Franchise tax administration is moving from the Secretary of State to the Department of Finance and Administration (DFA) in 2021. Taxpayers should expect convenient online compliance through the Arkansas Taxpayer Access Point and more systematic efforts to enforce and collect the tax by DFA. Returns are still due by May 1 in 2021.
The franchise tax is really two different kinds of taxes. For limited liability companies, insurance companies, and corporations without authorized capital stock, the tax is is a flat fee of $150, $300, or $400 depending on the business and its size. For most corporations, however, the tax is a capital stock tax: 0.3% of the par value of outstanding stock or a minimum of $150. Arkansas thus is one of a handful of states that still has a capital stock tax.
Act 819 of 2019 adopted a number of technical and administrative reforms that were recommended by the Tax Reform and Relief Legislative Task Force. One of these, effective May 1, 2021, was to transfer administration of the franchise tax from the Secretary of State to DFA. This is based on expectations of more convenience for taxpayers, including combining the franchise tax return with the income tax return, and more efficient and effective administration and enforcement by DFA.
DFA has now posted detailed guidance about the transition and how franchise tax compliance will work under DFA, which will begin taking returns January 1, 2021. Taxpayers are encouraged to file their returns through the Arkansas Taxpayer Access Point (ATAP), and paper returns will also continue to be an option. The DFA guidance indicates that returns will continue to be due May 1, 2021; presumably in subsequent years it will shift to sync up with the income tax deadline as provided by Ark. Code Ann. § 26-54-105(c). (Entities that do not file income tax returns will keep the May 1 deadline.)
Part of the benefit to the state of DFA enforcement is that the agency’s systematic approach to assessment and collection will be deployed. Taxpayers that do not file will face estimated assessments and conceivably tax liens for franchise tax. And the risk of revocation by the Secretary of State for nonpayment of franchise tax will continue to be a possibility.
We may start seeing audit activity by DFA regarding franchise taxes. While the flat fee part is generally straightforward, taxpayers on the capital stock side of the tax should consider whether their current filing position is correct and whether any adjustments should be made to their outstanding capital stock. In particular, a taxpayer may wish to consider reducing the par value of its shares and thus its franchise tax liability.