State Sen. Jonathan Dismang has filed a bill to repeal the throwback rule for corporate income in Arkansas.
According to Dismang, the income tax apportionment throwback rule hampers economic development in Arkansas, by increasing the burden on companies creating jobs and making capital investments. The Arkansas Tax Reform and Relief Legislative Task Force, he wrote, support the repeal of the throwback rule.
This throwback rule is used by the state of Arkansas to determine the apportionment of business income by multistate businesses. Under this rule, untaxed “nowhere” income will be recaptured and taxed under the throwback rule.
Repealing the throwback rule would mean that companies would no longer be required to include “nowhere sales” in their Arkansas sales factor.
According to the Institute for Self-Reliance, a throwback rule is used by states to tax income by corporation that has facilities in that state. Per the institute’s description, a “corporation with facilities in the state has income that is not taxed by any state (because it does not have sufficient physical presence in some states where it has sales), then that income is “thrown back” and taxed in the state where the company has facilities.”
According to the Tax Foundation, Arkansas is one of 22 states, in addition to the District of Columbia, that has a throwback rule. There are also three states that have throwout rules, in which “nowhere sales” are subtracted from the total amount of sales.
Under this bill, sales of personal property are held to have occurred in Arkansas when the property is delivered or shipped to a buyer in Arkansas regardless of the Free on Board (FOB) point. A FOB shipping point is a trade term, meaning that a buyer will take responsibility for the loss or damage of goods once the shipper receives the goods.
Repealing the throwback rule on taxes has been a pressing issue for business interests in the states for several years. During the 92nd General Assembly, the state legislature passed tax bills to shift Arkansas to a single sales factor apportionment formula. Starting in 2021, businesses will use a single sales factor apportionment formula, compared to the previous three-factor, double-weighted sales apportionment formula, which included property, payroll and sales factors to determine the amount of tax to be apportioned to the state.
The Arkansas Department of Finance and Administration prepared a report in 2018 for the Tax Reform and Relief Legislative Tax Force, estimating the impact of changing the apportionment formula and repealing the throwback rule. According to this report, repealing the throwback rule would result in an average $24,145,624 reduction in state revenue, based on the 2013-2016 tax years. For the 2018 fiscal year, the department reported that a repeal would result in a $24.5 million reduction in state revenue.
Combining the single-factor apportionment and the throwback rule would result in further decreased state revenue, the finance department argued. Based on the 2013-2016 tax years, the department estimated that repealing the throwback tax and having the single apportionment would reduce the state’s revenue by $57.2 million averaged across those years.
In 2019, Sen. Jim Hendren (I) said that repealing the throwback rule was a recommendation that would be looked at, according to the Arkansas Democrat-Gazette. Coming into the 93rd General Assembly, the Arkansas State Chamber of Commerce listed the repeal of the throwback rule as a priority in its legislative agenda for the year.
The bill, entitled Senate Bill 483, was filed on Friday, March 5. If passed, the repeal would take effect for tax years on or after Jan. 1, 2022.
Arkansas Money & Politics reached out to Dismang for comment.