If you are selling goods or products online to customers located in Arkansas, you should be aware of Arkansas’s Internet sales tax rules. Keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both within individual states and at the federal level. Arkansas is one of a number of states that has enacted special legislation (known as Amazon laws) that effectively forces larger, out-of-state Internet retailers to collect and pay sales tax.
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 terms sales tax and gross receipts tax 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, physical presence means having:
The corollary to the physical presence rule is that, if you do not have a physical presence in the state, you are not required to collect sales tax for an Internet-based sale to someone in that state. However, Arkansas has special rules that apply to certain larger Internet sellers that make them subject to sales tax laws even without a physical presence in the state (see Arkansas’s Amazon law, below).
Examples of Physical Presence
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 (with the exception of sellers who fall under Arkansas’s Amazon law).
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.
Arkansas’s Amazon Law
In 2011, Arkansas enacted a new law, codified as Section 26-52-117 of the gross receipts tax statute. Under the 2011 law, larger Internet retailers with no physical presence in Arkansas are required to collect and pay Arkansas’s gross receipts tax under certain conditions. More specifically, an out-of-state vendor must collect sales tax from Arkansas customers if that vendor:
Similar laws have been enacted in other states; they are commonly referred to 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 where it sells merchandise. Under the default physical presence rule, this type of seller would not have to collect sales tax from customers in states where it has no physical presence. Since most customers don’t pay the corresponding use tax, online sales by large online retailers like Amazon and Overstock.com constitute a significant lost tax revenue for many states. Amazon laws are enacted to try to reduce this loss.
As a result of Arkansas passing this law, Amazon.com shut down all click-through arrangements with people located in Arkansas. As Amazon’s Associates Program Operating Agreement shows, Arkansas residents continue to be ineligible for the program.
In addition, a separate provision of the 2011 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.)
Physical Presence and Nexus in Arkansas
While the physical presence rule may seem clear, in the case of Arkansas, as well as quite a few other states, it is necessary to emphasize that in Quill, the Supreme Court discusses not only physical presence, but also several types of potential nexus (connections) between a business and a state. Many states, including Arkansas, have used the term nexus rather than physical presence in their sales tax laws, regulations, or other official documents, and, in the process, have sometimes defined nexus in ways that some people may think goes beyond physical presence.
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.
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 26-52-446, 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.
Proposed Federal Legislation
At the federal level Congress has repeatedly considered legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The most recent form of a proposed federal law is the Marketplace Fairness Act of 2015. As in previous versions, the 2015 Act 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.
For most small online businesses, it is the long established physical presence rule that will apply in Arkansas. However, because Internet sales tax is a subject of ongoing debate, you should consider checking in periodically with the Arkansas Department of Finance and Administration to see if the rules have changed.
Updated: April 14, 2016