Taxes Levied By The State

• Corporate Income Taxes
• Personal Income Taxes
• Sales and Use Tax
• Unemployment Insurance Tax
• Corporate Franchise Tax
• Other Taxes

Corporate Income Tax

Domestic corporations and all foreign corporations doing business in the state are subject to tax on the net income at the following rates:

     First  -   $3,000:  1%
     Next   -   $3,000:  2%
     Next   -   $5,000:  3%
     Next   -  $14,000:  5%
     Next   -  $75,000:  6%

Net taxable income greater than $100,000 is taxed 6.5% of the entire amount of the total income. When business income is derived from activity which is taxable both within and without Arkansas, it is apportioned for taxation according to the percent of property and payrolls utilized in the state and sales attributable to Arkansas pursuant to the multi-state tax compact.

A corporation doing business in Arkansas and sustaining a net operating loss may carry forward the loss to the next succeeding taxable year and annually, thereafter, for a total period of five years succeeding the year of such loss and deduct it from gross income except in the case of an operating steel mill (Act 48 of 1987), which may carry forward the loss for ten years.

Corporations that are members of an affiliated group that files a federal consolidated corporate income tax return may elect to file an Arkansas consolidated corporate income tax return. However, only those corporations in the affiliate that have taxable income from sources within Arkansas are eligible.

Arkansas has also adopted the provisions of Subchapter S of the Federal Internal Revenue Code of 1986 (Title 26, U.S.C., Sections 1361 through 1379).

Incentives

Arkansas does not require the unitary method of reporting income for either multi-state or multi-national corporations.

New or expanding businesses participating in the Advantage Arkansas Program are eligible for a credit on corporate income tax for each new job. The credit is 100 times the average wage of the new worker.

Companies with a day care facility are eligible for a credit of 3.9% of the total annual payroll of employees working in the day care facility.

Donations of new state-of-the-art equipment to qualified research programs of the Arkansas Science and Technology Authority merit a 33 percent income tax credit. If the credit exceeds 50 percent of the tax liability, the remainder can be carried forward for three years (Act 759 of 1985).

Definitions

Domestic - When applied to any corporation or association, including partnership, means created or organized in the state of Arkansas.
Foreign - When applied to any corporation or association, including partnership, means created or organized outside the state of Arkansas.
Net Income - That income reported on the federal return, with certain additions and deductions prescribed by Arkansas Law, such as adjustments for state income tax deductions, adjustments for capital gains and losses, and deductions for energy-saving devices purchased for use by the corporation.

The accompanying example shows the method of apportioning business income to Arkansas and the computations of tax due the state for a hypothetical firm with business income amounting to $1,250,000.

Example of Apportioning Income and Computing Tax Due

                           Total            Arkansas     % in Arkansas

Plant, property,         $ 3,100,000        $  750,000         24%
and equipment
(beginning of year)


Plant, property,         $ 3,300,000        $  850,000         26%
and equipment
(end of year)

Total                    $ 6,400,000        $1,600,000         25%
Average (divided by 2)   $ 3,200,000        $  800,000         25%
Payrolls                 $   900,000        $  180,000         20%

Sales and other
apportionable income     $25,000,000        $3,750,000         15%
Sum of percentages                                             60%
Average (divided by 3)                                         20%

Income subject to tax in Arkansas is the total income multiplied by the average of the sum of percentages in Arkansas ($1,250,000x20%=$250,000).

Arkansas state income tax computations based on $250,000 and Arkansas tax rates:

                             Income Amount    Amount of Tax

Amount Taxable at 6.5%         $250,000         $16,250

Personal Income Tax

Resident individuals, estates and trusts, non-resident individuals, estates and trusts deriving income from within the state are subject to a tax on their net income at the following rates:

Net Taxable Income      Rate

First $ 2,999           1.0%
Next  $ 3,000           2.5%
Next  $ 3,000           3.5%
Next  $ 6,000           4.5%
Next  $10,000           6.0%
$25,000 or over         7.0%

To arrive at the net taxable income, the taxpayer may elect to itemize deductions or to use the standard deduction of $1,000 or 10 percent of gross income, whichever is less. Federal income tax is not deductable from income subject to Arkansas' personal income tax.

