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STARTING AND OPERATING A BUSINESS IN ARKANSAS Copyright © 2009, Michael D. Jenkins CHAPTER 18
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION I. INTRODUCTION Arkansas has a fairly typical tax and legal structure under which businesses must operate. Like most states, Arkansas imposes an income tax, a franchise tax on corporations, a sales and use tax, various excise taxes, with property taxes imposed at the local level. The state has also adopted a limited liability company (LLC) law, so that businesses operating in Arkansas in LLC form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. Overall, Arkansas has the second-lowest per-capita tax burden of any state in the nation, and very competitive manufacturing wages, among the five lowest states in the nation, at only about 80% of the national average. While many people outside the state may still think of Arkansas as being a primarily rural state, it has seen a rapid growth in manufacturing in recent decades, so that Arkansas now has over 22% of its work force engaged in manufacturing, compared to 15.5% nationally. The entire state is an enterprise zone, in which businesses can earn corporate tax credits for each net new job created, and double credits in areas with high unemployment, and purchases of manufacturing equipment are exempted from sales taxes. A Massachusetts Taxpayers Foundation study of state taxes in 2004 (based on 2002 data) found that Arkansas ranked 48th (or third best, put differently) in property taxes in the nation, in relation to residents' income, at only $16 of tax per $1,000 of income. Alabama had the lowest property taxes, at $13 per $1,000 of income, in comparison, and Delaware was second-lowest, at just under $16 per $1,000 of income, while Maine had the highest property taxes, at $55 per $1,000 of residents' income. At present, the Arkansas economy is relatively sound, in terms of the level of unemployment, which was considerably lower than national levels, at 5.7% in November, 2008, compared to a national unemployment rate of 6.8, but has increased somewhat from a year earlier, when the unemployment rate in Arkansas was 5.5%. The rapid weakening in the national economy has not yet affected Arkansas greatly, due in large part to increased natural gas exploration and production activity in the past year. In addition, Arkansas has a very low cost of living, compared to national averages, making it an attractive place for businesses to locate and to attract employees. To view the latest federal Bureau of Labor Statistics unemployment rate data for Arkansas or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Arkansas can operate as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity. To be taxed as an S corporation under Arkansas law, it is necessary for a corporation that has made a federal S corporation election to also file Form AR1103 to elect S corporation status in Arkansas, and it must also be registered as a corporation with the Arkansas Secretary of State. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV below. (b) Sole Proprietorships. In general, sole proprietorships in Arkansas can start a business with no legal formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. In addition, if you sell any kind of tangible personal property at retail or provide certain types of services, you may be required to obtain a sales tax license and collect sales tax, as discussed in Section IV(d). No separate tax form filing is required, generally, for a sole proprietorship, under the Arkansas income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your state personal income tax return. See Section IV(c) for information on the Arkansas income tax and filing requirements for individuals. Doing business as a sole proprietor in Arkansas is generally much simpler than operating as any other kind of business legal entity. As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any federal or state income tax from wages, or obtain workers' compensation coverage for yourself. However, if your sole proprietorship operates under an assumed or fictitious business name (trade name), it will be required to register the name with the county or counties where you do business, as discussed in Section IV(g). (c) Partnerships. Arkansas's partnership laws allow creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, in general. State law also allows for the creation of a limited liability partnership, in which no partner has personal liability (subject to certain exceptions) and for a limited liability limited partnership (LLLP), which is a limited partnership that also elects limited liability partnership status. Partnerships, as entities, are not subject to state income tax in Arkansas. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners). Partnerships are required to file an annual tax information return with the state. For details on Arkansas partnership tax return filing requirements, see Section IV(c). A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
As a rule, general partnerships in Arkansas can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships. While not required to do so, a partnership may also file a Statement of Partnership Authority with the Arkansas Secretary of State's office, designating which partners in the partnership have (or do not have) the authority to enter into specified types of transactions, such as real estate transactions. The Statement of Partnership Authority expires after five years, unless it is renewed. The filing fee is $50.00. General partnerships (but not limited partnerships or limited liability partnerships) are also required to register an assumed or fictitious business name with the county clerk where they do business, as discussed in Section IV(g). A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under Arkansas law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a Certificate of Limited Partnership, Form LP-01 for a domestic limited partnership or an application for a certificate of authority, Form LPF-01 for a foreign limited partnership. The appropriate form is to be filed with the office of the secretary of state. There is a $50 filing fee for a domestic limited partnership, and a $300 fee for a foreign limited partnership. Unlike most states, Arkansas law allows limited partnerships, as well as general partnerships, to register as limited liability partnerships (LLP's). Thus, a limited partnership that registers as an LLP becomes a limited liability limited partnership, or LLLP. Doing so provides limited liability protection for the general partners of a limited partnership. Limited partnerships and LLLP's are required to file annual reports and pay a $15 fee each year. For information on limited partnership filing requirements, see the contact information for the offices of the secretary of state, listed in Section VI(a). LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLP's) are a relatively new form of partnership permitted under the laws of Arkansas, under legislation first enacted in 1997. