Knowing state and local sales tax, who needs to collect, when you must pay it – and how can you stay compliant between ecommerce platforms, marketplaces and software.
Introduction
For new businesses or business owners who are growing their business, sales tax in Arkansas can be confusing. This publication dissects the state base rate, what implications local taxes have on total rates, taxable vs exempt goods and services, registration and collection duties along with filing & remitting guidelines, and actionable compliance checks you can enact right now.
Base Rate and Local Additions
Arkansas BASE STATE SALES TAX As of December 1, 2019 Total Rank State Combined Rate Max Local Rate City, county and municipal rates vary. Local governments — counties and cities — can tack on their own sales taxes in addition to the state’s rate. A customer’s total sales tax paid at the point of a credit card sale that includes state and local jurisdictions is a composite of the individual state and local rate, which varies by location. Sellers must calculate the proper combined rate according to the point of delivery or where the customer is located in the case of remote sales.
What Is Taxable
In general, the retail sale of tangible personal property is subject to a sales tax in Arkansas. Much of the service aspect may be subject to tax depending on how state law handles certain types of services. Items that are commonly taxed include clothes, electronics, furniture and prepared food sold in restaurants or by vendors. Retailers who both sell taxable and nontaxable items need to itemize sales on invoices and maintain adequate records to substantiate exempt sales.
Common Exemptions
Certain items may be exempt from sales tax under Arkansas law. Some call it a “point of sale” tax holiday and in most cases, only certain items — groceries that meet a specific criteria and do not include prepared food or takeout, prescription drugs, and some services — are exempt from being taxed. Exemptions typically involve the collection of the resale or other exemption certificate from an eligible buyer. Gather and keep in a file valid documentation of exemptions to avoid liability if a sale is audited.
Nexus: When You Must Collect
A business only needs to collect Arkansas sales tax once it has what’s called nexus — a connection — with the state. Nexus can occur in a variety of ways – physical presence, such as a store, office or employees; or economic nexus based on a sales threshold or number of transactions into the state. When nexus is established, a seller must register with the state tax agency and start charging and collecting sales tax on taxable sales to in-state buyers.
Remote Sales and Marketplace Considerations
Out-of-state sellers making sales into Arkansas may have to collect and remit sales tax, based on certain thresholds for economic nexus in the state. Additionally, sales on third-party marketplaces may be subject to special collection rules where the marketplace facilitator or seller is responsible for collecting and remitting tax. “Sellers should literally verify with the marketplace who is responsible for the collection of tax on a particular channel and keep detailed records of those arrangements.
The right automation tool minimizes manual errors and saves time by ensuring your rates and rules are consistent across these channels. Seek out software that automatically updates rates, tracks nexus by jurisdiction and can file returns on your behalf. Make sure it can integrate with your ecommerce platforms, accounting system and onsite and marketplace channels to avoid reconciliation headaches. Also ascertain that the vendor has clearly defined support and documentation in place for exemptions and certificates.
Geo accurate lookups and automatic rate updates
Nexus Monitoring and Threshold Alerts
Assistance with filing and paying returns automatically
Storage and validation of exemption certificates
Rich audit trails and reconciliation reports
Registration and Permits
If any business collects sales tax then it is required that the state tax department must provide a permit for collecting Sales Tax. Registrations are typically relatively straightforward and include minimal business information, what kinds of things are sold, and rough sales volume. Upon registration the business will be assigned a registration number and receive instruction about filing frequency and types of payment.
Collecting the Correct Amount
To compute the proper amount of sales tax, calculate the total state and local combined rate for each sale, and multiply it by the taxable portion of a transaction. If the sale contains taxable and nontaxable items, tax is computed on the taxable items. Prices could be advertised with tax included or not, but companies must make clear how tax will be calculated at the checkout and on receipts.
Integrating Sales Tax With Shipping And Returns
Shipping selections and return policies can affect the taxable nature of a sale, so ensure your mapping between shipping rules and tax calculations is as accurate as possible. Relevant taxes should be applied based on where something is first delivered and what the item is, and there needs to be clear rules around handling refunds so taxes can be reversed accordingly. Teach the systems how to follow returned items, restocking fees and partial refunds so that your tax reports reflect real transactions. Work with carriers and your returns process to set up automatic address validation and minimize mismatched tax jurisdiction scenarios.
Tax based on delivery address, instead of origin
Define proper procedures for the tax treatment of returns
Tax treatment of restocking fees and partial refunds are also automated
When calculating the jurisdiction, make use of Address Validation
Separate records of adjustments for audit clarity.
Filing, Remittance, and Deadlines
The filing period of sales tax returns is usually determined by a company’s liability: most businesses fall into monthly quarterly, or annual filing periods. Returns should include the entire amount of taxable sales, exempt sales, tax collected and adjustments. Payments are typically required by the time a return is filed. Late filings or payments can lead to penalties and interest, so establishing a schedule with automated reminders will ensure you stay in compliance.
Recordkeeping and Documentation
Maintaining organized records is essential. Retain sales receipts and exemption or resale certificates, as well as copies of filed reports for the period required by state rule. Such workbooks help to prepare accurate returns, answer audit inquiries and support exempt transactions.
Handling Exempt Sales and Refunds
When the customer qualifies for an exemption, make sure to secure documentation and apply the necessary exemption at time of sale. If businesses mistakenly collected tax, they should follow the state rules to refund the customer or take a credit on future returns, as dictated by the state’s rules.
Use Tax; out-of-State Purchases
When tax wasn’t collected on a purchase shipped to Arkansas — such as from an online or out-of-state seller who didn’t collect tax — the buyer is usually required to pay use tax. Purchases of this type should be monitored by businesses and use tax reported where charged to prevent underreporting.
Penalties and Audits
Unpast tax can result in penalties, interest or audit exposure for not having collected or remitted the applicable sales tax. Sales records, tax returns and exemption certificates are usually examined in an audit. Proper preparation with good records, systems and practices minimizes both internal risk and the chance of audit being painful.
Employee Training And Internal Controls
Strong internal controls and continual training will minimize errors and shortened exposure with improper collection of taxes. Have one team calculate or record the transactions while a second team reviews filings and reconciliations to ensure segregation of duties. Create basic SOPs for accepting and storing exemption certificates, as well as for elevating unusual transactions. Conduct quarterly reviews and mock audits to help drill the processes you developed that identify gaps before problems arise.
Put in Writing Standard Operating Procedures for Tax Collection and Exemptions
Specify which element is responsible to verify and store the certificate
Periodic reconciliation between sales and tax reports
Create approval process for tax changes and credits
Provide refresher training if laws or systems change
Best Practices Checklist
- Register timely once nexus is established and obtain sales tax permit.
- Calculate your blended state and local rates for every customer delivery location.
- Accurately classify products and services to identify taxability.
- Gather and manage exemption/resale certificates.
- Submit & remit payment of filed returns on due dates as assigned.
- Match collected to reported tax after every period.
- Maintain thorough, readily available records for audits and refunds.
Conclusion
Sales tax in Arkansas is knowing a base state rate, but also local rates, what’s taxable and exempted - and when does nexus mean you need to register and collect. Define the right procedures for determining, documenting, filing and storing rates to minimize compliance risks and thrive. Frequent check-ins with your sales operations and keeping abreast of changes in state rules will ensure that you continue to collect and remit correctly over time.
