Arkansas Sales and Use Tax: Rules, Rates & Nexus Explained

Sales and Use Tax Basics in Arkansas

Sales Tax

The sales tax in Arkansas applies to sales of tangible personal property, or tangible goods, and certain taxable services. Interestingly, Arkansas enacted a gross receipts tax in 1937 and later introduced a sales tax as a synonym. Consequently, the sales tax applies to the gross receipts of the sales. Additionally, the sales also include the rental of tangible goods.

Use Tax

The use tax was introduced in 1949 as an addition to the gross receipt tax or sales tax. Therefore, the use tax applies to tangible goods bought outside Arkansas and brought into the state for use, storage, consumption, or distribution, ensuring fair competition between in-state and out-of-state businesses. 

Taxable persons, regardless of whether they are individuals or businesses, must pay use tax on goods and services that would be taxable if bought in Arkansas, such as goods purchased through catalogs, online, or other remote sources, and for which Arkansas sales tax or an equivalent has not already been paid elsewhere.

Arkansas Sales and Use Tax Rates

Arkansas imposes a statewide 6.5% sales and use tax rate. In addition to state sales and use tax, one or more local city and county sales and use taxes, as well as one or more special district taxes, ranging from 0.5% to 6.125%, may apply. As a result, the total or combined applicable sales and use tax rate can reach 12.65%. However, certain goods and services, such as food, electricity, manufacturing, and short-term rentals, may be subject to lower tax rates.

Tax-Exempt Transactions

The Arkansas legislation provides an elaborate list of tax-exempt transactions. For example, interstate or international private communications, as well as property that becomes an integral part of items manufactured or processed for resale, are exempt from sales and use tax. Additionally, machinery and equipment used directly in manufacturing, whether for new facilities or to replace existing ones, are covered by the exemption, along with equipment legally required for pollution control or sulfur removal.

Furthermore, energy sources such as electricity, natural gas, and liquefied petroleum gas qualify for use in agricultural structures, aquaculture, horticulture, commercial grain drying, and manufacturing processes, including aluminum production, chlor-alkali production, glass manufacturing, and tire manufacturing. Also, sales of new motor vehicles to blind military service veterans are exempt from state sales and use tax.

Nexus Rules in Arkansas

Taxable persons may become liable for sales tax in Arkansas if they establish physical, economic, or marketplace nexus in the state. Before 2019, there were also click-through and affiliate nexus rules in place, but they were repealed on June 30, 2019.

Physical Nexus

A business has a tax connection, or nexus, with Arkansas if its in-state activities go beyond simply soliciting orders for tangible goods shipped from outside the state. Only the solicitation of orders for tangible goods is protected from creating nexus. In contrast, other activities, such as leasing, licensing, providing services, or selling tangible goods, can establish a nexus.

Additionally, activities such as installing or repairing products, collecting payments, approving orders, conducting training, providing technical assistance, or maintaining offices or stock in Arkansas can establish nexus and subject businesses to state tax.

Economic Nexus

Since July 1, 2019, all remote sellers must collect and remit sales and use tax if, within the current or previous year, the sale of tangible goods, taxable services, a digital code, or specified digital products for delivery into Arkansas exceeds one USD 100,000 or 200 separate transactions.

Marketplace Nexus

The same rules that apply to remote sellers also apply to marketplace sellers and facilitators. However, for marketplace facilitators, sales made through a marketplace are considered sales of the facilitator, not the individual seller, for purposes of determining whether this threshold is met.

Taxable Goods and Services in Arkansas

Unless they qualify for an exemption, sales of most tangible goods are taxable. For services, however, the situation is different. They are typically exempt unless defined explicitly as taxable. For example, all sales of natural or artificial gas, electricity, water, ice, steam, or any other utility or public service are subject to the sales and use tax, except for transportation services and sewer services.

Additionally, telecommunication services, including the electronic transmission, routing, or conveyance of voice, data, audio, video, or other information between points, including fixed wireless, mobile wireless, paging, and certain value-added nonvoice data services, are taxable. Also, ancillary services, meaning those incidental to providing telecommunications, such as detailed billing, directory assistance, voicemail, vertical services, and conference bridging, are taxable.

