1 Introduction Tax Desk Book USA, ARKANSAS Rose Law Firm CONTACT INFORMATION: Adam H. Crow Dan C. Young Rose Law Firm 120 East Fourth Street Little Rock, AR Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.) The following are the majority of the taxes that are imposed in the State of Arkansas: income tax, gross receipts (sales) and use tax, franchise tax, property tax, and real property transfer tax. A brief summary of each tax is set forth below. The Arkansas income tax is imposed by the State of Arkansas upon resident and nonresident individuals, estates, trusts, and corporations deriving income from within the state. Additional information about the Arkansas income tax is set forth in the answers to questions The Arkansas gross receipts (sales) tax is a tax on gross receipts from the sale or rental of tangible personal property and certain selected services. The Arkansas use tax is a tax on items purchased out of state, but used, stored, or consumed within Arkansas. The Arkansas gross receipts tax and the Arkansas use tax are imposed by the State of Arkansas, as well as by certain counties and municipalities. Additional
2 information about the Arkansas gross receipts tax and the Arkansas use tax is set forth in the answers to questions The Arkansas franchise tax is imposed by the State of Arkansas on all domestic and foreign (Arkansas-based and non-arkansas-based) corporations, associations, joint stock companies, business trusts, limited liability companies, and all other organizations exercising or attempting to exercise corporate-type acts in Arkansas. The Arkansas franchise tax is imposed at the rate of 0.3% on the corporation s outstanding capital stock that is apportioned to Arkansas. There is a tax of $300 on non-stock corporations and mutual assessment insurance companies. The Arkansas property tax is levied on both real and tangible personal property by counties, municipalities, school districts, and certain improvement districts. The State of Arkansas is constitutionally prohibited from levying any statewide property tax. Property taxes in Arkansas are established by multiplying the millage rate to the assessed value of the taxpayer s real and personal property. The local millage rate determines the amount taxable per $1,000 of assessed value. A mill, or one onethousandth of a dollar (.001), is the basis for Arkansas property taxes. There is a constitutional limit on the maximum number of mills that can be levied by a city (up to 20) or county (up to 21). Conversely, school districts must levy at least a 25-mill tax on property in the district with no maximum limit. The Arkansas real property transfer tax is imposed by the State of Arkansas on conveyances of real property. The tax does not apply to certain transfers, including mortgages, leases, or transfers between corporations, partnerships, limited liability companies, or other business entities or between a business entity and its shareholders, partners, or members incident to the organization, reorganization, merger, consolidation, capitalization, asset distribution, or liquidation of a corporation, partnership, limited liability compa INCOME TAXES AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS Calculation of Income/ Profit Taxes 2. How is the taxable base determined? To arrive at taxable income, a taxpayer starts with his or her total income and reduces it by the deductions permitted under Arkansas law. The corporate income tax base is a corporation s net taxable income, which is generally represented by the corporation s profits.
3 3. What revenues are included? An individual taxpayer s income includes wages, salaries, tips, taxable interest and dividend income, business and farm income, realized net capital gains, income from rents, royalties, trusts, estates, partnerships, taxable pension and annuity income, and alimony received. A corporation s income generally includes gross sales minus cost of goods sold. Other items such as federally-exempt interest, including interest on another state s obligations, bank deposits and mortgages, taxable dividends, except those received from 80%-owned subsidiaries and capital development corporations, and rents and royalties, are added to arrive at gross income. 4. What deductions are allowed? To arrive at net taxable income, individual taxpayers may either itemize their deductions or use the standard deduction of $2,000 per taxpayer (including $2,000 per spouse when married filing jointly). The amount paid to the federal government in federal taxes is not deductible in the calculation of the Arkansas income tax. A corporate taxpayer is entitled to deduct from its gross income the cost of doing business. Deductible costs include the cost of materials, wage payments to employees, and interest payments on loans where the corporation is the debtor. Depreciation, or the decline in value of tangible assets, is also a deductible cost. Arkansas allows the deduction of out-of-state manufacturing or merchandising costs, interest income attributable to federal or Arkansas governmental obligations and capital corporation bonds, net operating losses for a carry-forward period of five years, capital losses, charitable contributions (within limits), and depreciation (often consistent with federally allowed depreciation). Taxes paid to other states are deductible from Arkansas corporate income while income taxes paid to the federal government are not. 5. What are the major expenses that are not deductible? No answer provided 6. What are the applicable federal rates? The federal income tax rates for individuals are composed of marginal rates of tax ranging from 10% to 35%. There are special, lower rates for many long-term capital gains.
