Revenue & Taxation- House

And with that, we're going to the first bill we're gonna take up is going to be built HB 1203 Representative Underwood, if you'll go down, introduce yourself for the record, you'll be recognized to present your bill. Uh, thank you, Chair. Thank you committee. I'm Kendon Underwood, uh, state representative for District 16. Uh, thank you for taking the time to, to hear me out on my bill today. This bill is pretty simple. Essentially what this bill does is it eliminates the $50 fee, uh, for the tax registration fee that you for applying for your sales tax permit. So currently, if you own a business or you're starting a business and you wanna collect taxes for the state government, you have to pay a $50 fee in order for the privilege of collecting taxes for the state government. Um, I think that we should be encouraging entrepreneurs. Um, and they shouldn't have to pay this fee for that privilege, and I think that's really mostly helps small businesses. Because I think it removes the barrier and simplifies the startup process for these businesses. When you consider the fact that a small business, a lot of times, um, has to do a lot of other things to start up their business, whether it's paying a CPA or paying that, you know, that the Secretary of State fees for starting your LLC or maybe an attorney paying the franchise tax, whatever those things are, I think this $50 fee is just another added burden for that. In addition, I think it also encourages compliance with state laws. I think that when you run into another barrier and it just becomes too much of a hassle. A lot of times, uh, people just may decide that they're not going to deal with it. And so I think by removing this fee it'll encourage people to apply for the sales tax permit and then legally be remitting their sales taxes to the state. Um, and I'll kind of Finish with this. I truly think this is beneficial to the true small businesses, uh, one example is my mom. She started, we have a little wedding venue and she started a little side business with that and so she spends her weekends, um, in addition to taking care of my, my disabled dad and working a full-time job on weekends, she rents linens to our customers at our business and so she washes, dries. replace these replaces these linens, um, she irons these linens, and she does all this just to, you know, make a couple $100 extra dollars every weekend and to help make ends meet. Now this business may not make her wealthy, but it helps her pay her bills. It provides a value to the service to our clients and this additional $50 fee that she had to pay to start this business. I think truly would help her in acquiring the materials that she had to use to start a business. Or you know, on top of everything else that she had to pay, so. With that, that's kind of my pitch for this bill. Uh, happy to take any questions. Thank you, members, are there any questions? Representative Bray, you recognized. Representative Underwood, is this, is this presentation gonna take 6 hours like your last one. judging by the room, I don't think so, but. OK, the rest of my questions will be for uh DFNA about the bill. Thank you. Any other questions, members? Dave and I, it sounds like you're gonna have a question if you don't mind going down to the end of the table for us. And if you will introduce yourself for the record, please. Thank you, Madam Chair, members of the committee, Paul Gehring, DFA. Yes, do you have a comment about the bill you'd like to start with or you want to go straight to questions. Uh, thank you, Madam Chair. Usually we do discuss the the fiscal impact of the bill we excise tax did a review of the last two fiscal years to determine the amount of the sales and use tax permit fees that we had received from applicants for sales tax permit on average over fiscal year 22 through fifth school. A year 2024, um, our average was $432,000 that we collect per fiscal year and those um permit fees are deposited in state central services for use by the revenue division. I'm happy to answer any questions. Members, any questions for DFA? Representative Ray, you're recognized. Thank you, Madam Chair. So, um, Mr. Geering, is this, is this an annual fee or is this a one-time fee? How does it, how does it work? It's a one-time application fee per permit that's issued. OK, and is there any sort of threshold, uh, as it relates to when you're required to start collecting and remitting sales tax like. If there was someone who sold homemade jewelry at a Uh, at a festival or something, at, at what point would they be legally required to start collecting and remitting, so an individual that is um Engaged in the business of selling tangible personal property, taxable services, or um, The other items that are subject to sales tax in Arkansas that aren't tangible personal property or services, generally we're looking at your actually engaged in business. We're not looking at those isolated transactions, for example, if I'm going to have a yard sale and I'm just gonna be selling my own personal property on one day. I'm, I'm not engaged in the business of providing um uh taxable services or selling tangible personal property, but certainly someone that has decided I'm going to. Create a business now that that individual might have organized as a corporation, an LLC, they might be a sole proprietorship, but uh certainly if someone's going to make that determination, I'm going to start selling. Usually it's tangible personal property could also be services, but to, to a greater extent it's tangible personal property. That's at that point that they need to apply for the permit, get a permit number, and begin remitting the sales tax to the state that they're collecting from their customers. OK, so it's not a transaction-based threshold. It's a threshold based on, it's like a yes or no, are you engaged in the business of Versus an isolated, like you mentioned, a yard sale that's correct. It's it's once that that individual or that company determines that they are going to enter into this business they need to begin the process of applying for a permit, getting