House Revenue & Taxation Committee
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Transcript
Bills discussed (2)
| Bill | Title | Sponsor | Status |
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HB1004
· 1 mention in transcript
Matched: “…ls you want open at once, and if you notice here underneath House Bill 1004, there's a fiscal impact, so, you know, this here shows”
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Pre-2017 bill | ||
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HB1005
· 1 mention in transcript
Matched: “…eath here is a bill on the agenda, so if you click on, say, House Bill 1005 here, if you click”
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Pre-2017 bill |
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- October 5, 2026
Representative Charlie Collins
Unverified
0:00
What we're going to do is kind of make an arrangement behind this desk, so if everyone wants to come up and... Okay, yeah.
Unknown speaker
0:30
Thank you.
Thank you.
Thank you.
Thank you.
Thank you.
Thank you.
Representative Charlie Collins
Unverified
3:30
all right thank everybody for participating in the picture and make sure you rub it in to those who didn't make it the the next item on our agenda is going to be some help overviewing the new IT tablets we've got. And I think we've got Joseph from BLR here to help us with that.
Is Joseph here? Excellent. And what I've asked him to do is be willing to be as hands-on as we need, so this may feel a little bit like a work-in session. But, Joseph, I'll turn
Speaker 11
4:18
it over to you. Please take it away. Thank you, Mr. Chairman. Good morning, members. I've been given the opportunity to give you guys an overview of our IRIS application, which is the application Tim Carlock and I made to do the committee rooms paperless.
Chair
Unverified
4:34
So if you're on the desktop, if you click on the IRIS, do we have the
Speaker 14
4:39
lights dimmed can we dim the lights at the back? I
Speaker 11
4:47
forget which, I don't know which. So anyway, if you're at the desktop still, if you click on the iris icon, it is the little mercury man looking person here. I have four, y'all won't have four. But if you double click on that, it should open you up to this screen right here. And if you have any trouble, we'll get some
people by to help you out. Just going over the basics here, on the left-hand side of the screen here, you have the navigation tree. Up at the top it says revenue and tax, which is the committee that you're into. The agenda is the first thing underneath that, and the agenda should automatically appear when the program opens. Underneath the agenda you'll see bills, and if you actually, you know, everything underneath here is a bill on the agenda, so if you click on, say, House Bill 1005 here, if you click
on that, it should open up the bill in a new window here, and the right window over here is your PDF pane window, which you'll actually show the bill, and if you notice kind of right here where my mouse is at the top, it's kind of like your internet browser, it'll open up in multiple tabs, so when you click another bill, it'll open up a new tab here, and so you can have two, three, four, how many ever bills you want open at once, and if you notice here underneath House Bill 1004, there's a fiscal impact, so, you know, this here shows
you that everything underneath here is a fiscal impact, so if you click on that, it'll open up the fiscal impact document. And that works the same for amendments as well, yes sir. To scroll down you can use the pin and it should have like a little hand icon and you should just pull it up and pull you know pull it up and the document should go down
Speaker 11
7:33
come check that out.
So if you notice here in the top right of the document, there's a green X right here. If you happen to be done with that bill or don't want to look at it anymore, you can hit that green X and it'll close. It will close that tab. Up here in the top left you have a few buttons here to work with. The first two buttons are the tree panel buttons and what that means is this left navigational pane, if you click the left arrow, it will make that navigational pane disappear and so that way you can get a little wider view of the bill, you know, it will expand the
text out, you get a little wider view. And if you click on the right arrow right there, it will show the navigation pane again So, you know, if you want to do a new bill, you can click on a new bill and then hide the panel again so you get that wider view. The next two buttons here are the font size buttons, and these two font size buttons are just for the navigational pane. If you click on the plus, it will make the navigational pane, if you see right here,
it will make the navigational pane font get bigger. If you click on the minus, it'll make the navigational pane font get a little smaller. If you would like the bill or document actually bigger or smaller, if you hover over, if you hover about a quarter inch to an inch to the bottom of your screen, there should be a little gray, this little gray bar that appears at the bottom, and on that gray bar there is plus and minus icons and that will allow you to zoom in on the actual build text itself.
Other than that, it's pretty well straight forward. Does anybody have any questions or I know we're still kind of getting around. Eddie, go ahead.