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and Arkansas state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. Partners in a general partnership or the general partners in a limited partnership can obtain a significant degree of limited liability by simply registering the partnership with the state as an LLP. To form an LLP in Arkansas, you must register as an LLP with the secretary of state and pay the applicable filing fees. Arkansas has enacted a new version of the Uniform Partnership Act, effective since January 1, 2000. Under the new Act, the initial filing of documents by a domestic limited liability partnership (LLP) is subject to a $50 fee, or $300 for a foreign LLP. All other filing fees with the secretary of state for LLP's are set at $15, including annual reports, which are required under the new Act. Under the new Uniform Partnership Act, Arkansas law now also provides for the formation or registration of limited liability limited partnerships (LLLP's), as well as LLP's. LLLP's are limited partnerships that elect LLP status. In a limited partnership that elects LLLP status, the general partners can obtain the liability protection of the LLP law. The fees charged for LLLP's are the same as for LLP's. For more information on LLP and LLLP registration and reporting requirements, see the contact information for the offices of the Arkansas Secretary of State, listed in Section VI(a). Note that one potential drawback of LLP's, if you will do business in other states besides Arkansas, is that you may not enjoy limited liability with regard to creditors of the LLP if you do business in such states. Some states, like California and New York, only recognize certain types of professional partnerships as LLP's. Such states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. (d) Corporations. To form a corporation in Arkansas, you must file articles of incorporation with the Arkansas Secretary of State and pay a fee of $50. A foreign corporation (one formed under the laws of another state or a foreign country), must obtain a certificate of authority before it may legally conduct business in Arkansas, by filing an application for a certificate of authority with the Arkansas Secretary of State and paying the applicable filing fee of $300. For more information on filing articles of incorporation or applying for a certificate of authority to do business in Arkansas, see the contact information for the offices of the secretary of state, listed in Section VI(a). In addition to paying federal income taxes on its income, a corporation that does business in Arkansas must also file corporate income tax returns with the state. See Section IV(c) for a discussion of state corporate income tax rates and tax return filing requirements. Corporations that do business in Arkansas are subject to a corporate franchise tax, which is also discussed in Section IV(c). The following business activities are not considered to be "transacting business in Arkansas" and thus will not require a foreign corporation to obtain a certificate of authority to do business in the state:
For tax forms and more information on corporate income and franchise taxes in Arkansas, see the contact information for the offices of the Department of Finance and Administration, and the Arkansas Secretary of State, respectively, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. Arkansas recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment. To qualify as an S corporation for Arkansas state income tax purposes, a corporation must meet three initial requirements:
See Section IV(c) for more on the income tax treatment of S corporations under Arkansas tax laws. (f) Limited Liability Companies. Arkansas, like all other states, has now adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Arkansas may also choose to operate in the form of an LLC. In most states, including Arkansas, LLC's are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal income tax purposes. See Section IV(c) for a discussion of the income tax treatment of LLC's under Arkansas tax laws. To form an LLC under the laws of Arkansas, one or more persons must file articles of organization with the Arkansas Secretary of State, which must be accompanied by filing fees of $50. Foreign LLC's, those formed under the laws of another state, must obtain a certificate of authority to do business in Arkansas, by filing an application for a certificate of authority with the Arkansas Secretary of State and paying a filing fee of $300. The filing fees are reduced by 10% for persons who file electronically, under a new fee schedule that went into effect on January 1, 2006. LLC's, like corporations, are also subject to the Arkansas franchise tax, but LLC's pay only a flat annual tax of $150. Note that Arkansas was one of the first few states that allowed an LLC to be owned by only one person, and even provided that such an LLC would be treated like a sole proprietorship for state income tax purposes. IRS Regulations were finally amended when the IRS eventually came around to this same position, and now also permit one-person LLC's to be taxed as sole proprietorships ("disregarded entities") for federal income tax purposes, as well. For more information on filing articles of organization for an LLC, see the contact information for the offices of the Arkansas Secretary of State, listed in Section VI(a). III. BUSINESS ACQUISITIONS (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales and use tax or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Arkansas is one of the business-friendly states that has repealed its bulk sale laws a few years ago, so you need not be concerned with this requirement any longer in Arkansas. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. In Arkansas, you should obtain tax releases for sales and use taxes from the Revenue Division of the Arkansas Department of Finance and Administration, and for state unemployment taxes from the Arkansas Department of Workforce Services. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. To obtain the seller's favorable experience rating as a successor employer, you will need to apply within 30 days after the acquisition to the Department of Workforce Services, requesting that you be treated as a successor employer, if you are acquiring only a portion of the seller's business. Both buyer and seller must agree to the experience transfer in such cases. When you acquire the entire business of the seller and its operation is continued, your business will automatically be treated as a successor employer, as though the acquired employees had worked for you for the entire year. If your business is already an experience-rated employer, and you acquire all or a segregable part of another business and its employees, you will continue to use your existing tax rate for the rest of the year. If yours is a new business without employees when you acquire all or a segregable part of an existing business, you will succeed to the seller's experience rating through the end of the rate year. PLANNING POINT: EXAMPLE: IV. ARKANSAS TAXES AND OTHER GENERAL REQUIREMENTS (a) In General.