a permit number, and begin the reporting and remitting their taxes that they have collected from their customers. OK, um, just two more quick questions. What is the justification for having the fee, I would think you want everyone who's engaged in the business of selling tangible personal property to be collecting and remitting, so what's, what's sort of the policy justification for charging a fee to set that up, so I did get some research that was conducted on this issue and so when the original sales tax um law was enacted in the 1940s, a permit fee was not collected in order to collect the sales tax, eventually a $250 permit fee was implemented, um, but the taxpayer at that point could apply the $250 credit, um, $250 permit fee toward their future collections, and then ultimately there was a determination um in like. 1993 looks like the the $50 non-refundable permit fee was what the General Assembly landed on is that we'll just have a $50 nonrefundable fee, um, of course it's, it's deposited into state central services for credit to the revenue division. There are individuals within the excise tax section that is responsible for Um, processing the applications, as well as the, the excise action has to accept from our 90 + 000 taxpayers, the uh the monthly reports and remittances of sales tax, so there is that administrative cost that goes along with receipt of those applications, processing them if there are any issues or questions, we have to be responsive to our, our customers, our taxpayers that have the permits. OK. And then I think my last question is, could you comment on Representative Underwood raised a point about encouraging compliance. I would assume there are probably Some folks on the on the smaller end, you know, small businesses, sole proprietorships, things like that, that May just not be collecting and remitting, uh, because they didn't wanna pay a setup fee, is it, can you respond to his point? Do you think that it would encourage compliance if there wasn't a fee, especially, I mean anybody that's set up in a legitimate businesses is probably gonna be doing this, but on the really small end. Do you have thoughts on that? Certainly, and I believe from purposes of compliance, um, just my experience in working with the department often it's a lack of knowledge that they were the individual was supposed to be collecting sales tax whether it was performing taxable lawn care and landscaping services, house cleaning services, um, or also maybe just someone operating a small business on the internet where they're selling tangible personal property. They just don't know that there is this requirement, but certainly there are issues with barriers to starting a business, whether it's you got to pay a $50 sales. um permit fee, submit the application to the department. we certainly understand that, you know, removing barriers to individuals that would like to start a business can certainly help, um. But it's also, it's, it's multiple issues that can maybe factor into an individual, uh, but I think in our experience, mostly it's been that the taxpayer just didn't know what they were doing, required a permit in the first place. OK, thank you for that. And Mr. Guerra. In my world and the other job that I hold, uh, some dealerships charge something called a dock fee, and that's a fee that we get for preparing the paperwork. And so for all the papers that we have to go through and things, it's called a do fee. Uh, we have to justify the cost of that do fee and how we arrive at that amount of money that it cost us to be able to prepare these documents as DFNA ever done a study to justify why they need the $50. Not that I'm aware of, Madam Chair. I certainly could go back and look at What our administrative costs are for the excise tax section, particularly the sales and use tax section, uh, one thing that's noteworthy, however, to to be aware of is that sales and use tax, they're, they're not just limited to processing permits. They do a lot of other things uh we receive refund claims we receive, um, you know, questions from taxpayers about to assist them with with compliance, but uh I was certainly work with sales tax and excise tax to see, um, but I aware that we've ever done a cost study as to the amount of the permit fees that have been received versus the actual cost to administer this particular process of receiving the applications. Yeah, I'd be kind of curious to know if what's the justification for 50? I know it was done some time ago and somebody set it up, but what the justification was, uh, Representative McClure, you're recognized. Thank you, Madam Chair. Um, you have a physical impact of $432,000. Was that aro simply based on the $50 fee. Yes, sir. So we're averaging over 8600 new permits a year, is that correct? Yes sir, that on average, OK, uh, then to follow up what she was talking about on the compliance issue, most of what you mentioned probably fall under the heading of self-employed that they just don't know that they're supposed to be collecting that fee, whether it's a small, uh, carpenter's shop, the lawn care shop, all of those things. How do we know or how are we getting those small entities and sales tax compliance. certainly we receive information from our citizens from time to time that a business is operating, they're not, they don't have a sales tax number we might receive outreach from A mayor of a city or a county judge that That would contact DFA to let us know that we're aware of a business that's operating in our area that does not have a sales tax permit number, um, assigned to them. Would you please take a look at the issue. So that we can um figure out whether or not that business is registered to collect sales tax we have individuals within DFA that Just receive information from a number of different sources to see if businesses are actually collecting sales tax. If we find a business that looks like they should be collecting sales tax whether it's a restaurant or a um a landscaping company or uh house cleaning company, we'll reach out to that to that business and um see if we can get them registered. Now if