Representative Charlie Collins
Unverified
9:58
Representative Armstrong, I think the idea is that we're going to move away from paper. Now, if we
get into extremists of some sort where, you know, we can't function, you know, obviously we're going to solve that problem. But I think the goal is for us to transition to paperless at the committee. And if we have some big problem, then we'll look to make an exception. But I'd like to try and support the move of the House. And I can promise you I will be in the back of the pack in terms of ability to do this.
so I'm putting the pain on myself with everyone else. You
can ask Representative Bell if you have any questions about
Speaker 11
10:44
that. Does anybody have any questions or comments? I do not believe so, but I will be there if you need me.
Representative Charlie Collins
Unverified
11:00
Joseph, how about, I see agendas and bills, and are those the two things that we're going to have access to on, is this thing, this is, what do you call this machine, a tablet? Tablet. Okay, on the tablets, are we going to have agendas and bills, those are the
Chair
Unverified
11:18
two types of documents? It also has a fiscal impact, too. It should mirror everything
Speaker 11
11:23
that you see on your agenda, whether it's a, you know, So if it's a bill or an amendment or fiscal impact, it should be reflected over here on the left-hand side.
Representative Charlie Collins
Unverified
11:34
Got it. Okay, thank you. Does anyone else have any
questions? Going once. Representative Jean. Could I ask you to please use
Speaker 36
11:53
your microphone so everyone can hear the question? If we bring
Speaker 38
11:59
in a bill and we have additional talking points for the committee, do we need
to get ahead of time and put this on the tablet or can we bring in
Representative Charlie Collins
Unverified
12:10
paper to pass it out to each member? That's a fantastic question and I think we
can hand out paper for that. I just didn't want to make sure paper was excluded, totally. No, sir, I think that's a great question. And if this tablet handles agendas, bills, and fiscal impacts, and then obviously amendments is also done via this tablet, those documents will all go through the paper list.
But if you have a handout of some sort, you're absolutely right, we
can hand them out. Okay. Thank you, Mr. Chairman. Any other questions?
Speaker 11
12:49
Joseph do we have your contact information my email address is teis j t-h-e-i-s j at blr.arkansas.gov thank you
Chair
Unverified
12:57
representative bell you recognize for a question thank
Representative Charlie Collins
Unverified
13:06
you mr. chair actually just a point of
Representative Nate Bell
Unverified
13:12
information on the contact sheet that's been handed out today that has my MENA office number on there and members would be better to contact me via my cell phone first area code two three four two zero nine two so you want to make that correction otherwise I'll get your message Saturday when I get back to the office two zero nine two four seven nine area code two three four two
Representative Charlie Collins
Unverified
13:42
zero nine to excellent if there are no further questions then mr. Tice you're welcome
to to depart us and thank you very much thank you all right Gina is gonna give us a handout as we get ready for our next section
Representative Harold Copenhaver
Unverified
14:03
which is going to be an yes representative Copenhaver mr. chair I'd like information as well for other committee members my cell phone is eight seven zero two four three sixty sixty thank you it's Vermont yes
Speaker 49
14:20
representative Alexander my cell phone is four seven nine
Speaker 52
14:39
three one Yes, Representative Gossage. I'll give him my cell phone as well. Bill
Speaker 53
14:44
Gossage, the last one on the list, 479-209-2803. 209-2803.
Representative Charlie Collins
Unverified
14:50
Thank you. P.S., if anybody thought that this form of update was an accident, it's not. I knew we weren't going to get the
updates until you had the numbers sitting in front of you. Yes, Representative
Speaker 55
15:02
Wren. Mr. Chairman, that is my cell phone on there, and I would appreciate it if you did not call me unless you had an emergency. Thank you. Let's
Representative Charlie Collins
Unverified
15:12
make a deal. You don't create any emergencies, and I won't call you about them.
All right. For an overview of the corporate income tax, kind of how it works and how we can think about it and how we ought to think about it,
We've got Mr. Leathers and Mr. Tice, and I think the handouts have been delivered to each
of you. Gentlemen, if you'd each recognize yourself and tell us who you're with, we appreciate it. Thank you very much for educating us.
Speaker 61
15:49
Mr. Chairman, Tim Leathers of Department of Finance and Administration.
Speaker 63
15:54
Mr. Chair, I'm John Tice with DFA, and I will tell the committee that Joseph is the much more intelligent part of the family.
