Planning ahead can help city officials avoid ‘rebate’ surprises

Shelby Woods, arguably the best marketing mind to ever pitch a campaign in Arkansas, liked to say, “The name of the game is information and the one with the most, wins.”

That wisdom applies to city planners and leaders as well as to marketers.

Earlier this spring the Greenwood City Council and other Greenwood leaders were shocked to see that the city’s local sales tax disbursement from the Arkansas Department of Finance and Administration (DFA) received in February was 23% below the same period from the previous year and more than 25% below the budget projection for 2025.

Single digit swings in local sales taxes are not unusual and can result in something as simple as whether a month has five full weekends or experienced a severe weather event. A 25% deviation is big deal and can have a serious impact on a city’s projected budget.

A review of the other cities in the Fort Smith area showed no concerning declines in their revenues, and most statistics said internet sales were ahead of the previous year. Greenwood had not experienced any natural disasters or losses of major retailers or employers. Private visits with leading retailers indicated that sales were fine in the town for the month.

The answer would have to come from the DFA.

State Rep. Lee Johnson, R-Greenwood, connected Greenwood officials to DFA officials who provided a precise answer — the “Local Sales Tax Cap Rebate” is the name of the process that led to the surprise numbers.

To explain it one must go back to when the first legislation was passed to allow a city to institute a local sales tax. In response to a fear that a city tax would lead merchants to move out of the city limits to avoid sales losses resulting from a 1% increase in prices on large purchases, a compromise was reached. The maximum city sales tax that can be charged on a single purchase or transaction is $25. Whether the sale is for $200 or $200,000 the maximum city tax paid by the purchaser is $25.

The state, however, requires sellers to remit the tax on the gross receipts of the transaction. A $100,000 sale would result in the seller collecting $25 from the buyer but the seller would remit $1,000 (1% of the gross) to DFA. DFA in turn sends that full amount to the city as sales tax collected on its behalf. The seller then has 12 months to provide documents to show it paid more tax than it collected. When an overpayment is recognized by the state, DFA then refunds the amount to the seller and deducts it from state’s next payment to the city. Most months the amounts overpaid and the amounts deducted are similar and wash each other out and the impact on the city’s bottom line is minimal.

Occasionally an unusually large transaction or group of transactions are rebated in the same month. That can result in an unexpected deduction from the city’s sales tax revenue. A large construction project, or in many cases a large highway project, are the typical sources of sizable rebates.

In Greenwood’s case, sales tax collections on more than $10 million in highway construction costs resulted in a $115,000 reduction in February 2025 sales tax revenue compared to February 2024.

There have been recent news^[1] reports of other cities having similar experiences with a reduction of sales tax revenue through rebates to sellers.

On a positive note, cities do get to use excess tax payments interest free for several months, and a few sellers either forget or don’t bother to apply for the rebates, so the cities get to keep that money.

If city planners have a reasonable idea of expected income, they can plan the budgets around those expectations and avoid surprises. Fortunately, there are several sources of information available to city planners to avoid rebate surprises.

The DFA website details the taxes^[2] paid to each city by category and includes the amount in rebates for each month.

City planners can get a feel for how local sales tax income is generated and how the rebates affect the totals each month. Once they understand the patterns they can sharpen their predictions. For big road projects, the Arkansas Department of Transportation makes project cost information by job or contract number available on its website.

Most cities have a fee for building permits based on the projected cost of the project. Planners can take these numbers each month and add the anticipated tax revenue and rebates to their projections. By combining the expenditures that are going to cause some obvious rebates and looking at the historical timing of the rebates in general from the DFA data, the planners can avoid big surprises.

Every budget plan requires good information to be accurate and useful. Because cities are spending someone else’s money officials are charged with getting the most for their constituents with the funds they have been allotted. Accurate and timely information about the amounts to be expected is critical to successfully carrying out that charge.

Editor’s note: Bob Purvis is executive director of the Greenwood Chamber of Commerce. The opinions expressed are those of the author.

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