling; and Sanitization chemicals used to meet USDA standards for machinery and equipment used in processing meat and poultry for human consumption.

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10/06/2008 REVISED RULES

• GR-56.G. – Exemptions from Tax – Manufacturing Exemption – Dies and Molds: The following are examples of molds or dies:

• 1. Cutting or shaping tools that when moved toward each other or another component of a machine impart a desired physical characteristic to an object by pressure or by a blow; • 2. Taps and internally threaded screw-cutting tools used for forming threads; • 3. Perforated blocks through which material is drawn or extruded for shaping; • 4. Die blocks and inserts and other devices attached to a die block and used during the manufacturing process; and • 5. Printing plates.

10/06/2008 REVISED RULES • GR-56.E. – Exemptions from Tax – Manufacturing – Dies and Molds: • The gross receipts derived from the replacement of any item that was originally exempt as a die or mold, or any of its component parts, shall be exempt from the gross receipts tax.

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RECENT ARKANSAS DEVELOPMENTS ACTS of 1999

SALES AND USE TAX CHANGES: • ACT 854 Exempts ALL chemicals, catalysts, reagents and solutions consumed or used in the manufacturing process.

You will have to fight for each chemical you claim as exempt!

THANK YOU FOR YOUR ATTENTION! • B.J. Pritchett, CMI Pritchett Sales/Use Tax Consulting Arkansas Sales and Use Tax School