Representative Charlie Collins
Unverified
16:10
at least he learned her trade I was thinking the same thing for Emily
Speaker 64
16:20
that's true mr. chairman if you'd like us to proceed I just wanted to do some brief comments
and we're going to be pretty brief with this presentation as requested I want to talk to just a little bit about the significance of the corporate income tax and kind of tied in with our overall tax picture that is it's about 7% of general revenues about 435 million in general revenue plus 26 million in special that's the gross collections and then we refund approximately 57 million that's based on last year so a little over 400 million dollars in taxes it is
at 7% it is a one of our major revenues but not our two biggest revenues which are individual and sales tax so it is meaningful to the money that we do collect the vast majority of that tax is paid by large multi-state corporations they pay on an apportion basis John's going to get into a little bit more the detail of that based on the property payroll and sales they have in the state they divide up their income among the states and about ten corporations ten
big corporations pay 27% of that tax about 50 pay 46% of that tax so you can see it's not a small business type tax as a rule the reason for that is that small corporations and small businesses can become LLC's and other types of entities that they can get the same types of advantages for limiting their tort liability and other liabilities and for other things and then they can be
taxed as a partnership and not be subject to the corporate income tax and most these days are preferring that for their way of organization so it's mainly a tax paid by large multi-state corporations that are doing business in the state it is
Speaker 67
18:34
the I guess if not the most difficult close to the most difficult area for us to
Speaker 64
18:41
forecast when we're putting together the budget and
particularly if we're looking at it on a month-to-month or quarterly basis as to when corporations are going to pay corporations operate on their physical year and they do their their year-end returns and their quarterly based on a physical year rather than a tax year as individuals so we have that issue that makes things a little different plus corporations these large ones will pay and they will estimate their taxes and pay early sometimes to take a deduction
for federal purposes because it fits their cash flow needs and their operations so when they do that it might particularly skew what we're looking at in terms of trying to make the forecast. Also we have the situation where earnings can vary due to a lot of things that are not anticipated two years in advance when we're out making a forecast sometimes or even a year in advance or a few months there's also the tax planning that
corporations use with their tax structure and that John's going to give you some of the details but corporations will divide their corporation up among entities and shift their tax to another entity through tax planning strategies that will shift their income out of state and they have a lot of high paid lawyers and accountants that they've hired a lot of former state employees that are out there some of our friends assisting them and trying to structure
their corporations so that they can avoid the tax and if you read the Wall Street Journal even the local news you will see some of the strategies that corporations used to do that and states are constantly chasing those corporations trying to close those tax schemes that they've come up with one of the most famous is the Jeffreys case that you might have read out in South Carolina all this is public and we can't tell you anything about our own information unless it's been in court
or somehow public but we can speak about things that are public and the Jeffreys case is one happened in several states where the corporation is Toys R Us has the big giraffe, Jeffrey, and what they decided to do is put Jeffrey in another corporation, at least the trademark Jeffrey, and pay a big fee to Delaware on no tax state where they have a tax advantage
and then deduct that for South Carolina and a lot of other states so that they don't pay any tax where they're retail competing with your local stores even competing with Walmart and those kind of places they're not paying any corporate income tax because they're expensing it all off to Jeffrey but that's just one of the examples that states are consistently chasing there's another one that's been in the news a real estate investment trusts where corporations are putting
their real estate in an entity in a state where there's no tax and paying exorbitant rents that they would not normally pay and shifting that income, expensing it all off to a no tax corporation. So all kinds of things going on like that, you know, those three factors make it extremely hard to try and forecast. We do a pretty good job of it, but you'll hear us from time to time when we do the monthly revenue report saying, well, you know, that corporate is out of line up or down, but that's
just corporate. And when we say that,
Speaker 67
22:37
that's kind of what's going on there. Another thing I want to point out from the overall area is
Speaker 64
22:47
that Professor Pomp, one of the leading tax people in the United States that does tax work for businesses and occasionally for states has appeared before the committee and talked about before in terms of the tax rate it really doesn't mean a lot to these corporations what means more to
them is the tax base the rate is that we got a top six and a half percent rate and that corporations by manipulating the base the way I showed you with Jeffries and others if they can define their rate they're a lot but you know their base then it doesn't really matter so much what the rate is it's the base that they're more concerned with that makes the state more favorable and we generally tend to be one of those low base rates that wrote low base states