they um if, if they, sometimes there's also subject to audit and an assessment if they should have been. collecting sales tax or if they were collecting sales tax from their customers and not even registered to to collect sales tax and they hadn't been remitting it, uh, likely would have resulted in an assessment of sales tax that they would be responsible for, um, to, to pay the sales tax that either was collected and not remitted or should have been collected. Of course there is a Um, statute of limitations, ordinarily it's 3 years uh for a business, but it also can be extended up to 6 years, the lookback period if the taxpayer underreported their tax amount by more than 25%. Thank you. Representative wouldn't be recognized. Thank you, Madam Chairman. Mr. refresh my memory isn't there a, a, a fee discount that they received for collecting that. That's correct, sir. 2% is the problem prompt payment discount 2% off. Of the total amount. That's correct. That's their discount. That's correct. 2% discount and I believe it's, it's capped it. 5000 I have to go back and double check. Alright, thank you, thank you, Madam Chairman. Representative McGrew, you're recognized. Thank you, Madam Chairman. Uh question not sure direct directly to this, but how would an individual know if their business was required to pay sales taxes or not, for instance, or collect sales tax, for instance, I come from the electrical trade, so we're installing uh wiring a house or new construction, that's usually not a taxable expense, but if we have a generator or ceiling fan, uh, some of those things do. How, how could someone and it before when I was in it, it was a very Very gray area and hard to understand. Is there some way someone can contact someone and find out or what's the process? Yes, so we do have the taxable services within the code, the Arkansas code, and also we have those services that are outlined in the gros receipts Act that's that are not subject to in those areas where we're talking about contractor services or installation of mechanical and electrical items into into structure. so that the statutes are provide that guidance. DFA also has promulgated rules on taxable services, including those those types of services for electricians. We also um have um their prior hearing decisions from the Tax Appeals Commission and also administrative decisions from DFA a lot of taxpayers that are in that business area, they, they might consult with their accountant or their their their counsel on on questions of taxability. So there are, there are multiple resources, but um tangible personal property, the sale of tangible personal property is a much easier when you're a retailer because everything is taxable. On tangible personal property sales unless there's a specific exemption, whereas it comes to services, you have to make sure that there's a clearly defined service in the Arkansas code in our rules, that's subject to tax. And so the taxpayer at that point would go to the code or and also um look at our rulemaking. To make a determination on whether or not that service is is taxable in our state. follow it. So, so you answered that with a long, there's a lot, so it can be very complicated for an individual trying to figure out, I know doing that when I did figuring out when an appliance was taxable and when it wouldn't. Can, if an individual wanted to, could they get clarification in a letter from DFNA so they would know that they're OK. Yes, we do have an opinions process that a taxpayer or the taxpayer's representative could ride into DFA request what's known as a revenue legal opinion. We do have a database of those prior opinions that's on our DFA website. They go back to 2015. It's searchable by the opinion number as well as key terms, um, those opinions are issued and redacted format, so there's no taxpayer specific information on those opinions, but also many, many businesses. We'll go and look at those prior opinions to see if their question can be answered, um, on the basis of something that we've already issued. Thank you very much. Yes, sir. Representative Ryer recognized. Yes, thank you. Thank you, Madam Chairman. Let me ask this, Paul, on this $432,000 that's generated each year off this. If we knock this $50 fee off. Will that not affect that $432,000. So yes, sir, if the $50 fee were um repealed, um, then that $400,000 on average would not be credited to state central services for the benefit of the revenue division. Follow up ma. Yes, ma'am. As a reminder, you don't have to ask for follow-ups in this office. Thank you, ma'am. Thank you. Um, let me ask this though, Paul. That $432,000. Is that going to The central fines to pay salaries. That would be our primary expense in the revenue division or employee salaries. Yes, sir, or so if it was not there, if we'd knocked that off. Would we not have to come up with money from the maybe the general fund to. To take care of this. We, we would certainly have to make sure that those those business processes that were responsible for doing that there are staffing in place and the other resources that are required to make sure that we can continue to do the work that's that's necessary. Thank you. Thank you, Madam Chairman. Representative Eaton, you're recognized. Thank you, Madam Chair. Um, Mr. Geering, it, so if it was 4:32 and looks like that's about 8600 plus applicants a year for applying for permits. Do you have a person that is just in charge of that? Would there be a reduction in staff if you were to remove this permit. Oh, was the permit would stay under the bill, but the application fee would no longer be there. OK, thank you sir. Representatives are recognized. Thank you, Madam Chairman. Um, the Trying to figure out how to phrase this question. If you take this $50 fee off, you're gonna lose $432,000 on average. What does it cost? But. How many employees is that going to affect? And I guess I'm just trying to figure out if this is a good idea or not because we need the employees that you have to take care of the taxpayer issues that we've that we face. Whether that's Well, there's 1000 different questions you