4 The federal income tax rates for corporations are composed of marginal rates of tax ranging from 15% to 35%. There are no special rates for a corporation s capital gains. 7. What are the applicable state and/ or other local rates? The Arkansas income tax rates for individuals are composed of marginal rates of tax ranging from 1% to 7%. The Arkansas income tax rates for corporations are composed of marginal rates of tax ranging from 1% to 6.5%. If a corporation does business both inside and outside the state of Arkansas, the net income of the corporation is apportioned according to the percentage of property and payroll in Arkansas and the amount of sales attributable to Arkansas. The resulting amount is then subject to the Arkansas rate structure. 8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc? In Arkansas, 30% of long-term net capital gains are exempt from tax, but 100% of short term net capital gains are taxable. For qualified small businesses, if certain holding requirements are satisfied, then gross income does not include a portion or all of the gain from the sale of qualified small business stock. All of the gains from the sale of a qualified venture capital investment are not included in gross income, if the investment has been held by the taxpayer for five years. 9. How are operating losses handled? A corporation s net operating losses are deductible and may be carried forward for five years. In the case of the acquisition of assets of one corporation by another corporation, the acquiring corporation succeeds to and takes into account any net operating loss carryover apportionable to Arkansas. The net operating loss may be claimed only when not less than 80% of the voting stock of each corporation is owned by the same person or where prior to the acquisition the acquiring corporation owned at least 80% of the voting stock of the acquired corporation. 10. How are capital losses handled? Long term capital gains are netted with long term capital losses and short term capital gains are netted with short term capital losses to compute net long term capital gains or losses, and net short term capital gains or losses. An individual taxpayer m
5 Territorial Rules 11. What are the residence rules? Residents are those taxpayers domiciled in Arkansas (those with a settled connection for legal purposes) as well as those maintaining a permanent home in the state and spending more than six months per year within the state. All other taxpayers deriving income from Arkansas sources are taxed as non-residents. These Arkansas sources include property as well as income from businesses or occupations carried on in Arkansas. Non-residents are subject to the same tax and rates as residents, but the tax is imposed only as to the net income earned within Arkansas. 12. Is worldwide income taxed? Income derived from Arkansas sources is taxed by the State of Arkansas. 13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others? The State of Arkansas provides a tax credit to individuals for taxes paid to another state. This credit is generally available when Arkansas and another state both seek to tax the same income. Withholding Taxes 14. What are the rates on dividends for withholding taxes? A pass-through entity, such as a partnership or S corporation, is required to withhold Arkansas income tax at the highest Arkansas income tax rate on the share of income of the pass-through entity that is derived from or attributable to sources within the State of Arkansas and distributed to a nonresident member. There are certain exceptions to the withholding requirements. For example, if the pass through entity has filed with the Director of the Arkansas Department of Finance and Administration the nonresident member's signed agreement to timely file an Arkansas nonresident individual or trust income tax return, to pay any tax due on the return, and to be subject to the jurisdiction of the Department of Finance and Administration in the Arkansas courts for the purpose of determining and collecting any Arkansas income tax together with interest and penalties owed by the nonresident member, then the withholding requirements do not apply.
6 Arkansas employers are required to withhold Arkansas income taxes from the wages of employees who work within the State of Arkansas. The withholding requirements can be computed by using a formula or tables established by the State of Arkansas. 15. What are the rates on royalties for withholding taxes? 16. What are the rates on interest for withholding taxes? 17. What are the rates of withholding tax on profits realized by a foreign corporation? 18. Please list any other rates on withholding taxes that we should be aware of. Tax Returns and Compliance 19. What is the taxable reporting period? For individuals, the taxable year for Arkansas income tax is a calendar year, beginning January 1 and ending December 31. Corporations may elect either a calendar or fiscal taxable year for Arkansas income tax purposes. 20. What are the due dates for the filing of tax returns? Individual income tax returns are due April 15. Income tax returns for corporate calendar year taxpayers are due March 15 or on the 15th day of the third month following the end of the fiscal year for corporate fiscal year taxpayers. When a taxpayer reasonably anticipates that the Arkansas income tax liability for the income year will exceed $1,000, it must file a declaration of estimated income tax with the Arkansas Department of Finance and Administration. If the estimated tax liability is less than $1,000, the payment must be made at the time the declaration is filed. If the estimated liability is greater than $1,000, the payment may be made at the time the declaration is filed or in four installments. The first payment must be