which kind of offsets their rate we do have a graduated tax that John's going tell you a little bit of some more of the detail like individual tax some of the tax theorists say corporation you know you you don't look at a poor corporation or rich corporation particularly when it's these multinationals and they're paying based on what's in your state you want to have a flat rate we we actually tried to do that at least that was the intent of some legislators
about 20 years ago and the court interpreted our rate to be graduated rather than be a flat rate in spite of, I know what was the intent of the people that the legislators that proposed the bill and passed it, but we had a lawsuit, and sometimes our slogan is
Speaker 67
24:31
it's hard to get a square deal out of the round building over there. also on the graduated rate just wanted to mention that there's one of the
Speaker 64
24:49
the organizations that rate states for business purposes and they rate us lower for having a graduated rate their states that have a higher rate that get a better rating than us because they rate based on simplicity and they've determined that our we ought to be more simple so instead of having a six and a half if we had a seven percent flat in that particular rating we would write higher so that's just a kind of a quick overview John's got some of the details
I don't think he's going to take very long on that we'll be glad to
Speaker 63
25:34
answer any questions that you have Mr. Chair, committee members, last week we talked a little bit about the individual income tax and its structure, and the corporate income tax is very similar to the individual income tax. Basically, you start out with your gross income of the corporation. You have certain deductions that are allowed by law that come off of that gross income. You determine, after those deductions, you determine your income subject to tax, and
then you apply the graduated rate table. I've provided that graduated rate table for you in the handout. You'll see that 1% rate starts up to $3,000, then goes to 2% at $6,000, 3%, 5%, and then 6% all the way up to 6.5% on incomes over $100,000. As Tim mentioned earlier, we have about 50%, just under 50% of the corporate income tax paid by the largest 50 corporations.
that's out of about 31,000 corporations that file Arkansas Returns. So the other 30,000 pay about 50% and the top tier
Speaker 72
26:38
pay 50%. Corporate income tax can be fairly simple. For some corporations, it can be extraordinarily complicated for others, depending on the complexity of the corporation. If you have a closely held corporation that does 100% of their income income and their activity in Arkansas, it's a very simple return. You calculate the income
of that corporation, you apply this graduated rate table to it, and determine their tax liability. For other corporations, the calculation can be extraordinarily complicated. Imagine a corporation that has a parent corporation with multiple levels of corporations. Maybe Maybe one level does their manufacturing, another does their marketing, another does their warehousing, another does their sales activity, and on and on, and those activities are located in all 50 states in the union and maybe overseas.
How in the world do you determine what percentage of the income? Maybe that corporation has just a manufacturing facility in Arkansas, but they don't have any sales here, maybe they don't have any corporate office here, they have nothing else. How do you determine what percentage of that big corporation's income is subject to tax in Arkansas? Well, in 1961, the Arkansas General Assembly was facing that decision, and they came to a conclusion consistent with the conclusion in many other states to use an apportionment
formula. I've outlined that apportionment formula about two-thirds of the way down on page one of the materials. That formula looks at the property the corporation has in Arkansas compared
Speaker 63
28:23
to their property in all states, and their payroll in Arkansas compared to their payroll in all states, and their sales in Arkansas compared to their sales in all states, and you get a percentage for each one of those three
Speaker 72
28:37
factors, the property factor, the payroll factor, and the sales factor.
You add those together and then divide. Originally, you divided by three, but a few years ago, the General Assembly determined that the sales factor should be double-weighted or double-counted. And what that does is it creates additional benefit for a corporation that manufactures in the states, but the bulk of their sales is outside Arkansas. So now, once we've double-weighted sales, you divide that percentage by four. Once you calculate the property payroll and the sales times two, now you divide by four to come to what we call the Arkansas apportionment percentage.
And you take that apportionment percentage and you multiply that times the income of the corporation. So that if 12% of the income is to be taxed in Arkansas, that means the other 88% is going to be taxed in other states. If other states are using that same apportionment formula, then maybe Oklahoma might get 8 percent and Missouri 3 percent and so forth, to the point that if all states use that same apportionment formula, 100 percent of that corporation's income would be taxed in the states where
it operates. That's the ultimate goal of the apportionment formula. As Tim mentioned, there's basically two different ways to look at corporate income tax and tax corporations. One is what's called a combined return or looking at a combined entity. As I was describing that corporation with the parent corporation with multiple levels, some states would look at that corporation and say the entire activities of that corporation
is a single unified activity. All of those corporations should be treated as one taxpayer. That's called combined reporting, and they would look at the income of that combined group and say, combined group, you file a return for all of your activities. So if you've got Exxon Exploration that's located in Alaska, and Exxon Refining that's located in Texas, and you've got Exxon Marketing that's located in all 50 states, and they're They're all subcorporations of the big parent Exxon, Inc.
