Arizona may simplify remote transaction privilege tax compliance
Arizona may allow remote sellers to collect and remit a single municipal tax rate rather than the various rates in effect across the state. The Grand Canyon State may also give remote sellers more time to register after they establish economic nexus. Remote sellers are businesses with no physical presence in the state.
Read on to learn more about the following proposals:
A single municipal transaction privilege tax rate for Arizona
Retailers required to collect and remit Arizona transaction privilege tax (TPT), the state’s version of a sales tax, currently collect the rate in effect at the location of the sale. For remote online sellers, this is the delivery address.
There are 15 counties and more than 90 municipalities in Arizona, and each jurisdiction levies a local TPT. Ensuring the proper TPT rate is assigned to each and every transaction is a big job. The enactment of Senate Bill 1325 could make it less burdensome.
SB 1325 would allow remote sellers to elect to pay a single municipal TPT rate for all taxable retail sales of tangible personal property in the state. Today, remote sellers that are required to register for TPT have to collect the municipal tax rates for each city, town, or special district.
The Arizona Department of Revenue would set the single municipal tax rate each year, basing it on the average rate of municipal taxes during the preceding fiscal year. Remote sellers would have to opt to collect the single municipal tax rate and notify the Department of Revenue of their intention to do so.
A new economic nexus threshold
SB 1325 would also modify Arizona’s economic nexus threshold.
Under current law, a remote seller is required to collect and remit Arizona TPT if its gross proceeds from sales of tangible personal property or services in Arizona during the current or previous calendar year exceed $100,000. The threshold includes exempt sales and services.
If SB 1325 is enacted, the $100,000 economic nexus threshold will be based only on taxable sales into the state. This would be a balm for businesses with no taxable sales in Arizona that have more than $100,000 in exempt sales.
A more relaxed registration requirement
Remote sellers would have more time to register and start collecting sales tax after crossing the $100,000 economic nexus threshold, should the measure become law.
Currently, remote retailers must obtain a transaction privilege tax license and begin remitting the tax on the first day of the month that starts at least 30 days after the threshold is met. Under SB 1235, remote sellers would have until January 1 of the next calendar year to register and remit.
SB 1235 wouldn’t change Arizona’s trailing nexus policy. A remote seller must collect and remit applicable sales taxes for a calendar year after establishing economic nexus. If the seller doesn’t meet the threshold in the next calendar year, it may cancel its TPT license for the following calendar year.
For example, if a registered remote retailer’s sales drop beneath the $100,000 threshold in 2024, it can cancel its TPT license and cease collecting and remitting TPT starting January 1, 2025.
Simplified reporting options for remote sales tax
Finally, SB 1235 proposes to simplify remote sales tax reporting. This could happen in a couple of different ways, but not without the cooperation of other states.
Sellers remit to home state tax agency
One option is to let remote sellers report and remit Arizona transaction privilege tax to their home tax department rather than the Arizona Department of Revenue. For this to occur, the other state’s tax agency would have to extend comity to Arizona with respect to remote sales tax, meaning it would have to recognize Arizona’s remote sales tax laws and requirements.
In that event, the bill requires the department to allow a remote seller to communicate through their home state tax agency exclusively.
Sellers remit to a central clearinghouse
Arizona can’t singlehandedly create a central clearinghouse for remote sales tax administration. However, should such a clearinghouse be created, the bill requires the Arizona Department of Revenue to use it to accept all tax returns and remittances for remote sellers.
SB 1235 specifies that “the department shall cooperate with other state tax agencies, as necessary, in the development of the central clearinghouse.” The bill defines a “central clearinghouse” as “an intermediary between remote sellers and state tax agencies that accepts tax returns and remittances from remote sellers and provides the tax returns and distributes the remittances to the appropriate state agency.”
Will it pass?
It could, though Arizona introduced a similar measure in 2022, and it was held in committees.
The proposed clearinghouse would have to be a multistate effort, and other states would have to agree to administer Arizona tax for remote sellers based in their states. The likelihood of either happening seems low.
However, the bill would give remote sellers more time to file, allow them to collect a single municipal rate on all sales in the state, and amend Arizona’s economic nexus threshold. This could impact transaction tax revenue, though it’s unclear to what extent.
If Arizona does simplify sales tax compliance for remote sellers in this way, we’ll let you know at the Avalara Tax Desk.
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