The year 2025 looks to be an interesting one in tax policies for the State of Arkansas. With the continued reduction in individual and corporate income tax rates, sales tax issues will be front and center for the legislators. With a populus demanding more services and inflation continuing its rise, the State is needing a revenue boost to stay at the current levels of spending not just increasing spending.
There are two ways this is going to be accomplished:
1. Begin taxing more services.
2. Stricter and more forceful audits being conducted by the Department of Finance (DFA)
The rumbling from the meetings is that most exemptions need to be revenue neutral. That’s to say that if an exemption is granted, make-up revenue will need to come from another source so that there is not a loss in revenue. To make up the revenue for the exemptions that are proposed will taxing services move to the forefront, our guess is yes, there will be more services that become taxable beginning late in 2025.
We are seeing stricter compliance from the audit staff in areas that have largely been ignored in the past. The recent supreme court case is a great example of stricter compliance with the law. In an industry that provides courtesy cars, and cars for employees and family members to drive, there has never been an issue. Now there is an issue in that DFA looked at these items as a withdrawal from stock and assessed the dealership tax on these vehicles. Technically DFA is correct but has long turned the other way on these types of transactions.
Is the Ford dealership court case the beginning of “stricter compliance”? We believe yes that this is the beginning of stricter compliance along with the auditing of contractors and their adherence to Gross Receipts Regulation 21 (GR-21). This is a well written regulation small service providers are not aware of and get caught behind the language that “a contractor is deemed to be end-user of all tangible personal property in performance of a real property service”.
The revenue neutral recommendations and stricter compliance on audits are just the beginning and the 2025 legislative session is going to be interesting.
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