7 made on the 15th day of the fourth month of the taxable year, to be followed by payments on the 15th day of the sixth and ninth months with the final payment to be made by the 15th day of the last month of the taxable year. Arkansas gross receipts and use tax returns are due monthly to the Arkansas Department of Finance and Administration. Some large retailers must remit the tax payment in advance while some smaller retailers may file quarterly or yearly returns based on the amount of tax actually due. Franchise tax returns are due May What are the key compliance requirements? Compliance requirements, including forms and instructions, may be found online at The physical and mailing address for the Arkansas Department of Finance and Administration is as follows: Corporation Income Tax 1816 West Seventh Street Room 2250 Ledbetter Building Little Rock, AR P.O. Box 0919 Little Rock, AR Individual Income Tax 1816 West Seventh Street Room 2300 Ledbetter Building Little Rock, AR P.O. Box 3628 Little Rock, AR Office of Excise Tax Administration 1816 West Seventh Street Room 2420 Little Rock, AR P.O. Box 8054 Little Rock, AR 72203
8 22. Are there any other requirements that we should be aware of regarding tax returns and compliance? INDIRECT TAXES 23. Are there any indirect taxes in your jurisdiction? A gross receipts (sales) tax and a use tax are both imposed in the State of Arkansas. 24. How does it operate? Is it a VAT or a sales tax? The Arkansas gross receipts (sales) tax is a tax on gross receipts from the sale or rental of tangible personal property and certain selected services. The Arkansas use tax is a tax on items purchased out of state, but used, stored, or consumed within Arkansas. The taxpayer for the Arkansas gross receipts tax is the seller of goods or the provider of services, and is the party responsible for the payment of the tax, but may pass along that tax to consumers. The taxpayer for the Arkansas use tax is the individual or entity that purchases items out of state, but uses, stores, or consumes those items within Arkansas, and is the party responsible for the payment of the tax. 25. How is the taxable base determined? The Arkansas gross receipts tax applies to a sale, which is defined as the transfer of either title or possession of tangible personal property for valuable consideration. The consideration paid or to be paid is the basis for the gross receipts tax. A sale also includes leases, barters, or rentals. In the case of a lease or rental, the basis for the tax is the rental or lease payment. In the case of services, the consideration provided or to be provided for the service is the basis for the gross receipts tax. The Arkansas use tax is applied to items purchased out of state, but used, stored, or consumed within Arkansas. The use tax rate is equal to the difference between the rate of tax paid outside of Arkansas and the Arkansas rate, provided that the Arkansas rate is higher. The use tax does not apply to services performed outside of Arkansas. 26. What are the applicable rates? The Arkansas gross receipts (sales) or use tax is generally imposed at the flat rate of 6% by the State of Arkansas. Municipalities and counties may also impose a gross receipts or use tax, and currently the standard combined state and local rates range
9 from 6% to 10.75%. The State of Arkansas imposes a lower rate on the sale of natural gas and electricity sold to a manufacturer, and on the sale of food and food ingredients. Additional excise taxes are imposed upon certain items, such as tobacco, gasoline, and alcohol. 27. Are there any exemptions? A variety of goods or services are exempt from the Arkansas gross receipts tax and Arkansas use tax. Some of the most important exemptions are for machinery and equipment used in producing articles of commerce, manufacturing forms, gas and energy produced from biomass, isolated sales, and most resale sales. 28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction? No. PARAFISCAL CONTRIBUTIONS 29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)? No. 30. How do they operate? 31. How is the taxable base determined? 32. What are the applicable rates? 33. Are there any exemptions?
10 INHERITANCE AND GIFT TAXES 34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.? No 35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base. N/A OTHER MATTERS 36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.? Yes 37. If so, please indicate if there are any of the following: anti-deferral regimes; transfer pricing provisions; tax avoidance measures like legislated General Anti- Avoidance Rules, etc.; controlled foreign companies regulations; thin capitalization rules The State of Arkansas has not adopted any anti-deferral regimes, transfer pricing provisions, general anti-avoidance rules, controlled foreign companies regulations, or thin capitalization rules. 38. List the countries in which there are tax treaties. This could impact the withholding taxes on various distributions and to the extent possible, please itemize them below. Please include the impact upon withholding on compensation, interest, dividends or other distributions for each country listed. The State of Arkansas has entered into the Multistate Tax Compact, which was enacted for the purpose of facilitating the proper determination of state and local tax liabilities of multistate taxpayers, including the equitable apportionment of taxes and settlement of apportionment disputes, to promote uniformity or compatibility in significant components of tax systems, to facilitate taxpayer convenience and compliance in the filing of tax returns and in other phases of tax administration, and to avoid duplicative taxation.