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Arizona recently enacted two pieces of legislation that makes significant changes to the state’s transaction privilege tax.

Changes to Arizona Tax Law Impact Most Entities on September 13

  • 9/11/2013

Changes to Arizona Tax Law on September 13 Impacts Most Entities

Arizona recently enacted two pieces of legislation that make significant changes to the state’s transaction privilege tax.

First, effective September 13, 2013, Arizona House Bill 2324 makes leases of real property between two businesses (with at least 80 percent common ownership) exempt from municipal and state transaction privilege taxes.

Current law only exempts leases of real property to affiliated companies; leases to or from limited liability companies taxed as corporations do not qualify. The new law expands the exemption to affiliated businesses and persons.

"Prior to the law change, LLCs, sole proprietors — any entities other than a corporation — weren't eligible," says Marcus Mims, state and local tax partner with CliftonLarsonAllen. "Now all Arizona businesses get the exemption regardless of how your entity is set up."

The second piece of legislation, Arizona House Bill 2111, centralizes the administration of local taxes. Under current law, certain cities collect their own transaction privilege tax (TPT) and may perform their own audits. As an alternative, cities may contract with the Department of Revenue (DOR) to collect the TPT and perform audits on their behalf. Under the new law, the DOR is required to modify its online portal so that taxpayers can pay state, county, and municipal taxes online. The new law simplifies and centralizes the taxpayer experience.

Audit and payment changes

In addition, effective January 1, 2015, cities and towns that levy a local TPT must enter into agreement with the DOR to provide for unified and coordinated auditing programs. The DOR will audit taxpayers with locations in two or more Arizona cities or towns.

"Rather than filing and paying tax to the city of Phoenix and then separately filing and paying tax to the state of Arizona, you can go online and file and pay tax to both jurisdictions at one time,” says Mims. "In the event of an audit, you will be audited one time instead of for each tax jurisdiction."

Contractor tax change

H.B. 2111 also changes the incidence of tax for certain contractor-related transactions. Effective January 1, 2015, contractors whose work is limited to the replacement, repair, or maintenance of existing property are exempt from the prime contracting classification. However, contractors will be subject to a retail tax on materials purchased for the work. To be eligible, contractors must work directly for the property owner.

Under current law, contractors are subject to the transaction privilege tax under the prime contracting classification or the owner builder sales classifications. Such contractors are subject to tax on 65 percent of the amount they charge to their customer.

The new law repeals the owner builder sales classification effective January 1, 2015. Contractors that do not qualify for the exemption under new law will still be subject to the prime contracting classification.

How we can help

If you are engaging in these types of business activities, we can help you navigate and interpret recent tax and audit changes and how they may impact your organization.

Marcus Mims, Partner, State and Local Tax or 505-222-3508