The Arizona Department of Revenue (DOR) has been working toward the objective of simplifying the way that taxpayers report the Arizona Transaction Privilege Tax (TPT) for all localities (program and non-program) within the state. Arizona intended for the state DOR to become the single point of licensing, filing and payment for all localities on January 1, 2016; however, a decision was made to delay this implementation until (at least) next year.
Changes to Arizona’s TPT Tax Returns
A change, however, is effective for June 2016 filings due in July. Arizona will no longer accept filings on the existing Arizona TPT-1 tax return and will require taxpayers to either file the TPT-2 or the TPT-EZ. The TPT-2 should be utilized by those taxpayers who have two or more locations within the state, while the TPT-EZ is intended for taxpayers who only have a single Arizona location. Arizona is requiring taxpayers to report program city level tax by location code or location number on these two forms. This filing methodology is a form of outlet reporting similar to what is currently required in Missouri, Florida and Texas. Location codes are not required for state/county reporting. If a taxpayer is filing by for two or more locations or several business names, then they must file their return electronically. Organizations can find their location code or number (which can be used interchangeably) on their transaction privilege tax license, as assigned by the DOR. Taxpayers may have one license number, with multiple locations associated to that number. Conversely, they may have individual licenses for each separate location, with each license having its own location number. Our understanding here at Sovos is that taxpayers are required to report tax on a separate TPT form for each license number. In contrast, a taxpayer with a single license number can report multiple locations on one form (TPT-2).
What About Reporting E-Commerce, Digital Products and Digital Services?
The shift to an outlet or location based reporting system poses interesting compliance questions. For example, how should entities report transaction privilege tax for both their in-store and internet sales utilizing this new system? As Arizona employs origin based sourcing (i.e., location of the retailer) for intra-state sales of goods, in-store sales or transactions that originate from one of the taxpayers physical locations should be sourced to that physical location. The reporting of local tax by outlet becomes unclear when contending with digital products, digital services or interstate sale of goods because origin based sourcing may not be applicable. The state has not provided clear guidance on any of these points. Nexus issues will also cause reporting challenges. In Arizona, city-level nexus is determined on a locality-by-locality basis. If the taxpayer does not have nexus in the given location where a sale is sourced, they are not required to collect the program city transaction privilege tax. This stands in contrast to county level tax, which always has to be collected by Arizona taxpayers. We suspect if a taxpayer has nexus, but does not have a location code for the city at issue, that the state will require that the sale should be reported to one of existing the taxpayer’s location. As long as taxpayers are taking a consistent approach in reporting tax on such transactions, the state should not have issue with the reporting in this manner. Arizona did confirm that a taxpayer would require a new location when they move a physical location or establish a new physical location. This tells us that the state appears to be taking the position that outlets are established only via physical location, and the mere act of selling into a location would not necessitate the creation of an outlet. For example, Arizona specifies that internet sales into a city where no outlet exists should be reported to an outlet in a different city, but in the same county.
Origin-Based, Outlet Reporting May Be the Future for Arizona
In summation, Arizona appears to be following the lead of other origin-based states in now requiring outlet reporting. This shift also evidences a movement to bring all Arizona cities into alignment for reporting, whereby the appropriate tax is always associated with the taxpayer’s physical locations. This change may also set the stage for eventual state-level administration of all local taxes. Some questions remain unanswered as they relate to the reporting of inter-state sales, sales of digital products as well as the proper sourcing of services. Sovos is closely monitoring the situation and will continue to ensure that our clients remain compliant with whatever changes Arizona may have in store.