A credit is allowed to resident individuals for the amount of income tax paid to any other state not to exceed what the tax would be on out-of state income if added to the Arkansas income and calculated at Arkansas income tax rates. The following personal tax credits are allowed:
Single individuals, $20.00; blind or deaf taxpayers, additional $20.00.
Head of family, $40.00.
Dependents with gross income of less then $3,000, $20.00.
Fiduciaries, $20.00.

Sales and Use Taxes

The Arkansas sales tax is 5.125% of the gross receipts from the sales of tangible personal property and certain selected services. The tax is paid by the consumer at the point of final sale and is computed on the total consideration received without any deduction for expenses. "Sale" includes the lease or rental of tangible personal property. Taxable services include sales of gas, water, electricity, telephone and telegraph service and repair services.

The Arkansas compensating use tax of four and one-half percent is levied on tangible personal property purchased from outside the state of Arkansas for use, storage, or consumption within the state of Arkansas.

Exemptions from Sales and Use Taxes include:

• Sale of newspapers, advertising space in newspapers and publications, and billboard advertising services.
• Property which becomes a recognizable, integral part of property manufactured, compounded, processed, or assembled for resale.
• Machinery and equipment used directly in manufacturing which are purchased for a new manufacturing facility or to replace existing machinery or equipment. Machinery and equipment required by Arkansas law to be purchased for air or water pollution control are also exempt.

  The term "used directly" includes molds and dies that determine the physical characteristics of the finished product and/or its packaging materials; testing equipment to measure the quality of the finished product; computers and related peripheral equipment that directly control and/or measure the manufacturing process; machinery and equipment that produce steam, electricity, or chemical catalysts and solutions that are essential to the manufacturing process but which are consumed during the course of the manufacturing process and do not become necessary and integral parts of the finished product.

  The term "manufacturing" includes, in addition to those operations commonly understood within their ordinary meaning, mining; quarrying; refining; the extracting of oil and gas; cotton ginning; the drying of rice, soybeans and other grains; the manufacturing of feed; the processing of poultry; the processing of eggs and livestock; the hatching of poultry; printing of all kinds; the processing of metal into grades and bales for further processing; and the rebuilding or re-manufacturing of used parts and retreading of tires for automobiles, trucks, and other mobile equipment powered by electrical or internal combustion engines or motors, provided that the rebuilt or re-manufactured parts of retreaded tires are not sold directly to the consumer but are sold for resale.

• Electricity used in the production of aluminum metal by the electrolytic reduction process.
• Barges, towboats, and vessels of at least 50-ton load displacement.
• Feedstuffs used in livestock production, including poultry.
• Agricultural chemicals used in the commercial production of agricultural products.
• Sewer, sanitation, garbage service charges.
• Sale of any item of new or used farm equipment or machinery.
• Sales of aircraft manufactured or substantially completed in Arkansas and sold to a purchaser for use outside the state.
• Parts or other tangible property incorporated into or which become a part of commercial jet aircraft subcomponents.
• Chemicals and other ingredients used in the production of yeast.
• Natural gas used as fuel in the process of manufacturing glass.
• Waste fuel used for manufacturing.
• Forms which are consumed or destroyed during the manufactuirng of the item for which the form was built.
• Repair or maintenance services performed on railroad cars, parts or equipment brought into the state only to be repaired, refurbished, modified, or converted.
• Specialized motion picture equipment when used in conjunction with the Motion Picture Incentive Act.
• Electricity and natural gas used in connection with the operation of an eligible steel mill.

Refunds and Credits on Sales and Use Taxes

Sales and use taxes imposed on materials and equipment used for new construction or expansion for companies in the Arkansas Enterprise Zone Program are subject refund by the state to the company making the investment.