Arkansas has a fairly typical tax and regulatory structure, but
is generally a business-friendly state, with relatively low
individual and corporate income tax rates, and a low sales tax
rate. It also imposes an annual franchise tax on all business
corporations and on limited liability companies (LLC's). In
general, Arkansas state taxes tend to be low, compared to most
other states.
For state tax forms and tax information, see the contact
information for the Arkansas Department of Finance and
Administration in Section VI(a).
(b) State and Local Licensing.
Nearly any business, operated anywhere in the United States, will
have to have at least one government license of some kind. In
most cases, this will be a local license, issued by your city or
county. Before you open your business, contact your local city
hall or county clerk and find out if your particular business
needs one or more local licenses. Most kinds of local business
licenses are granted upon payment of a fee, with no further
requirements, except possibly for annual or other periodic
renewal fees.
However, if you are engaging in any kind of food business,
you will usually need to also obtain a health department
permit and show that you are in compliance with health
department food-handling requirements. In addition, be
sure to check with an attorney or local government zoning
or planning department officials to determine if your
business will be in compliance with all local zoning and
planning restrictions. If you own or rent any type of
facility, you will generally need fire department permits,
showing that you meet fire safety codes and any construction
or improvements to an existing structure will usually require
a building permit. If you intend to simply operate your
business from your home, you may be in violation of local
zoning requirements, but this is less likely to be a concern
if you don't have clients, customers, suppliers, or employees
coming to your house on business, on a regular basis.
State governments have traditionally required special
licenses for many kinds of professionals, such as physicians,
dentists, lawyers, and accountants. To further protect
consumers, Arkansas has expanded the list of occupations
that must be licensed by the state to include many other
occupations. Most state licenses not only require payment
of fees, but are only issued for a given profession or
occupation upon showing that you have completed certain
educational or experience requirements, or passed certain
tests, or some combination of the foregoing.
For information on state licensing and business registration
requirements in Arkansas, contact the Arkansas Department
of Economic Development and the Arkansas Department of Finance
and Administration, both of which offer information and
publications on state agencies you will have to contact to
get your business licensed and operating in Arkansas. See
address information for both agencies in Section VI(a).
(c) Income and Franchise Taxes.
Arkansas has both an individual income tax and a corporate
income tax, as well as a franchise tax on all corporations
and LLC's.
Under new legislation that is effective for tax years
starting on or after January 1, 2006, all pass-through
entities are required to withhold Arkansas income tax at
the highest Arkansas tax rate (7%) on any income distributed
to a nonresident that is derived from or attributable
to Arkansas sources. Pass-through entities include S
corporations, all types of partnerships, and limited
liability companies. Such entities are required to
file an annual tax return (Form AR941PT)
on or before the February 28 following the end of the
entity's tax year showing the total amount of income
credited or distributed to its nonresident members and
the amount of tax withheld.
The return data must be filed in an electronic format
(such as on a CD or 3.5" diskette) and must be accompanied
by payment of any withheld taxes. The entity must also
notify all nonresident owners of the amount of tax withheld
on their behalf, no later than the 15th day of the third
month after the end of the pass-through entity's tax year.
Various exemptions are provided from the pass-through
entity withholding requirements, including:
Effective March 28, 2007, Arkansas adopted a new
33 1/3% tax credit for qualifying equity investments in
certain targeted businesses. These include businesses
in the six following industry groups:
A number of other qualifications and requirements
must also be met to obtain the tax credit. These
include being a new business, operating in the state
for less than 5 years; paying employees not less than
150% of the county or state average wage; and having
been selected to receive special benefits and obtaining
approval after filing an application for the tax
credit with the Department of Economic Development.
However, don't count on easily qualifying to receive
this tax benefit -- the state will only authorize
a total of $6.25 million a year of such credits to
be granted.
TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS
The Arkansas individual income tax is imposed at a
maximum tax rate of 7% on taxable incomes of $31,700 or
more (for 2008). Tax brackets, which begin at 1%, are
indexed for inflation each year. The 2009 tax brackets
will not be announced until near the end of 2009.