Those combined reporting companies would say, look at Exxon, Inc., the combined entity, and apportion the income, even though all we have in our state is marketing, then you apportion the income because the exploration activities and refining activities all ultimately contribute to the income of Exxon, the parent. Arkansas does not use combined reporting. Arkansas uses what's referred to as separate entity reporting. That separate entity reporting looks at just the entity doing business in the state.
In my example, that would just be Exxon Marketing, and Arkansas would say Exxon Marketing, you separately identify your income and you apportion the income of that separate entity. That type of separate entity reporting is used in many of the southern states and Arkansas being one of them. We do have something a little different in Arkansas, and that is I do mention in the middle of the second page that a few years ago the Arkansas Supreme Court issued a decision that said that under Arkansas law, corporations are allowed to petition to use combined reporting
Speaker 63
32:08
as an alternative apportion method if they can prove that it's justified. We do actually have some Arkansas corporations or some corporations that have petitioned to use combined reporting in Arkansas if it's to their benefit, and those petitions have been granted. It's not many. It's
Speaker 72
32:24
fewer than five, but we do use combined reporting. Yeah, but as Tim pointed out, they're generally very large corporations. I think the rest of my outline, Tim's already pretty much mentioned. We'll be glad to answer any questions that
you might have about corporate income tax or the
Representative Charlie Collins
Unverified
32:44
structure of it. Representative Meeks, you're recognized for a question. Thank you,
Representative Stephen Meeks
Unverified
32:50
Mr. Chairman. This is maybe slightly outside of this realm, but I'm wondering if you could talk about taxes on business inputs in the state, how that's handled, and do we have any idea what those figures are?
Speaker 67
33:04
Mr. Meeks, we can get figures on any of those. You talk about business inputs, that covers a wide range of areas,
anything from chemicals to repair parts and even actual services repair on machinery and their broad range of things to explain to the committee as most states in Arkansas we do some some of the items purchased by mainly by manufacturers that are used to produce a product are exempt we do that in Arkansas but we're not as broad-based as a lot of states you know a lot of the
The theorists say all business inputs should be taxable, and that would be the electricity, the gas, the repair parts, and all that. So we're more restrictive than some states, and over the years, states have given more and more. In Arkansas, we have. Our law has evolved so that it's gotten broader and broader. We have numbers on those. As a matter of fact, we have stated publicly just from a pure theorist and not from the money standpoint of where we stand now, we wish that instead of nibbling at the edges over the years
and creating more controversy and work for lawyers and accountants to argue back and forth and for us to be hiring expert witnesses to determine if a chemical becomes part of a product we would have rather had a broad-based exemption but it's very expensive now I think the last time we looked at it was about $50 million to do that, something of that nature so we can get you numbers on things we've looked at before we can get you broad numbers anything individually you'd like to look at we bring them bring
Representative Stephen Meeks
Unverified
34:49
them to the committee I think I'd be interested in that and interested in your thoughts about you know obviously we've got tight budgets so trying to come up 50 million dollars would be a monumental task but that may be something that I think I would be in favor of looking at thank you thank you mr. chairman Representative
Representative Douglas House
Unverified
35:10
House, you're recognized for a question. Thank you, Mr. Chairman. Gentlemen, when we see statistics about corporate income tax rates, returns, taxes paid and such as that,
Speaker 78
35:19
are the S corporations included in those kinds of statistics?
Speaker 67
35:24
We have statistics on S corporations. Of course, they don't pay corporate income tax, but I think we can look and see it. We do track any of those distributions from S corporations, and we try to get those, and even LLCs where they're doing business in the state to get that. So if you have a reporting for federal purposes from a business in Arkansas, we're going to try and make sure that you're paying Arkansas income tax on that.
So we do have statistics, and we'll be glad to
Speaker 62
35:58
look at anything you'd like to look at. And I would say the numbers that I provided in this handout
Representative Douglas House
Unverified
36:08
do include only C corporations. They do not include S or LLC corporations. One other question. I was looking at the formula that you laid out. The sales tax was invented, if you will, back in the day when most sales were the sales of hard goods, corporeal.
