A recent ruling by the Arkansas Tax Commission has provided significant clarity for Arkansas residents conducting business in Texas. The case also confirmed that Tennessee’s excise tax qualifies for Arkansas’s credit for taxes paid to another state, an issue the DFA conceded before the hearing. Together, these developments help prevent double taxation by ensuring that Arkansas residents can claim a credit on their Arkansas return for taxes paid through their S corporations or partnerships. The ruling not only sets a precedent for future cases but also underscores the importance of understanding how the credit for taxes paid to another state applies to business owners operating across state lines.
This case involved an Arkansas resident who paid both Texas Margin Tax and Tennessee excise tax through an S corporation. While another firm prepared the entity return, our HoganTaylor team prepared the individual return and reported those taxes as credits to reduce the Arkansas liability. Prior to the hearing, the DFA conceded the Tennessee excise tax issue but continued to dispute whether the Texas Margin Tax qualified.
Working alongside the taxpayer’s other advisors, HoganTaylor demonstrated that although the Texas tax is not labeled a net income tax, it functions as one in substance because its calculation is driven by net income. The Arkansas Tax Commission agreed, reversing the proposed assessments and refund denial.
This ruling is important for Arkansas residents who do business in states like Texas and Tennessee as Arkansas taxes residents on worldwide income, so any taxes paid to other states should be credited to avoid double taxation. Without that credit, many residents would be taxed twice, once by the other state at the entity level and again in Arkansas at the individual level.
The Commission’s decision puts an end to that double taxation. It ensures Arkansas residents are not taxed again on income that has already been taxed in another state. It also sets a clear precedent the Commission may follow in future cases, which is an important development for businesses across Arkansas.
This ruling matters most for S corporations and partnerships operating in Texas, since many Arkansas residents in these structures may not have been taking advantage of this credit. The Arkansas Tax Commission’s en banc decision gives business owners a stronger psition to reduce their tax liability when they do business across state lines.
Tax Credit for Texas and Tennessee Taxes
Arkansas residents with business in Texas or Tennessee can claim a credit on their Arkansas individual return for taxes paid in those states. Many business owners have not been aware of this, which could mean they have overpaid in prior years.
Looking Ahead
This ruling gives Arkansas business owners clarity on how taxes paid in Texas and Tennessee are treated. It highlights the value of careful planning for those with operations in multiple states. At HoganTaylor, we will continue to monitor developments and help clients review their past filings, identify opportunities for amendments, and plan with confidence going forward.
If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Tax practice, please email Tony Otto, Tax Practice Lead, at jotto@hogantaylor.com.
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