By Rob Moritz
Arkansas News Bureau

LITTLE ROCK — A state law passed three years ago to help streamline sales tax collections has unintentionally caused a budgeting nightmare in some localities around Arkansas.

The worst case so far appears to be in Phillips County, where officials said they learned out of the blue in July that the county, municipalities and the Port Authority owed a $550,000 rebate to a business.

“It’s painful and it was unexpected,” said Helena-West Helena Mayor Arnell Willis, who took office in January and learned this summer the city must give back $281,629 in sales tax money it collected.

Phillips County Judge Don Gentry says he also was caught off guard by the news the county owes $166,000.

“I didn’t realize,” Gentry said. “That’s a pretty good little bit of money.”
A number of local governments and taxing entities across the state have faced similar financial difficulties since the law that eliminated, in most cases, a $2,500 local sales tax cap took effect in 2008.

Along with removing the cap, the new law, approved in 2007 as lawmakers worked to get Arkansas’ tax code in line with a national effort to tax Internet purchases — referred to as the streamline sales tax — allows businesses to seek a rebate on their purchases for which sales taxes exceed $2,500.

“It’s a definite problem and it really makes budgeting difficult when a large rebate comes unexpectedly like that,” said Don Zimmerman, executive director of the Arkansas Municipal League.

Gentry and Willis said their inability to anticipate the financial hit put the city and county in a financial bind. The state Department of Finance and Administration is not required to reveal the name of the business seeking the rebate under the state Freedom of Information Act.

“They haven’t even told us who the rebate payment is for,” Willis said.
The mayor and county judge said they believe the rebate is owed to companies that installed a section of the Fayetteville Express Pipeline in Phillips County last year.

The $1.1 billion, 185-mile pipeline originates in Conway County and stretches east across the state, through Phillips County. It terminates in Panola County, Miss.

A spokesman for the project, Joe Hollier, referred questions to Dallas energy company that could not be reached for comment Friday.

Gentry and Willis said that if they had known in advance that a company was going to claim such a large rebate, they would have budgeted better, they said. Instead, both said they assumed brisk sales accounted for higher tax revenues.

The county, Helena-West Helena and several smaller communities in the county — Marvell owes $35,624.22, Elaine $19,103.71, Lake View $13,306.51 and Lexa $8,590.66 — have reached agreements with DF&A to pay the amount of the rebate in monthly installments. The Phillips County Port Authority must pay back $25,745.20.

Under the agreement, DF&A will take the rebate money off the top, before the cities, county or Port Authority receive their tax revenue payment from the state.

Willis and Becky Gattas, the Phillips County treasurer, said last week that paying back the money has forced the city and county to tighten their budgets for the remainder of the current fiscal year, and the next.

“It’s going to affect all of our funding for the next year when I’m doing our revenue projections,” Gattas said. “I’ve already adjusted my budget for this year, but when I get ready to do my revenue projections for next year … you’re talking about 12 months worth of loss. That’s hard.”

Since 2000, Arkansas and more than 30 other states have participating in a project to streamline tax codes for vendors to be able to tax online and mail-order purchases when the retailer is located outside the buyer’s home state.

John Theis, DF&A’s assistant revenue commissioner, said the project was created in response to a U.S. Supreme Court ruling that forbid states from forcing a business to collect their sales taxes unless the company has a physical presence in the state.

The high court said there were thousands of tax jurisdictions and a variety of definitions of why goods are taxable.

The idea of the project, Theis said, was that once the states made tax codes more streamline, Congress would then enact federal law allowing states to begin taxing Internet sales, which a University of Tennessee study has estimated would generate about $100 million in annual revenue for Arkansas.

The Streamline Sales Tax Project includes tax law simplification, more efficient administrative procedures and use of computer technology to reduce the burden of tax collection on those out-of-state companies.

In 2008, several new laws approved by the Legislature related to the project went into effect, including one that eliminated in most cases the local sales tax cap, which limited the application of local sales taxes to the first $2,500 of a taxable amount.

Under the new law, the cap remained on motor vehicles, aircraft, watercraft and modular, manufactured or mobiles homes.

Businesses, not individuals, are eligible under the law for a sales tax rebate on other purchases where the local sales tax exceeds $2,500.
To qualify for the rebate, businesses must prove the purchases of personal property or a taxable service and submit a rebate request within six months, Theis said.

The affected county and cities are notified that they must return the excess sales revenue because a business has requested it, Theis said. The FOI does not require the fiscal office to inform the city or county which business requested the rebate.

“It is a constant issue around the state,” Theis said. “When the law was changed, DF&A sent something to all cities and counties saying you may have situations where you get a windfall one month and do not anticipate that you are going to keep that money. Prepare that you may have to give it back.”

Theis said some cities and counties have not followed DF&A’s advice.
“They may end up with a surprise,” he said.

Willis said the rebate payment is especially difficult for his city, which is already paying about $700,000 in federal income tax withholdings that the city failed to pay to the IRS in the past five years.

“We’ve been hit hard,” Willis said, noting he has had to lay off 15 city employees since he took office in January, and more layoffs are expected. “There is no question about it, it was already challenging and this (rebate payment) is going to make it more challenging.”

Not all local governments have been so unprepared.

In Little River County, County Judge Clayton Castleman said he worked with Ash Grove Cement in Foreman for about two years in planning a company expansion. During the process, company officials let him know they planned to seek a sales tax rebate on materials purchased for the expansion, Castleman said.

The rebate ended up being about $1.2 million.

“The county judge has to be involved in the economic issues,” he said. “When they started construction, their executives and I talked and we informed the cities and other taxing entities that there was a good possibility they would seek the rebate.”

The advance warning allowed the county, the cities of Ashdown, Foreman, Ogden, Winthrop and Wilton, along with Little River Memorial Hospital, Cossatot Community College and the various sanitation programs, to prepare in advance for the financial hit.

“We adjusted our budget some, but we knew for a while and that allowed us to plan better,” Castleman said.