Individual taxpayers generally pay state income tax on
their business earnings from a sole proprietorship, or on
their share of the earnings of a pass-through entity,
such as a partnership, S corporation or LLC.
The Arkansas personal income tax return is Form
AR1000, which must be filed with the Division of
Revenue, Arkansas Department of Finance and Administration,
and is due on April 15th of each year for the preceding
calendar taxable year.
Partnerships, or entities taxable as partnerships, such as
LLC's, are not subject to state income taxation in Arkansas, but
must file an information return with the Department of Finance
and Administration each year, showing each partner's share of
taxable income, losses, and credits, on Form AR1050.
The partnership information return is due by April 15th of the
following year, in the case of a calendar year partnership.
Individual taxpayers doing business as sole proprietors
(or who are partners in partnerships, members of LLC's,
or shareholders in S corporations), who have income from
the business, will generally be required to make advance
payments of estimated Arkansas individual income taxes, on
Form AR1000ES, if their net tax liability
(not covered by withholding) exceeds $1000. Estimated tax
payments are due in four installments, on the 15th day of
the 4th, 6th, and 9th months of the taxable year, and the
15th day of the first month of the following year. To
avoid penalty, you must either pay in 90% of the current
year's tax, or 100% of the previous year's tax.
As noted above, partnerships with
nonresident partners may be required, in some cases, to
withhold Arkansas state income tax on behalf of such partners.
The Arkansas corporate income tax on corporations, other
than S corporations, applies at graduated rates of 1% to 6%
on taxable income up to $100,000, and a 6.5% tax rate on all
income over $100,000 of income. Until a few years ago,
the state tax authorities had interpreted the law to require
corporations with over $100,000 of taxable income to pay a
flat tax rate of 6.5% on all such income, but the Arkansas
Supreme Court has ruled that the 6.5% rate applies only to
the income in excess of $100,000.
As was the case with the individual income tax, a 3% (of
the regular tax liability) tax surcharge also applied in tax
years that began in 2003 or 2004. For 2005 and subsequent
years, the surcharge has been repealed.
The state corporation income tax return is Form
AR1100-CT, which must be filed with the Arkansas
Department of Finance and Administration by the 15th day
of the third month following the end of the taxable year,
or by March 15th in the case of a corporation whose
taxable year is the calendar year.
Corporations are required to make estimated tax payments
of their state corporate income tax in advance, if their tax
liability for the year exceeds $1000. Estimated tax payments
are due in advance, in four equal installments, on the 15th
day of the 4th, 6th, 9th and 12th months of the current taxable
year. The total estimated tax that must be paid in is usually
equal to 90% of the actual tax liability for the year.
However, if the preceding year was a full year of 12 months,
the current year payments need only be equal to 100% of the
prior year's tax liability, if less. Penalties will be imposed
for failure to make the required estimated tax payments on a
timely basis.
Corporations that do business in Arkansas are also subject
to a corporate franchise tax. The franchise tax, which is
administered by the Arkansas Secretary of State, is based
on the value of the outstanding stock of the corporation,
or the portion of of the stock value allocable to the
state of Arkansas, for multistate corporations. Where a
corporation has real estate or personal property outside
the state, the percentage of its total such properties
that is located in Arkansas determines the amount of its
stock that is allocable to Arkansas and subject to the
franchise tax.
The franchise tax rate is 0.3% of the par value of the
stock of the corporation. Stock with no par value stock is
deemed to have a par value of $25 per share. A corporation
with no authorized stock must pay an annual franchise tax
of $300. There is a minimum annual franchise tax of $150.
Both foreign and domestic corporations must register with
the Arkansas Secretary of State on Form FT-11,
in order to begin receiving franchise tax return forms.
Franchise tax reports are due by May 1 for the preceding
year. Failure to file this annual franchise tax report on a
timely basis can result in the suspension or revocation of
your corporation's charter.
S corporations are also subject to the franchise tax, but are
generally not subject to the corporate income tax in Arkansas,
as under federal tax law. However, all nonresident shareholders
of S corporations receiving a prorated share of income, loss,
deduction, or credit must file an Arkansas state income tax
return with the Department of Finance and Administration and
remit the applicable state income tax due. Failure to do so
may result in the state's collecting the tax that is owed
by the shareholder from the S corporation or revoking the S
corporation's tax status for state corporate income tax purposes.
To qualify as an S corporation for Arkansas state income tax
purposes, a corporation must meet three initial requirements:
S corporations filing an Arkansas S corporation return must
attach a complete copy of the federal S corporation return,
Form 1120-S.
As noted above, S corporations with
nonresident shareholders may be required to withhold Arkansas
state income tax on behalf of such shareholders.
