An Arkansas Senate committee on Wednesday endorsed a bill that would extend for two years the sunset date for the 2017 state law mandating all sellers of medical marijuana collect and remit the special 4% privilege tax on sales.
The Senate Revenue and Taxation Committee recommended Senate approval of Senate Bill 465, by Sen. Jonathan Dismang, R-Beebe.
The state Department of Finance and Administration projected that the bill would raise $13.3 million in tax collections, with $12.4 million deposited to the University of Arkansas for Medical Sciences National Cancer Designation Trust Fund in fiscal 2022 that begins July 1.
Act 580 of 2019 aimed to use funds raised from medical-marijuana taxes and new tobacco taxes to help UAMS in its attempt to get a National Cancer Institute designation.
UAMS received $9.1 million in fiscal 2020 that ended June 30 as a result of Act 580 of 2019, said finance department spokesman Scott Hardin after the committee meeting. The $9.1 million is a combination of revenue from the 4% medical-marijuana privilege tax along with the additional 50-cent tax on cigarette papers, he said.
When a patient makes a purchase at a marijuana dispensary, the 6.5% state sales tax applies along with the 4% privilege tax for a total of 10.5% in state taxes, Hardin explained. When a cultivator sells to a dispensary, the 4% tax applies, but the 6.5% tax does not, he said.
Since June of 2019, the 6.5% tax on medical marijuana has generated $13.2 million in state tax revenue, while the 4% tax has generated $13.5 million in revenue, he said.
Under Dismang's bill, the privilege tax would sunset July 1, 2023.
Arkansans voted to legalize medical marijuana in 2016, but it took more than two years for the program to get off the ground.
In other action, the Senate tax committee on Wednesday advanced legislation that would impose a voluntary individual income tax on pass-through business entities, such as partnerships and S corporations, if they opt to be subject to the tax, and it would exclude certain income from gross income for pass-through entities.
The committee-endorsed legislation -- House Bill 1209, by Rep. Joe Jett, R-Success -- could provide federal tax benefits for the affected business entities while potentially increasing state tax collections.
Dismang said the finance department projects the bill would raise $4.24 million in increased state general revenue, but it would provide an estimated $50 million worth of tax savings "on the federal level for those same taxpayers."
"It's kind of an interesting idea, one that a lot of smart CPAs got together and figured out how to move forward," he said.
Eight other states have similar laws and numerous other states are considering changing their laws in a similar way, he said.
The federal Tax Cuts and Jobs Act of 2017 imposed a cap on the deduction for state and local income taxes paid or accrued during tax years 2018 through 2025, and the IRS recently indicated that it expects to propose regulations to clarify that amounts paid by a partnership or S corporation to a state, a political subdivision of a state or the District of Columbia to satisfy its liability for income taxes are not subject to the cap on the deduction, according to the finance department.
House Bill 1209 would provide a 5.9% rate on total net taxable income on certain business entities that elect to be subject to the tax, while providing a corresponding exclusion from gross income for members of the affected business entity. The bill would become effective for tax years beginning on or after Jan. 1, 2022.
The finance department's projection assumes that the number of taxpayers that elect to opt-in to pay the voluntary pass-through entity tax is 5,995 partnerships and 11,750 S corporations, the department said in its legislative impact statement on the bill.
This estimate is based on partnerships and S-corps that have net incomes greater than $80,000 per number of partners or shareholders, according to the department. The revenue projection is based on the difference between the 5.9% income tax rate paid by the pass-through entities versus an average income tax rate of about 4.5%, and the difference would be $239.
More than 45,000 pass-through entity returns reported income in 2019, including 12,658 partnership returns and 33,168 S-Corp returns. Total net income for these entities was $8.1 billion, including $3.3 billion for partnerships and $4.8 million for S-Corps, according to the finance department.