The Arizona Department of Revenue has released an advisory policy statement dealing with “substantial nexus” and sourcing rules within the state. First, the statement clarifies that the Transaction Privilege Tax (TPT) is a tax on the privilege of doing business in Arizona that businesses can pass on to their clients, and that businesses do not have to be within the state to be subject to the TPT.
The policy statement highlights the Dormant Commerce and Due Process Clauses of the US Constitution, the rulings in Quill Corp v. North Dakota and South Dakota v. Wayfair, noting that Arizona’s substantial nexus rules derive from the most current precedent, Wayfair, which allows for both physical and economic factors in determining substantial nexus in a state. If a business performs activities in the state of Arizona either directly or through independent contractors physically in the state, that business has established substantial physical nexus and would be subject to TPT for all applicable business activities from the first dollar derived from taxable activities. For economic nexus, the Arizona thresholds only apply to retail sales, so personal property rentals and other business classifications do not count when calculating if the threshold has been met. The remote business will also only be subject to TPT for retail transactions. One additional consideration is that cities are permitted to impose a City Privilege Tax on businesses that establish nexus within those cities. Businesses who have nexus with the state of Arizona also have nexus in every city and are subject to all applicable local taxes.
Use tax, it is noted in the policy statement, is not as highly relevant as it previously was, due to out-of-state vendors now charging TPT on sales to Arizona customers. However, the use tax still applies to any purchases from out-of-state businesses or utility businesses where TPT is not charged. Consumers are liable for use tax, even if the vendor may be responsible for collecting and remitting the tax. The Department of Revenue takes the position that they will generally seek to impose TPT rather than use tax.
Once nexus is established, a business must consider sourcing. Arizona’s sourcing rules will help businesses determine the appropriate rate for each business classification and can be found at A.R.S. §§ 42-5034, -5040 with more guidance for retail, personal property leasing, or rental sourcing provisions offered in Arizona Transaction Privilege Tax Ruling TPR 20-2.
Businesses looking to ship or expand into Arizona should take care to understand the state’s particular tax laws. Unlike many other states, the TPT is the business’s responsibility, though they can pass it on to customers. However, this means if the business did not correctly collect the tax, they will be required to pay out of pocket if needed to make up for any shortfalls. With many cities taking advantage of the city tax, sellers will want to ensure they are calculating, charging, and collecting the correct amounts. As tax becomes more complex, taxpayers will want to ensure they are making continued efforts to stay up to date with the most recent requirements. (Transaction Privilege Tax Ruling 24-1, Signed by Woods, Robert, Director. Arizona Dept. of Rev. (12/6/24).)