Good. Today, something like 60% of all sales are actually services. Have y'all looked at how much of the service market is actually being taxed as a sale versus corporeal? Yes,
Speaker 64
36:45
sir. Representative House, we have looked at that for previous studies. A lot of states have looked at
Speaker 67
36:52
that. And in fact, over the years, we have broadened our tax base and included services that have
been taxed. And we've included some, then come back and gotten them exempt later on after folks complain. But we do have, we can get you a list of the services that we tax, and we look at comparison with other states. Some states have gone as far as having passed laws and quickly had to repeal them where They try to go after professionals' fees like lawyers and doctors and accountants and things like that and getting that broad. And then there's an intermediate level, and we've kind of gone after that intermediate level over the years
and included some of those services that are out there. We can get you a list of those, and we can even look at a comparison with other states if you would like to see on broadening that base. But states, you know, are aware of that, that we're shifting to a service economy and that we're losing the base
Representative Charlie Collins
Unverified
37:57
on sales tax. Representative Thompson, you're recognized for
Representative Tommy Thompson
Unverified
38:03
a question. Thank you, Mr. Chair. gentlemen of the 31,000 corporations that are moving money out of Arkansas in their
reporting process do we have any figures that tell us how many dollars they're actually moving out
Speaker 88
38:20
and how much income tax we could be collecting if they reported
Speaker 49
38:28
it here we mr. Thompson we don't have a good number for
Speaker 67
38:32
that we've had some people state numbers based on other states experience before we could resurrect what those people have said and presented to the committee in terms of you know if we did
try to go after that and try and give you that one of the proposals at one time was to try and do have businesses report two ways just to see what the impact would be if we had a law that would reach out there and get that and we require them to combine report and that was never passed so at least you would have a comparison side-by-side to see what the revenue impact would
Speaker 63
39:16
be. Representative Thompson I don't want to mislead you that 31,000 corporations have
the ability in Arkansas to use these kinds of techniques that we described. Only large multi-state corporations really have the ability to take advantage of those things. Most of those 31 corporations are small Arkansas-only corporations that would not have that ability.
Representative Tommy Thompson
Unverified
39:39
And do they determine what percentage they want to move
Speaker 67
39:45
out themselves? mr. Thompson the way it works is they file and usually these big corporations
will hire experts to try and structure and a lot of time it'll be the the scheme of the day kind of thing we see them come in phases and they'll come in and they'll come up with something new and they'll structure a certain way and they're big accounting firms that will actually go out and put a sales pitch on on and say what a deal we have for you sometimes they've even done it for a percentage we'll save you a percentage if you'll use this scheme so that's the
way they they come up with that it's not unlimited they have to have a theory behind what they're doing and some justification you know there's a line between tax evasion and tax avoidance and they're trying to structure it so they call it tax avoidance and they get paid big bucks to do
Representative Charlie Collins
Unverified
40:50
that thank you sir thanks for sure gentlemen when you talk about two dimensions of parceling one is combined reporting versus not combined reporting another
is this fraction of whichever entity either the combined entity or the non-combined entity it sounds like a lot of states are doing things consistently, but not all states. So at the end of the day, is it possible for corporations to basically have their income apportioned out to equal either more than 100 percent of their income, hence they're being taxed on more than 100 percent, or conversely that it would be apportioned out at less than 100 percent, given the way that this thing is
Speaker 67
41:31
currently structured? Mr. Chairman, there are certainly corporations that will argue that if you did combine reporting that they could be subject to more than 100% of their income being taxed. You will hear that argued, you know, as to being demonstrated where that ever happened. I don't know that I've ever seen it demonstrated, or if so, very rarely. there are a lot of court cases you can read on this where taxpayers have made those kind
of arguments, but, you know, courts have said combined reporting is okay. Now, the business community does not like combined reporting, and neither would I if I had to pay more tax as a result of it if I had the benefits of being able to tax plans. So, you know, they don't like it. They think it's extraterritorial, as you're saying, and they would make those arguments in that process, and, you know, we certainly understand that. But
Representative Charlie Collins
Unverified
42:28
I'm even talking about the way things are today, if you don't even think about combined versus non-combined.
We have a formula that's based on four parts, including something that's double-weighted, and we multiply it. But if someone else calculated their formula differently, you know, a series of corporations could have different
Speaker 64
42:45
outcomes. Yes, sir, that's exactly true. And you'll hear businesses that will make that argument occasionally,
Speaker 67
42:50
and, you know, they've made it in courts over the years. And what the courts have come down saying is it's not an exact science, and it doesn't have to be exact between the states. It just has to be a fair formula under the Constitution, under the due process and the interstate commerce clauses.
