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Major Overhaul To Arkansas Sales And Use Tax Exemptions



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.

Aaron C. Giles is the Founder and President of Agile Consulting Group. Aaron spent five years working within the specialty niche of Sales & Use Tax at Brown & Associates before forming his own firm in 2005. He has worked hundreds of audits in states all across the U.S. during that time and has delivered savings of over $75M in the form of refunds and credits to his clients. Today, he leads a group of talented, detail-oriented colleagues who focus exclusively on Sales & Use Tax.

Some of our firms’ greatest achievements have come in successfully arguing new and unique perspectives to existing tax law in various states enabling our clients to claim exemptions on categories of purchases previously held to be taxable. Included in these victories are: communication services taxes for religious nonprofit hospitals in FL, bulk purchases of drugs in VA, specific surgical tools and instruments for healthcare providers in TX, printing plates in GA, railroad utilities in KY, and most recently software in AL.

One comment

  1. Aaron Giles – thanks for the article. There are a couple of points to be included in dealing with Act 465 of 2017.

    While it is true the InvestArk Program is going away beginning July 1, 2017, companies may still file for the InvestArk Program up until June 30, 2017.

    The Major Maintenance and Improvements DOES NOT have to be approved by ADED. This incentive was pushed by the Arkansas State Chamber of Commerce first in July 1, 2014 for only Direct Pay Permit Holders and Limited Direct Pay Holders. Beginning July 1, 2015, this Reduced State Tax Rate was opened to ALL Manufacturers, in NAICS Sectors 31-33 and 22, thanks to the Arkansas State Chamber of Commerce. There is no application to participate – you just have to be a manufacturer in the correct NAICS Codes. Up until July 1, 2018 any manufacturer who has not received a refund through Amended Tax Returns can still apply to DFA for the refund. The refund will be without Interest!

    The state of Arkansas will stop providing refunds for the Major Maintenance and Improvements as of July 1, 2018 by Amending Returns.

    While rebates and refunds are provided by Amended Returns up until the full exemption kicks in July 1, 2022, the key in claiming the Rebate/Refund is to tie directly the Repair/Replacement Part and labor to a production machine. Beginning July 1, 2022, Manufacturers will have to offset tax liability due on the Excise Return and claiming a State Tax Credit for Repair/Replacement Parts and Labor that can be directly tied to the production machinery. If the Taxpayer cannot identify the production machinery, DFA will deny the refund/rebate.

    The goal of a complete exemption (both State and Local taxes) will be effective July 1, 2022.

    Consumables will still be subject to the full tax rate (state and local). What constitutes a consumable? Anything that does not have continuing utility such as oil, lube, blades, etc.

    Arkansas has been climbing a mountain in trying to level the playing field for Arkansas Manufacturers. All surrounding states provide an exemption for repair/replacement parts. Arkansas has passed several pieces of legislation to accomplish this goal such as Reduced State Tax Rate on Utilities for Manufacturers, Reduced State Tax Rate on Repair/Replacement Parts and Labor for Manufacturing and clarification laws on dies/molds.

    The Arkansas State Chamber of Commerce has been instrumental in working for businesses in this regard. High Five to their hard work.

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