TAXATION OF LIMITED LIABILITY COMPANIES
In Arkansas, a limited liability company (LLC) is taxed
in the same manner as a partnership, thus avoiding the
possible double taxation of income that can occur with a
corporation. Or, for state income tax purposes, a one-owner
LLC will be taxed as a sole proprietorship by Arkansas.
As noted above, LLC's with nonresident
members may be required to withhold Arkansas state income
tax on behalf of such members.
Under IRS regulations, a one-owner LLC is allowed to
elect to be treated as a sole proprietorship for federal
income tax purposes. Arkansas follows the federal tax
treatment of an LLC.
Note that it is not always entirely clear whether an LLC is a
"single-member LLC" or not, where the "single owner" is a married
couple who hold the entire ownership of the LLC in some form of
co-tenancy, such as joint tenants with right of survivorship,
tenants by the entirety, or as tenants in common. The federal
Internal Revenue Service (IRS) has taken a very lenient position
in Rev. Proc. 2002-69, where a couple hold the LLC
interest as community property, ruling that the IRS will accept
whatever choice the couple make, either to disregard the LLC as
an entity (treating it as a "single-member LLC") or to treat it
as a partnership between the husband and wife.
However, Arkansas is not a community property state, so where
the LLC is owned by a husband and wife in some form of co-tenancy,
it is unclear whether the IRS treatment would be as lenient as
for community property owners, since the IRS has not issued any
published rulings on whether an LLC can be a disregarded entity
if held in one of the various forms of co-tenancy by a married
couple, rather than being held as community property. Thus, it
is also unclear, where an LLC is owned by a husband and wife as
co-tenants, whether Arkansas would treat the LLC as a single-member
LLC or as a partnership.
Like corporations, LLC's are subject to the Arkansas franchise
tax, but rather than paying a tax based on their capital, LLC's pay
only the annual $150 minimum franchise tax.
(d) Sales and Use Tax.
Arkansas imposes a general sales tax on retail sales of tangible
personal property and certain types of services at the statewide
rate of 6%, effective March 1, 2004 (formerly 5 1/8%). Local
governments are allowed to adopt local sales taxes, generally at
a rate of 1%, or 2%. Certain border cities that are divided by
the state line, where the neighboring state has no individual
state income tax, such as Texarkana, are also allowed to adopt
an additional 1% sales tax, in which case residents of such
cities are not subject to Arkansas state income tax.
The city tax in some cities is as high as 3.5%. However, local
tax on a "single transaction" could, until recently, only apply
to the first $2,500 of any such transaction ($25 for each 1% of
local tax), for some types of sales.
However, effective since January 1, 2008, the limitation of
local sales and use taxes to the first $2,500 of a transaction only
applies to sales of motor vehicles, aircraft, watercraft, and
modular, manufactured, or mobile homes. Also effective since that
date, the state sales and use tax rate on food and food ingredients
(but not on alcoholic beverages or prepared food) was reduced from
6% to 3%. Local taxes on food and food ingredients were not changed.
Note that business purchases on which local sales tax is paid
on more than a $2,500 purchase price will still entitle the
business buyer to claim a sales tax credit for local taxes on
the excess of the purchase price over $2,500.
The sales and use tax was expanded a few years ago
to apply to a number of services, such as cleaning and
janitorial services, pool services, lawn care and
landscaping, auto storage and parking, fur storage,
and indoor tanning. Numerous additional services
became taxable on July 1, 2004, such as:
There are numerous exemptions from the sales tax, the most
important of which is the resale exemption. If you are a
wholesaler or retailer who purchases goods that you will
resell, your purchase of such goods may qualify as an exempt
sale for resale. Similarly, if you sell goods to wholesalers
or retailers for resale by them, your sale may also qualify
as an exempt sale for resale. In any such transaction, the
exemption is ordinarily available only if the purchaser gives
the seller a valid resale certificate, certifying that the
items are being purchased for resale, and not for use or
consumption by the buyer.
A parallel tax, the use tax, is also imposed at the same
rate as the sales tax. It is primarily intended to tax
property that is acquired from sources outside of the state,
in transactions not subject to sales tax, when such property
is used or consumed within Arkansas. Use tax may also apply
to items purchased on an exempt basis, such as for resale,
if such items end up being used or consumed, instead of
being resold.
Before making any taxable sales, you will need to register for
your Gross Receipts Tax (sales tax) permit on an Arkansas
Application for Permit, Form ST-1 with the Sales and Use
Tax Unit of the Department of Finance and Administration. As a
seller at retail or wholesale, you are required to obtain a Gross
Receipts Tax seller's permit for each business location, and to
pay a $50 non-refundable permit fee. Businesses that are not
domiciled in Arkansas must post a bond or deposit equal to the
anticipated sales tax liability for the year.
