If you are selling goods or products online to customers located in Arkansas, you should be aware of Arkansas’s Internet sales tax rules. Those rules have been a subject of debate in Arkansas, as in many other states and at the federal level. More particularly, within the last eighteen months, Arkansas has enacted new laws that apply to certain out-of-state Internet retailers.
The federal government is currently considering legislation that would affect how online sales taxes are collected in all states. The proposed federal law (called the Marketplace Fairness Act of 2013) would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
Below is an article on the current rules on Internet sales tax in Arkansas. A new federal law would affect all state Internet sales tax laws so be sure to check for updates in this area.
A Note on Arkansas’s Sales Tax Terminology
Along with the more common term “sales tax,” Arkansas law uses the term “gross receipts tax.” As interpreted by Arkansas’s Department of Finance and Administration (DFA), which is Arkansas’s revenue collection authority, under Arkansas law “‘sales tax’ and ‘gross receipts tax’ are synonymous.” The two terms are used interchangeably in this article.
The General Rule: Physical Presence in the State
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a “physical presence.” The physical-presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail-order businesses to collect sales tax on out-of-state sales. The decision has been extended to include online retailers. Generally speaking, a physical presence means such things as:
- having a warehouse in the state
- having a store in the state
- having an office in the state, or
- having a sales representative in the state.
For more specific guidance on how physical presence is defined specifically under Arkansas’s sales tax statute, refer to the definition of “doing business” in Section 26-52-103(10)(A) of the Arkansas Revised Code and under Regulation GR-3 of the Arkansas DFA Gross Receipts Rules. Both sources refer to—among other things—having a “warehouse, store, office, storage point, rolling store, motor vehicle, [or] delivery conveyance” in Arkansas. (Note: Arkansas’s statutes are available online through a web portal maintained by a private company, LexisNexis; it is not possible to provide direct links to individual sections of the Code in this website. Similarly, the DFA Gross Receipts Rules are available online only in their entirety, as part of a nearly 200-page PDF file.)
As you might expect, the corollary to the physical-presence rule is that if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state.
Be aware that Arkansas has new state laws applicable to certain out-of-state Internet retailers that present an exception to these general rules.
The following examples generally would be valid in situations where special rules, such as those enacted in Arkansas in 2011, do not apply.
Example 1: You are operating solely out of a store in Fargo, North Dakota and make a sale to a customer in Conway, Arkansas—a state where your business has no physical presence: You are not required to collect sales tax from the Conway customer.
Example 2: You are operating solely out of an office in Fayetteville, Arkansas and make a sale to a customer in Springdale, Arkansas: You are required to collect sales tax from the Springdale customer.
Example 3: After several years of operating solely out of a store in Fargo, North Dakota, you open a one-room satellite office just outside of Little Rock, Arkansas—a state where previously you had no physical presence. A day later, you make a sale to a customer in Fort Smith, Arkansas: You are required to collect sales tax from the Fort Smith customer.
Some items sold via the Internet to Arkansas customers may be exempt from sales tax under Arkansas law. For example, under Section 26-52-437 of the gross receipts tax statute, textbooks and instructional materials for public schools are exempt from sales tax. Also, DFA Regulation GR-25 states that, subject to certain limitations, software downloaded electronically is not subject to sales tax. More generally, Subchapter 4 of Section 26-52 of the Arkansas Revised Code, running from Section 26-52-401 through Section 26-52-445, lays out in detail most sales tax exemptions.
Arkansas law also provides for an annual sales tax holiday, limited mainly to clothing and school supplies, on the first Saturday and Sunday in August. More information is available on a DFA webpage and in Section 26-52-444 of the state sales tax law.
The Customer’s Responsibility
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a “use tax.” According to DFA Regulation GR-5(C) (Interstate Sales), an out-of-state seller “may” be required to collect sales tax; but, if not, then the customer is responsible for paying a compensating use tax. For additional information, see the DFA webpage on the consumer use tax.
Arkansas’s “Amazon Law”
In the Spring of 2011, Arkansas enacted a new law, codified as Section 26-52-117 of the gross receipts tax statute, that requires out-of-state Internet retailers with no physical presence in Arkansas, but meeting certain other conditions, to collect and pay Arkansas’s gross receipts tax. Similar laws have been at least considered, and sometimes enacted, in various states around the country. These laws are commonly known as “Amazon laws.” (As you might guess, the name refers to Amazon.com, which is a large, Internet-based retailer that does not have a physical presence in many states, and therefore, under the default sales tax rule, need not collect sales tax from customers in those states. As customers in those states often do not pay the corresponding use tax, Amazon’s sales, and those of other large online retailers, such as Overstock.com, are frequently understood to constitute significant lost tax revenue for those states.)
The new Arkansas law requires certain out-of-state sellers without a physical presence in Arkansas, but with a special affiliation with one or more persons located in the state, of a sort commonly known as a click-through arrangement, to collect sales tax. More specifically, an out-of-state seller needs to collect sales tax from Arkansas customers if that seller:
- has an agreement with one or more Arkansas residents to direct potential buyers to the dealer via a website link or otherwise
- compensates the Arkansas residents for directing potential buyers to the online dealer, and
- the seller’s “cumulative gross receipts” from such directed sales to Arkansas purchasers exceeds $10,000 during the preceding 12 months.
A separate provision of the new law requires an out-of-state seller that is part of the same “controlled group of corporations” as an in-state person to collect and pay state sales tax. In essence, a controlled group of corporations encompasses situations where two or more businesses are related as parent and subsidiary, or otherwise have significant overlap in terms of stock ownership. (Arkansas relies on the definition of “controlled group of corporations” as it existed under federal law in 2011; for guidance, see this webpage.)
As a result of Arkansas passing this law, Amazon.com shut down all click-through arrangements with people located in Arkansas.
For most small online businesses, it is the long-established physical presence rule that provides primary guidance on collecting tax on sales to customers in Arkansas. However, the issue is contentious, as demonstrated by the Amazon law enacted in Arkansas last year.
A good place to turn for additional information about a Arkansas’s Internet sales tax laws is the Department of Finance and Administration, which devotes a section of its website to the state’s sales and use tax. For more general information on taxes on Internet sales, see Nolo's article Sales Tax on the Internet. And, for information on the rules about collecting sales tax for Internet sales in any other state, see Nolo’s article, 50-State Guide to Internet Sales Tax Laws.