Not just economy putting pressure on local sales tax revenues, officials say

LITTLE ROCK Bethel Heights Mayor Fred Jack complained recently that sales tax collections in his Northwest Arkansas community are down as much as 50 percent from a year ago.

North Little Rock Finance Director Bob Scisson said sales tax revenues in his city have been sliding for eight consecutive months and are $1 million below forecast this fiscal year.

Other cities across the state with high numbers of businesses that offer merchandise delivery services also have seen a sharp drop sales tax revenue over the past 18 months, according to the Arkansas Municipal League.

While sagging revenue is due in part to the struggling economy, officials also cite a law that went into effect Jan. 1, 2008, requiring that the sales tax be applied at the point of delivery rather than the point of sale.

Through May, the state collected nearly $2 billion in sales tax revenue for the current fiscal year, the state finance office reported $3.2 million below the same point last year and $28 million, or 1.4, percent below forecast.

The change in the sales tax law brought Arkansas in line with the Streamlined Sales and Use Agreement. The agreement provides states with a way to collect transactions made by their residents through the Internet and other sellers outside the state, such as sales through catalogs.

When a majority of the states have their tax codes streamline, Congress is expected to enact federal laws allowing states to begin taxing Internet sales.

So far, Arkansas and 23 other states have passed laws changing their tax codes. Twenty-one other states are developing legislation.

Jack said the new law has hurt his city. He supported a bill during this year's legislative session to temporarily repeal the change, but the measure failed to get out of a House committee.

John Theis, deputy director of revenue for the Arkansas Department of Finance and Administration, said the law may have short-term drawbacks for some cities that are home to delivery-based companies while other cities where people who order merchandise live may tax revenues rise.

In the long run, the law could net the state as much as $100 million a year in new revenue, as much as 30 percent of which would be split among cities and counties, Theis said.

Reports say U.S. Sen. Mike Enzi, R-Wyo., and U.S. Rep. William Delahunt, D-Mass., are poised to file the streamlined sales tax bill any day.

"It's imminent," Theis said last week.

Sen. Blanch Lincoln, D-Ark., a member of the Senate Finance Committee, said last week she likes the proposal, as long it is fair to local businesses and Internet vendors.

"We've had a hearing on the finance committee, we even had a hometown company testify Wal-Mart," Lincoln said. "I think we're very capable of doing this if it levels the playing field. It makes good sense to me."

Other members of Arkansas' congressional delegation said they wanted to read the bill before making any commitment on the issue.

The streamline sales tax project started in response to a U.S. Supreme Court ruling that prohibited states from forcing an out-of-state business to collect their sales taxes unless the company had a physical presence in the state.

A recent study by the University of Tennessee showed Arkansas is losing as much as $100 million a year in taxes on Internet sales.

In 2007, the Legislature approved changed the tax code to require sales taxes to be charged at the point of delivery. The move was intended to position the state to collect sales taxes on Arkansans' Internet purchases.

But Jack said his small town and many others that are home to building supply stores, furniture stores, appliances stores and other businesses that deliver their products to buyers elsewhere are suffering because of the tax change.

In Bethel Heights, between 50 percent to 70 percent of all businesses make deliveries, he said.

"If you have delivery-based businesses, other cities are getting the sales tax dollars because the purchases are being delivered to them," he said.

The tax change also hurts cities that may have improved their infrastructure to recruit businesses to move there.

"The company may use the city's infrastructure, sewer, water, streets, street signs ... and if they're predominately a delivery-based business, for that the municipality receives nothing in the way of sales taxes," Jack said.

Rep. Jon Woods, R-Springdale, who along with Rep. John Burris, R-Harrison, filed legislation during the recent legislative session asking that the 2008 changes to the tax law be repealed until Congress enacts the national streamlined sales tax, said he was surprised some cities are not losing more tax revenue than expected.

"It's a gamble because you don't know when Congress is going to pass the streamlined tax," Woods said. "What we're doing is setting up the groundwork for taxing the Internet and right now many people go online to avoid having to pay the taxes. I think it's a political liability."

John Zimmerman, executive director of the Arkansas Municipal League, said his organization supports the move to streamline taxes and thinks now is the time for Congress to make it law across the country.

"This might be the time, this might be the year as state and local governments are looking for additional revenue," he said. "Other states, not Arkansas, are struggling with massive deficits and I think this would be an easy way for Congress to give them all some assistance. Maybe it's an idea whose time has come.