An unprecedented level of sales tax rebates has forced significant budget cuts at the City of Bentonville.

Because of the large volume of rebates, the city is facing a shortfall of $8.5 million, roughly 10% of the revenue expected in this year’s general operating budget. 

The latest estimates project the rebates will total $15 million this year, about double what city accounting staff expected. About $9 million of those rebates are being claimed by Walmart, according to city finance staff.

In June, the city announced a hiring freeze. Since then, city departments have continued to make budget cuts, and more details about the challenges facing the city have come to light.

“Every department participated in cutting their operating and maintenance expenses. Everybody just cut it to the bone,” City Finance Director Patrick Johndrow said.

In addition to the hiring freeze, the city is postponing construction projects until next year, including city hall renovations, some new sidewalk construction and a library bookdrop at the community center.  The city’s travel and training budget has been cut to only include critical certifications. Numerous smaller changes have also been made to plug the budget gap.

To encourage economic development, many business expenses over $2,500 qualify for sales tax rebates under state law. The rebate applies only to city and county sales tax on the amount exceeding $2,500. 

While sales tax often appears as a single number on receipts and invoices, it’s actually made up of three separate taxes: city, county, and state. Under this rebate program, the city and county sales tax is refunded, but the state sales tax is not. 

The full sales tax is paid at the time of sale, and the purchaser has up to 12 months to claim the rebate. 

The city has limited insight into individual purchases tied to the rebates. The state government collects all sales tax and then passes that money back to the city, making it difficult to predict how much and when rebates might be redeemed in the future. 

“The rebate process, I think, is less than perfect, because it's kind of like if I told you this is what you're going to get paid every month, but every once in a while, you're only going to get paid 80% of that,” Johndrow said. “It would be pretty hard to plan for your life. In our case, a budget that's highly dependent on sales tax is how we budget.”

In the case of Walmart, the large amount of rebates could be driven by the construction of the new multi-billion-dollar home office campus. Since rebate reports from the state show only the category of the business — not the kind of expense — the specific purchases being rebated are not known to the city.

In fact, much of what the city knows about Walmart’s rebates is from information voluntarily provided by the company since the city’s budget situation first began to come into focus earlier this year. 

Johndrow said he appreciated Walmart working with the city, calling them “the best partners you could possibly have in this situation.” 

“I don’t blame Walmart for taking advantage of state sales tax incentives. They’re a publicly traded company. They have a fiduciary responsibility to their shareholders to take advantage of that,” he said.

Walmart declined to discuss specifics of sales tax rebates with The Bentonville Bulletin, but through a spokesperson issued the following statement: 

“We’ve been proud to call Northwest Arkansas our home for 63 years and we’re honored to play a role in the growth of the area. We look forward to continuing to work closely with the city of Bentonville to make this community a great place to work and live.”

Johndrow has previously called the situation a “champagne problem.” For rebates to total $15 million, well over $600 million in purchases would have had to occur in Bentonville, fueling other economic activity that can be taxed now and in the future. In the immediate term, however, the rebates pose a challenge to the city.

City staff assumed rebates would be assessed within a year of purchase, as the law states a purchaser has 12 months to redeem them.

Normally, that is how things work. However, there was an unexpected issue: some larger rebates went into a purgatory of sorts while the state government audited them, according to city staff. That extended the processing timeline for rebates – something that city staff claim they didn’t even know was possible. 

“For the 2025 budget, we were looking back to 2023 saying that's past 12 months. Now, no rebates are coming out of that. We can use that number for our projections,” city communications manager Michael McCranie said. “Come to find out, that's not accurate. Rebates can come out after the 12-month legal period.” 

As a result of the current fiscal situation, city finance staff have started looking at revenue from sales tax differently.

“Now it’s like it’s not 12 months anymore. It’s 12 months plus audit ... the way I see it is I’m exposed to anything that could’ve happened and been put in audit in September of 2023,” Johndrow said. 

While he supports economic development incentives, Johndrow also feels that the state should be rebating some portion of its sales tax revenue, instead of requiring cities and counties to refund all of their sales tax on eligible purchases.

“We understand economic development, but it's all on our back,” he said.