You must collect and pay over the state and local sales
and use taxes to the Sales and Use Tax Section of the Arkansas
Department of Finance and Administration.
In 2003, filing requirements for small businesses were
modified, so that any business whose average monthly Gross
Receipts Tax did not exceed $100 per month for the last
12-month period ended June 30 may now file sales tax returns
and make payments on a quarterly basis, rather than monthly.
If the average tax liability per month did not exceed $25,
then only an annual return and payment of the tax are required.
The sales tax law provides serious penalties for businesses
that fail to file or pay sales tax for any two months in a
24 month period. Under the Business Closure Act, effective
since July 1, 2004, the state will notify the taxpayer in
such cases that if a third failure to file or pay tax occurs
in the same 24-month period, a "closure order" will be issued
and the business will be forced to close for 5 days, with
notices of closure posted on its doors. (Needless to say, that
will not be good for the image of your business.)
Arkansas has joined the Streamlined Sales Tax Project (SSTP)
as an "associate state." However, the SSTP provisions did not
become effective in Arkansas, generally, until July 1, 2007.
As of January 1, 2008, a number of sales tax rules were
changed to comply with the SSTP:
For further information on Arkansas sales and use tax
registration and compliance, see the contact information
for the offices of the Arkansas Department of Finance and
Administration in Section VI(a).
(e) Real and Personal Property Taxes.
In Arkansas, as in every other state, any business real estate
you own will be subject to real property taxes. In general,
there is little that you must do, unless you wish to challenge
your assessed valuation, since the assessor will bill you for
each year's property taxes as they come due.
Arkansas also imposes personal property taxes on tangible
personal property. ("Personal property" is any kind of property
that is not real estate.) Each business is required to conduct
a self-assessment each year between January 1 and May 31 for
personal property it owned on January 1. Contact your county
tax assessor for personal property tax forms and information.
While Arkansas generally taxes tangible personal property,
it does not impose state or local property taxes on intangible
personal property, such as stocks, bonds, promissory notes,
and other such paper assets, generally.
However, unlike most states, Arkansas does not exempt
business inventories from taxation.
(f) Other Business Taxes.
Arkansas imposes a number of excise and other taxes on
businesses, including:
Contact the Miscellaneous Tax Section of the Arkansas
Department of Finance and Administration for further
information on excise and miscellaneous business taxes.
(g) Trade Names.
A trade name, also known as a fictitious or assumed name, is
any name used in the course of business that does not include
the actual legal names of all the owners of the business.
Thus, if your business goes by any name other than your own
real name, it is operating under a trade name. The same is
true of a corporation, if it operates under a name other than
its legal name. A trade name might also be one that suggests
the existence of additional owners, by using such words as
"company," "associates," or "group."
In most states where you do business, it will be necessary
to register a trade, fictitious, or assumed name, so that
people who do business with you can find out who the actual
owners of your business are. Even in states where registration
is not required, you may want to register any such trade name,
as a means of protecting against other companies usurping that
particular trade name.
In Arkansas, a business operating under an assumed name,
other than a corporation, limited partnership, LLC, or LLP,
must file a certificate with the county clerk's office in
each county where business is conducted, disclosing the name
and address of each person participating in the business.
Thus, this requirement generally applies only to a sole
proprietorship or to a general partnership. The indexing
fee charged by the clerk is $1.00.
Corporations wishing to register a fictitious name must
file similar information, but not including the names of all
owners, with the secretary of state, and must pay a filing
fee of $25. Domestic corporations must also file with the
county clerk in the county where the registered office of
the corporation is located, if other than Pulaski County.
