Act 465 will significantly change the Arkansas sales and use tax exemptions available to manufacturers by phasing out two sales tax incentives while concurrently expanding the exemption for manufacturing repair parts and services. Arkansas Act 465, which was enacted on March 13, 2017, sunsets the InvestArk incentive as of June 30, 2017 and the Major Maintenance and Improvements incentive as of June 30, 2022.
The InvestArk incentive, also known as retention tax credit program, detailed in Arkansas Code §15-4-2706, encourages capital investment and job creation within the state of Arkansas by businesses. Applications need to be submitted to the Arkansas Economic Development Commission. If awarded, the approved business would be entitled to use the tax credits as either a sales and use tax credit or an income tax credit. The InvestArk program will be accepting applications through June 30, 2017. Carryforwards of any InvestArk incentives awarded will still be honored for the 5-year period after the year in which the credit was first earned.
The Major Maintenance and Improvements incentive explained in Arkansas Code §15-4-3501 provides a 100% refund of Arkansas sales and use taxes for qualifying major maintenance and improvement projects. This increased sales and use tax refund must be pre-approved by the Arkansas Economic Development Commission and is project-specific. Applications for this incentive program will be accepted through June 30, 2022.
While Arkansas is ending these two popular sales and use tax programs, there is some good news for taxpayers related to Arkansas sales and use tax as part of Act 465. In addition to phasing out these sales and use tax incentives, the Act will also phase in an additional reduction in the Arkansas sales and use tax rate for manufacturing machinery and equipment repair, replacement and service beyond what was implemented beginning July 1, 2014.
Arkansas Act 465 will phase in an additional reduction in the Arkansas sales and use tax rate for manufacturers’ purchases of qualifying repairs, replacements and services over a 5-year period of time beginning July 1, 2018. Eligible purchases include repair and replacement parts and services for manufacturing machinery or equipment used directly by the manufacturer in manufacturing, producing, fabricating, processing, assembling, finishing or packaging products at manufacturing facilities located within Arkansas. See below for reduced sales and use tax rates for corresponding time periods:
- Reduced sales & use tax rate of 5.5% for the periods July 1, 2014 through June 30, 2018
- Reduced sales & use tax rate of 4.5% for the periods July 1, 2018 through June 30, 2019
- Reduced sales & use tax rate of 3.5% for the periods July 1, 2019 through June 30, 2020
- Reduced sales & use tax rate of 2.5% for the periods July 1, 2020 through June 30, 2021
- Reduced sales & use tax rate of 1.5% for the periods July 1, 2021 through June 30, 2022
- Reduced sales & use tax rate of 0.0% beginning July 1, 2022
Additionally, Arkansas Act 465 will broaden the methods available for taxpayers to claim the benefit of the reduced Arkansas sales and use tax rates. Prior to the enactment of Act 465,taxpayers were required to hold a direct pay sales and use tax permit in order to claim the sales and use tax refund. Beginning July 1, 2018, taxpayers that do not hold a direct pay sales and use tax permit may obtain the credit or rebate authorized by claiming the amount against the amount of state tax due to be remitted with the taxpayer’s sales and use tax return. It’s important to note that taxpayers cannot report credits or rebates exceeding the sales and use tax liabilities that are reported on a return.
Two sections of the Arkansas Code were amended to accomplish these changes related to the additional reduction in the Arkansas sales and use tax rate for manufacturing machinery and equipment repair, replacement and service. Arkansas Code §26-52-447 was amended to implement the changes related to sales tax and Arkansas Code §26-53-149 was amended to make the corresponding changes related to use tax.
Arkansas Act 465 was originally introduced to the 91st General Assembly as Senate Bill 362 on February 17, 2017 and remained largely unchanged as it moved through the legislative session. Senate Bill 362 was initially co-sponsored by 24 members of the General Assembly including 9 Senators and 15 Representatives. Act 465 went into effect on March 13, 2017, but the different provisions have implementation dates ranging between March 13, 2017 and July 1, 2022.