Tax reform task force to Arkansas: Tax magazine subscriptions, not car washes – Wacky Tax Wednesday

The Arkansas Tax Reform and Relief Legislative Task Force recently came out with a recommendation to require remote sellers to collect and remit Arkansas sales and use tax. A similar proposal was abandoned in early 2017 over concerns that it would be unconstitutional. Now, thanks to the Supreme Court of the United States decision in South Dakota v. Wayfair, Inc., the path to taxing remote sales tax is clear. If adopted, it could generate more than $35 million in Arkansas sales tax revenue annually.

That’s not so wacky, really. What’s wacky is that the Task Force is also troubling itself over magazine subscriptions and car washes.

To be fair, there’s more to the story. Before the Wayfair decision landed in June 2018, the Task Force had flagged more than 40 sales and use tax exemptions for potential elimination as a way to increase state revenue.

For example, the Task Force found that eliminating the current exemption for twine used in the production of tomatoes would generate approximately $2,600 in annual sales tax revenue. On the other hand, taxing sales of machinery and equipment used directly in manufacturing or processing would bring in roughly $107 million annually. And eliminating the partial exemption for food and food ingredients would boost sales tax revenue by roughly $249 million a year.

Yet during an April 2018 meeting, the majority of these exemptions were left standing. Instead, in its August 2018 report, the Task Force recommended the following (in addition to taxing remote sellers):

• Expand the current sales tax exemption for coin-operated car washes to all car washes. This would result in an estimated loss of approximately $1.2 million in general revenue annually. Potential gains in revenue from a proposed fee based on water use couldn’t be determined.
• Repeal the sales tax exemption for magazine/publication subscription sales (except newspapers), provided the state requires remote magazine sellers to collect and remit tax on their Arkansas sales. This would generate approximately $1.5 million in general revenue per year.
• Repeal the sales tax exemptions for named entities and create new, more generalized exemptions for them. The Arkansas Department of Finance Administration (DFA) couldn’t provide a fiscal analysis for this.
• Repeal the sales tax exemption for four-wheelers and all-terrain vehicles purchased for farm use and replace it with a tax rebate. The DFA predicts there would be no immediate impact on state tax revenue, but there would likely be a reduction in the number of improperly claimed exemptions.
• Cap local sales and use taxes and regularly review all sales and use tax exemptions.

Simplifying the state’s tax code is a stated goal of the Task Force, and exempting all car washes instead of just coin-operated ones may be a step, if a small one, in that direction. Repealing the exemption for publication subscriptions (except newspapers) and turning a sales tax exemption into a sales tax rebate, maybe less so.

It all just seems like small potatoes compared to taxing remote sellers — but that’s what makes it textbook wacky tax policy.

With the Task Force’s final recommendations slated for review during the 2019 legislative session, businesses selling into Arkansas and beyond face growing sales tax complexity. That’s why it’s good to know there’s sales tax software to help with the insanity.