V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. In addition, since Arkansas imposes a state income tax on the income of individuals, you will need to also withhold Arkansas income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the state by filing Form AR4ER, Employer Income Tax Withholding Registration Statement. The Withholding Tax Unit of the Arkansas Department of Finance and Administration will then supply you with preprinted forms which you must use to remit withheld income tax, based on withholding tables. All new employer withholding accounts are required to file monthly withholding reports until notified by the Department of Finance and Administration of a different filing status and frequency. Payment coupons (Form AR941M) must accompany all withheld tax that is remitted. For more information on Arkansas income tax withholding and registration requirements for employers, see the contact information for the offices of the Department of Finance and Administration, listed in Section VI(a). Request their publication, Income Tax Withholding Tables and Instructions for Employers. (b) Unemployment and Other State Payroll Taxes. If your business has one or more employees, you, as an employer, will be required to pay state unemployment tax based on the amount of such wages paid. Employers subject to the Arkansas unemployment tax are required to register with the Arkansas Department of Workforce Services on Form DWS-ARK-201. New employers are required to pay tax at a rate of 3.6% in 2008 on the first $10,000 of wages paid to each employee. (The 2009 tax rate has not yet been posted on the Workforce Services web site, in mid-January, 2009.) After you have had employees for a while, you will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. All state unemployment taxes are imposed upon you as the employer, and, under Arkansas law, cannot be charged to your employees or withheld from their wages. Payment of state unemployment tax must be made quarterly by the end of the month following the end of each calendar quarter. Therefore, state unemployment tax reports are due by January 31 (for the fourth quarter of the previous calendar year), April 30, July 31, and October 31. Once an employer has established an account with the Arkansas Department of Workforce Services, reporting forms are provided by mail on a quarterly basis. In addition to registration, tax payment, and reporting requirements, all covered employers are required to post a notice of unemployment insurance coverage, "How to Claim Unemployment Insurance" (Form DWS-ARK-237) in the workplace. For more information on your Arkansas unemployment tax obligations as an employer, see the contact information for the offices of the Arkansas Department of Workforce Services, listed in Section VI(a). (c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In Arkansas, virtually all businesses with three or more employees are required by law to have workers' compensation insurance, except those able to self-insure. There are exceptions to the three-or-more requirement, so employers with fewer than three employees should check with the authorities before assuming they do not fall under the workers’ compensation laws. Employers in doubt may contact their agent or the Workers' Compensation Commission’s Information Officer, its Operations/Compliance Division, or the Legal Advisor Division. For example, employers of two or more employees in the building or building repair industry (or subcontractors with one or more employees) are required to provide coverage for their employees, as are contractors with one or more employees who subcontract out any part of their work. Note, however, that a sole proprietor, a partner in a partnership, a member of an LLC, or officer of a corporation is considered an "employee," but may choose to waive workers' compensation coverage for himself or herself, if not a subcontractor. If such waiver reduces the number of employees of the business to less than three, the employer must nevertheless continue to provide coverage for the employees. Real estate brokers and agents are generally not treated as employees. Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. CAUTION: Employers are required to post a notice of workers' compensation insurance coverage in the workplace. Obtain a copy of WCC Form P from the Workers' Compensation Commission, which will fulfill this posting requirement. For more detailed information regarding your obligations as an employer under the Arkansas workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the Arkansas Workers' Compensation Commission, listed in Section VI(a). (d) State Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, even if few or none of your employees are covered by the federal wage-hour laws, because your firm does less than $500,000 a year in gross sales and the employees in question are not deemed to "...engage in (interstate) commerce...," they will still generally be subject to the Arkansas wage-hour laws, which provide for a state minimum hourly wage that, since October 1, 2006, has been set at $6.25 an hour. A lower minimum wage, at 85% of the regular minimum, may be paid to certain full-time students employed for 20 hours a week or less when school is in session or 40 hours a week or less when school is not in session. The Arkansas minimum wage law applies, in general, to any employer with four or more employees. Arkansas law, like the federal labor law, requires an employer to pay time and one-half for overtime hours worked. Overtime is defined as hours worked in excess of 40 hours per week. Note that, as under federal wage-hour laws, certain classes of executive, administrative, and professional employees and outside salespersons are exempted from the Arkansas overtime rules, since Arkansas adopts the federal overtime law exemptions. Employers are required to display a state minimum wage poster in a conspicuous location in the workplace. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar state child labor laws in Arkansas, including the requirement of obtaining an employment certificate from the Department of Labor before employing any child under the age of 16. Under the Arkansas child labor laws:
For more information on Arkansas wage/hour, child labor, and other state labor laws, see the contact information for the Arkansas Department of Labor, listed in Section VI(a). (e) State Occupational Safety and Health Laws. Employers in Arkansas must comply with job safety laws designed to prevent injuries resulting from unsafe or unhealthy conditions in the workplace. While about half of the states have their own OSHA enforcement agency that enforces federal and state job safety laws, Arkansas is one of the states that relies on the federal Occupational Safety and Health Administration (OSHA) to enforce such health and safety rules in the state. To determine if your workplace is in compliance with federal and Arkansas job safety requirements, you may wish to contact the OSHA Consultative Training and Education Division of the Arkansas Department of Labor and request a free and confidential on-site safety consultation. You will not be cited for any violations detected, provided that you promptly correct the unsafe conditions. This differs from the rules for consultations by federal OSHA inspectors, who are required to cite you for any violations they find. For information, required posters, and possible on-site safety consultations, see the contact information for the offices of the Safety Division, Arkansas Department of Labor, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Arkansas labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to employees. Wage payments generally must be made on a semi-monthly basis, though larger businesses with annual gross income of more than $500,000 may pay certain executive employees (those exempt from federal wage-hour laws) on a monthly basis. Wage payments to employees of a corporation who are discharged or suspended, or refused further employment, must be made within seven days. Otherwise, if the employee quits or resigns, payment may be made at the next regular payday. If an employee has been discharged or refused further employment and the final wages are not paid on a timely basis, wages may continue to accrue until payment is made, for up to 60 days. (2) Right-To-Work Laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. Arkansas has enacted a right-to-work law which prohibits an employer from denying employment to any person due to their membership or non-membership in a labor union. (3) State anti-discrimination laws. Arkansas does not have a state anti-discrimination agency. Federal equal employment opportunity laws are administered in Arkansas by the federal Equal Employment Opportunity Commission (EEOC) and the U.S. Department of Justice. However, state law does prohibit employment discrimination based on any kind of genetic testing or genetic information and Arkansas has an equal pay law, prohibiting discrimination in compensation based on sex. (4) Reporting new hires. Under federal welfare reform laws, employers in every state now must report all newly-hired (or rehired) employees to a designated state agency (the Arkansas New Hire Reporting Center, for Arkansas employers) within 20 days after the date of hire. Employers who file electronically or on magnetic media must submit the reports in two monthly transmissions, not more than 16 days apart. For more information, contact the New Hire Reporting Center at the address listed in Section VI(a) or file your new hire reports online at the Internet address listed for that agency in Section VI(c). VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Unlike some other states, Arkansas does not yet have a single agency to whom you can go to handle all your licensing and permit requirements for your business under the laws of Arkansas. Accordingly, you will need to contact the various Arkansas agencies that are mentioned in this book and listed below on an individual basis, to obtain needed forms, official posters, information, and other assistance from each such agency. A list of addresses and other contact information for such key agencies is set forth below for your convenience. BUSINESS STARTUP INFORMATION. Two key agencies that can provide helpful information on getting your business up and running in Arkansas are the Department of Economic Development and the Secretary of State, both of which are listed below: Arkansas Department of Economic Development SECRETARY OF STATE. Contact this office for information on:
Arkansas Secretary of State TAXES. Obtain state income, sales and use tax, and other miscellaneous business tax forms, instructions and information from the Department of Finance and Administration (DFA), which is the main tax collection agency in Arkansas. You may wish to obtain from the DFA website their helpful publication, "Starting a New Business," a brochure on Arkansas taxes administered by the DFA. (However, it does not cover property taxes or other local taxes, or the franchise tax on corporations and LLC's, and since the brochure was last updated in early 2005, it does not reflect recent Arkansas tax changes, such as the new withholding requirements for pass-through entities. It also does not cover non-tax matters, such as labor laws or other business regulations.) Arkansas Department of Finance and Administration STATE LABOR LAWS. Contact the following agency about your obligations as an employer under various state labor laws, including:
Arkansas Department of Labor EMPLOYER WAGE WITHHOLDING. Contact the following agency to register as an employer, for purposes of Arkansas income tax withholding. Individual Income Tax Withholding Branch STATE UNEMPLOYMENT TAX. Contact the Arkansas Department of Workforce Services (formerly the Employment Security Department, prior to July 1, 2005) to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer if you are subject. Arkansas Department of Workforce Services NEW HIRES REPORTING. Report new hires to the Arkansas New Hire Reporting Center within 20 days, by mail, fax or by various electronic means, including filing over the Internet at the Web address listed in Section VI(c). Employers who file electronically or on magnetic media must submit the reports in two monthly transmissions, not more than 16 days apart. Mail or fax reports to: Arkansas New Hire Reporting Center WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the following agency for further information: Arkansas Workers' Compensation Commission STATE OSHA PROGRAM. For information on both federal and state occupational safety and health laws that affect you as an employer in Arkansas, contact the Safety Division of the Arkansas Department of Labor, at the address listed above for that agency. (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Arkansas to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information or for the location of other SBDCs nearer to you. Arkansas Small Business Development Center (c) Internet Sites. For anyone with access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major Arkansas state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Arkansas. Since new sites are appearing frequently, you might also want to search for other Arkansas government Web sites by using one of the popular Internet search engines, such as Excite! or Yahoo. To start your Internet search for Arkansas government information, you may want to begin with the following Internet sites: State of Arkansas Home Page: Department of Finance and Administration, Revenue Division: Arkansas Employment Security Division (Department of Workforce Services): Arkansas New Hire Reporting Center: Arkansas Secretary of State (corporate, LLC, and partnership filings): Arkansas Department of Economic Development (business startup information): (d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in Arkansas, or contact the Arkansas Department of Economic Development at the address or phone number listed in Section VI(a). The Department of Economic Development provides a helpful free booklet, entitled Financing Resource Guide for Small Business. The address of the Little Rock SBA office is: U.S. Small Business Administration |
Copyright © 2009 Michael D. Jenkins
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