Furthermore, a wide range of services related to tangible goods, including installation, repair, replacement, alteration, cleaning, and refinishing of items such as vehicles, aircraft, farm machinery, appliances, furniture, electronics, jewelry, office equipment, tools, and machinery, are subject to tax. 

Bundled Transactions and the True Object Test

The state-wide rules require collecting sales tax on bundled transactions when at least one item in the bundle is taxable. However, certain exemptions apply, such as when the true object of the sale is a service, when the taxable portion is small, commonly known as the de minimis rule, or when most of the bundle consists of food, drugs, or medical items. Notably, if telecommunications or media services are part of the bundle, special rules determine how to allocate the price and tax, using books and records to identify which portions are taxable and which are not.

E-Commerce Framework

When remote or out-of-state sellers exceed USD 100,000 in sales or have more than 200 separate transactions, they must collect and remit sales tax on goods and services delivered to local consumers. One of the most essential things remote sellers must consider is the delivery location, since the consumer's address directly affects the total applicable sales or use tax rate.

Marketplace Rules

One of the most significant benefits for sellers who use marketplace facilitators to offer and sell their goods and services is that, when a sale is processed through a marketplace facilitator, it counts as a sale for tax purposes by the facilitator, not by the individual marketplace seller. An additional benefit for marketplace sellers is that the state can audit marketplace facilitators for sales they facilitate, but generally will not audit individual sellers unless the facilitator seeks relief. 

Digital Goods and Services

As a general rule, digital products sold to final consumers that receive the right of permanent or less-than-permanent use granted by the seller, regardless of whether the use is conditioned on continued payment by the consumer, are taxable. Also, the sale of digital codes is subject to taxation.  

As a result of this definition, streaming video, digital audio work, digital audiovisual work, and digital books are taxable. In contrast, downloaded video games, digital newspapers and magazines, digital photographs or images, digital artwork, and digital greeting cards are not subject to sales and use tax.

Digital Marketplace

Individuals or businesses that provide a platform or service for third-party sellers, meaning marketplace sellers, to sell their products or services to consumers, are considered marketplace facilitators. In addition to providing these services, the facilitators also collect payment from the consumer, process the transaction, and may also manage shipping and returns.

Digital Platform Operator

Those who meet the requirements to be considered a facilitator must calculate all their own and facilitated sales when determining whether they exceed the USD 100,000 or 200-transaction threshold. Importantly, facilitators are not liable for tax collection errors if the marketplace seller provided incorrect information, unless the facilitator and seller are related.

Filing and Payment Requirements in Arkansas

Taxable persons may be liable for monthly, quarterly, or annual sales and use tax reporting and payments, depending on their average monthly tax. For example, if the average monthly tax in the previous year did not exceed USD 100, the state may allow quarterly reporting and payment. If the average tax amount is below USD 25, an annual report may be granted to taxable persons. In any other case,  monthly tax returns and payments are mandatory. 

Notably, in cases where taxable persons have high monthly sales of net USD 200,000 or more for a period of one year, electronic prepayment of their due taxes is required, either in two installments of 40% each or a single payment of at least 80% of the expected monthly tax, with any remaining balance due when filing the monthly report. Finally, those whose monthly tax liabilities exceed USD 20,000 must pay the due taxes through the electronic funds transfer (ETF).

Penalties for Non-Compliance with Sales and Use Tax Requirements

There are several types of penalties for those who do not comply with sales and use tax requirements, including negligence, fraud, and failure-to-file-and-pay penalties. A 10% negligence penalty is imposed when the cause of the deficiency is tax negligence or disregard of the law. However, if a more serious penalty is imposed, the negligence penalty is not charged.

The 50% fraud penalty for the unpaid tax is one of those more serious penalties. The fraud penalty is imposed when a taxable person intentionally violates the sales and use tax rules and regulations. When taxable persons fail to file a tax return on time, a 5% penalty is applied for each month or part of a month the return is late, up to a maximum of 35% of the due tax. The same rule applies to taxable persons who fail to pay their taxes on time.

In addition to state penalties, a 10% per annum interest rate applies to any underpaid tax from the date such tax was due to be paid until the date of payment.