And there's a long line of cases that have blessed the three-factor formula. They've blessed the double-weighted. And even some states or a few states now they're using only the sales factor, and they've blessed that. So, and they blessed combined reporting. So, all of those, the court, the United States Supreme Court has said, states can employ. It becomes a matter of what's acceptable between the government, the legislative bodies, and the business community out there and what law gets passed.
Speaker 63
43:45
And also, Mr. Chair, many states, including Arkansas, has adopted a law that allows modification of those factors to ensure that the income is accurately reported and to also prevent taxing more than 100% of the income. So there is some flexibility built into the law. Okay. My last question is, based on
Representative Charlie Collins
Unverified
44:04
the way the splits that you talked about, it sounds like there are about 50 corporations in Arkansas who are paying on average something on the order of $3 million a company,
and then tens of thousands that are paying much lower amounts. Obviously, it's going to be size of corporations. So it's these 50 or 49 or 52 or some number like that where it's almost like, you know, customized, you know, tax. Does it kind of feel that way at your end that, you know, with millions of people who file IRS 1040s going to the federal government, any individual, what he or she is doing on his or her return is very formulaic.
But when you have, you know, just a handful who have such a stake in it, you know, $3 million in a given year on average, it almost appears that customizing has got to be part of what you folks are doing every day with them. Does what I'm saying make sense? Is that part of it, or can we really make good law on this given how concentrated the taxpayers are? I think
Speaker 67
45:11
it makes good sense. You're right. So they're trying to customize on their side, and they're trying to come up with, you know,
customize their corporation. And, of course, you know, it's not unbridled with a big corporation because they've got SEC filings, and, you know, they have to structure to meet what their shareholders want and all those kind of things. But within those parameters, they have those tax planners that are out there customizing for the taxes. It's really grown over the 30-something years that I've worked at it that used to federal taxes were the big thing that the big businesses were concerned with were federal income taxes
and then over the years they've decided that they were going to shift and concentrate on the state tax burden to a large degree and again it's the big guys, it's not the small corporations that are only in the state and they've really spent a lot of time and effort in doing that and the state's responding to that but you're right it is customized on both sides thank
Representative Charlie Collins
Unverified
46:19
you very much are there any other questions from the committee yes sir representative Copenhagen
Representative Harold Copenhaver
Unverified
46:24
thank you mr. chair John you
mentioned and I'm just kind of curious on the alternate method you just mentioned larger institutions what is the difference from this method versus the original in revenue the I could not tell you
Speaker 63
46:43
the difference between those three or four or five corporations between the old I know there's only one that I know and their tax ended up being roughly the same under either method they wanted to
change for simplicity and for uniformity with their treatment in other states for the others they've been in existence for some time and I honestly don't know and that and the amount of money is not the determining factor what is typically the determining factor is does this change in method more accurately to reflect the corporation's income earned in the state that's the statutory framework that we work within and making that decision thank you for answering my question
Representative Charlie Collins
Unverified
47:30
thank you mr. chair any other questions from the committee seeing none mr. leathers and mr. Tice thank you very much and personally that was a very educational for me I did not grasp how this thing functioned as well as I think I understand the other one so I'm very appreciative okay the the last thing on our agenda is other business, if anyone has any. I don't see any hands, so I'm going to assume no other business. Can I get a motion for adjournment? Thank you very much.
Agenda
Committee Photograph
Overview on Committee Tablets Joseph Theis, Bureau of Legislative Research
Overview of Corporate Income Tax Tim Leathers, Commissioner of Revenue, Department of Finance and Administration John Theis, Assistant Commissioner of Revenue, Department of Finance and Administration
Other Business
Documents
No documents posted.
Speakers
Representative Charlie Collins
Unverified
Speaker 11
Chair
Unverified
Speaker 14
Speaker 21
Speaker 36
Speaker 38
Representative Nate Bell
Unverified
Representative Harold Copenhaver
Unverified
Speaker 49
Speaker 51
Speaker 52
Speaker 53
Speaker 55
Speaker 61
Speaker 63
Speaker 64
Speaker 67
Speaker 72
Representative Stephen Meeks
Unverified
Representative Douglas House
Unverified
Speaker 78
Speaker 62
Representative Tommy Thompson
Unverified
Speaker 88