On March 14, 2017, Arkansas Governor Asa Hutchinson signed HB 1562 (Act 482), which changes how partnership income is treated for tax years beginning on or after January 1, 2018. The state legislature also is considering changes to its apportionment rules, particularly in the area of receipts from services and intangibles, the expansion of its throwback rule and the adoption of a throwout rule.

Partnership taxation changes for years beginning on or after January 1, 2018

Under current law, Arkansas' equivalent of the Uniform Division of Income for Tax Purposes Act (UDITPA) did not apply to partnerships.¹ Accordingly, separate accounting, rather than apportionment, applies at the partnership level. Historically, many taxpayers apportioned partnership income notwithstanding the rule to the contrary.

For tax years starting on or after January 1, 2018, the apportionment statute will require partnerships to apply Arkansas' UDITPA provisions codified under Ark. Code Ann. Section 26-51-701 et seq. at the partnership level. This change will bring Arkansas' treatment of partnerships more in line with other states.

Remaining relatively unchanged, however, is how Arkansas income is allocated to partners. Partnership income and apportionment factors will not flow up to the partners, which is the same as under existing law. Partners will allocate Arkansas partnership income as determined and reported on the Arkansas partnership return.

Proposed Arkansas UDITPA amendments

HB 2100 (introduced March 6, 2017), would incorporate some of the recent amendments to UDITPA made by the Multistate Tax Commission in 2015. The proposed legislation would amend Ark. Code Section 26-5-101 by adopting the following provisions:

— The term "business income" would be replaced with the broader term "apportionable income," defined to include all income apportionable under the US Constitution unless otherwise provided by Arkansas law.

— The "sales factor" would be renamed the "receipts factor."

— Receipts from services would be sourced where delivered. Current rule is cost-of-performance.

— Receipts from certain intangibles would be sourced based on usage in Arkansas. Intangibles enumerated for this purpose include intangibles utilized in marketing a good or service to a customer, intangibles that authorize a user to conduct a business activity in Arkansas and intangibles that are contingent on the productivity, use or disposition of the intangible property. All other income from intangibles would be excluded from the numerator and denominator of the apportionment factor. Current rule is cost-of-performance.

— Expansion of the throwback rule via a change to the definition of "taxable in other state." The proposed legislation would treat a taxpayer as taxable in another state only if: (a) the taxpayer is subject to the destination state's income tax or other business activity tax; or (b) the destination state does not impose an income tax or other business activity tax, but the taxpayer's activities in that state exceeds the protections of P.L. 86-272.

— Adoption of a throwout rule for sales other than tangible personal property excluding from the receipts factor denominator sales where the taxpayer is not taxable in another state as defined previously.

— Hedging and securities transactions would be expressly excluded from the receipts factor.

— Arkansas' UDIPTA 18 equivalent would be amended to specify that the same burden of proof applies equally to the State and taxpayers in showing alternative apportionment is appropriate. There also would be a prohibition against the imposition of penalties, when the State asserts UDITPA 18 alternative apportionment, for taxpayers that exercise "reasonable reliance" on the prescribed statutory apportionment rules.

If enacted, these provisions would be effective for years beginning on or after January 1, 2018. In addition to corporations, these provisions would begin to apply to partnership-level taxation at the same time due to the adoption of Act 482, as discussed earlier.

Implications

The changes to partnership taxation in Act 482 highlight the fact that Arkansas has been an outlier among the states in how partnership income is determined. To the extent a partnership incorrectly apportioned income in open years before 2018, there may be an opportunity to review such returns to determine if the prescribed separate accounting methodology would be more advantageous.

———————————————

———————————————
ENDNOTES

¹ Ark. Code Section 26-51-802(c).