Any manufacturer who has been in continuous operation in Arkansas for at least two years and engages in a construction project or expansion totaling more than $5 million is eligible for a tax credit against sales and use tax liability of seven percent of total project cost. The credit cannot exceed 50 percent of the manufacturer's liability in any one year and can be carried over for a period of six years.

Unemployment Insurance Tax

An employer with no previous employment record in Arkansas is taxed at 3.5 percent on the first $9,000 of each employee's earnings. This rate stays in effect until the company's experience with its work force is established, usually three to five years. Once the company's employment record has been established by the Arkansas Employment Security Department, the contribution rate is based on the company's history.

New employers who do not experience much fluctuation in their work force after three years of benefit experience could have a contribution as low as 1.2 percent assigned. The rate could go as high as 7.1 percent if benefits exceed contributions for more than two years. The average contribution rate for Arkansas employers in 1996 was 2.0 percent and the average weekly benefit for 1996 was $169.97.

Corporate Franchise Tax

The Arkansas franchise tax is an annual tax imposed upon domestic corporations for the grant of charter privileges and upon foreign corporations for the privilege of doing business.

The tax is twenty-seven one-hundreds of one percent (0.27%) of that portion of the par value of the outstanding capital stock that the value of its real and personal property in Arkansas bears to the total value of the real and personal property of the corporation.

Corporations without authorized capital stock shall pay an annual tax of $100.00 regardless of valuation. Rates vary beginning at $50.00 per year.

Property Tax Exemptions and Incentives

• Arkansas has a "free port law" which exempts from property tax those finished goods in transit or awaiting shipment to out-of-state customers.
• Raw materials or finished goods stored within a Foreign Trade Zone or Subzone are exempt. Foreign and domestic materials may be co-mingled, re-assembled, replaced, re-packaged, processed, used in manufacture, stored, or simply held tax-free with duties delayed until goods or materials are sold or moved out of these zones.
• Real or personal property financed by industrial revenue bonds, and general obligations bonds are exempt from property taxes during the lease-amortization period in which a local government retains title to the property. Payments by industrial concerns to local governments in lieu of property taxes are generally encouraged and negotiated between the parties involved.
• Capital invested in textile mills, for the first seven years from the date of location of the mill, is exempt.
• Raw materials or finished goods stored within the Foreign Trade Zone in Little Rock are exempt. Foreign and domestic materials may be co-mingled, re-assembled, replaced or re-packaged.

Gross Receipts Tax

All incorporated municipalities, with voter approval, may levy a tax on gross receipts from sales within city boundaries up to a one percent rate. County governments also may levy up to a one percent tax on gross receipts from sales with voter approval. The county sales tax is applicable to municipal areas within the county whether or not a municipal sales tax is also effective. The municipal and county sales tax base forms with the state sales tax, but with a $25 limit on any one purchase. Cities and counties may pledge all or any portion of their local sales and use tax receipts to secure bonds used for the financing of industrial projects (Act 871 of 1985).

Advertising and Promotion Tax

Cities of the first class may also levy a three percent tax on the gross receipts of hotels, motels, and other businesses selling prepared food for consumption on the premises, to be used exclusively for advertising and promotion of the city, for the acquisition of a convention center within the city (including bond issuing authorization), and/or the establishment and operation of other tourist-oriented facilities including parks and other recreational facilities.

Income Tax

Occupational and Utilities Taxes

Municipalities may levy an occupational tax on persons or firms engaged in trade, business, or profession within the corporate limits of that municipality. In addition, they may levy a franchise tax on public utilities.

Entertainment Tax

Municipalities can license and tax the manufacture and sale of vinous (except native wines), spirituous, or malt liquors and amusement games, merchandise, and service vending machines.

Motor Vehicle Tax

Counties and cities may levy an annual motor vehicle tax within certain limits and procedures as described by law.

Aviation Fuel Tax