could probably come up with, but I mean you have these people there for a reason, and I'm assuming the $432,000 is what funds the people that are taking care of Arkansas taxpayers' questions and issues. So do you, I guess the question really is, do you need the whole 432,000. Well, certainly we definitely need the individuals uh to do the work within sales and use tax to process applications, respond to taxpayer issues, and to make sure all of the accounting that's necessary for the uh the revenues. that are collected for sales tax get um the the appropriate accounting so they can be deposited into the treasury, um, processing refunds, so we certainly, I would not say that we could eliminate any of members of our staff, um, if this were to to pass, we would need to continue with our resource levels and replace that 432,000 that we're losing with. Another source of of whether it's our appropriate or DFA appropriation. Or otherwise, so, um, but we certainly would not be able to, I don't think we'd be in a position where we're saying we would have to let people go because the work is going to still be there. We're still going to need to process new applications and also administer the, the 90 to 100,000 existing permit holders that we, that we have. Do you have enough excess appropriation, generally speaking, to be able to get rid of this 432,000. I mean, I clearly understand. I think that they do a valuable job in taking care of the taxpayer issues. it's just A question of can you absorb the 432 or not. I don't believe that we would have an extra $400,000 in our appropriation that would that we could forego, um, 200,000. would have to go back and speak with. Secretary Hudson and Commissioner Collins to make sure, but I, I, we certainly believe that DFA is an operation is, is, is, is very efficient that we maximize the value from every single one of our employees to make sure that the taxpayer is getting value for the taxes that they're paying, um, to, to the state of Arkansas, but whether we would not be able to eliminate any roles, we would still need to do the same work that we're already doing. They would just have to be looking at another. way to make sure that those salaries would be funded. Thanks. Representative Wootton you recognized. Thank you, Madam Chairman. Mr. Going, um, What is the average salary is it would it be 50? 50,000. We have a um In in sales tax, we we probably are lowest grade might be GS 6. Just 3 and then so from GS 3 on the salary scale up to our administrator, which is uh SCO2, um, so it Ordinarily I couldn't really answer what the average salary is, but we have people at various levels on the um classification compensation law that a different roles, so I would say that these salary and benefits of an employee, um, an entry-level employee is probably going to be in that $50,000 range for someone that has on on the the lower end of the class and Co um and then as they have more uh in a higher graded position would be higher than 50,000, would it average 50,000. I, I'd have to check with excise tax and see that's just use $50,000 is the total 432,000 going to salaries. I would have to verify, but I believe that our certainly our, our The highest line item in DFA's appropriation for this area is for personal salaries really it figures out to 8.64 employees or let's just say 9. How many employees do you have? In in the sales and use tax section dealing with these permits. I would have to check with our staff and we'll have to follow up to make sure that we I have a head count. yes sir get that number back to us. Yes, sir. But I want to be clear, they paid $50 for the permit. That's a one-time fee, correct? Correct, yes, sir. And but every time they file their monthly taxes by the 20th of the month, they get a 2% discount, sir. Oh 1000. Dollars, that'd be roughly $20. Yes, sir. So, Within 2 months, 3 months, they've got back their $50 correct? Yes, sir. OK. Thank you. Thank you, Madam Chairman. Thank you, members. Any other questions for DFA? CNN. Thank you, Mr. Gary, for coming down. Thank you, Madam Chair. Thank you. Do we have anybody that would like to speak against the bill? For the bill Representative Underwood, you're recognized to close. And just as a reminder, we're doing discussion only, we're not taking a vote today. Thank you. Well, thank you chair and thank you committee. I appreciate the questions and the thoughtfulness on this bill. Um, I would just say, I think, especially for small vendors, um, you know, the sales tax process can be complicated. I think as we just heard, and so I think by removing this $50 fee, it's just one less barrier, especially for those smaller individuals. Now, I know we had some discussion about the fiscal impact, you know, to me, and maybe we have different opinion about it, I don't know, but you know, 432,000 doesn't seem like a whole lot of money, uh, to benefit these small businesses and certainly I think that those who are processing these are important, and I don't think anybody's suggesting that we get rid of them, but I just think that, uh, you know, when you're Asking the state for the privilege to collect sales tax for the state. The state shouldn't then ask to pay a $50 fee for that privilege, so. Um, and one last point I do want to bring up is, uh, some questions were raised about, you know, I'm in favor of removing the $50 completely, but you know what amount is the appropriate amount, you know, should it be $10.25 dollars, you know, and I'm open to those suggestions as well, but, uh, finally, appreciate you guys. I know you guys are gonna hear a lot of bills and I just ask uh for this one to be under consideration. So thank you all. Thank you, Representative Underwood, um, with that members, we don't have any other bills. To hear today, um, but I do wanna just say that I've asked staff to develop us a report that they'll send out to us each week, um, and that report will actually show the running bills we have with the physical impact, so we'll have an ongoing idea of what the physical impact is for all the bills that are running through here. And with that, We are adjourned.