Airbnb, Homeaway, and VRBO have changed the way vacationers travel. More and more guests are choosing to rent private homes overbooking hotels. The opportunity for residents of Arizona to take advantage of this has never been greater.
With a bounty of glorious destinations including Sedona, Jerome, and the Hoover Dam, the Grand Canyon State offers prospective vacation rental hosts the opportunity to pad their income and meet new people.
But new income opportunities bring new tax implications. State and local tax authorities in Arizona expect most vacation rental home hosts to properly collect and file sales tax on short-term rentals (also commonly referred to as sales tax, bed tax, or lodging tax).
To help you get compliant with Arizona tax laws, Avalara has put together this guide covering the following key points:
- Understanding Tax Compliance
- Getting Started
- Due Dates and Penalties
- Local Laws and Regulations to Consider
- Commonly Asked Questions
Disclaimer: No vacation rental tax guide is a substitute for professional tax advice. Consider it an asset to help you understand and prioritize your vacation rental questions and concerns.
Understanding Tax Compliance
You might wonder why you have to consider transaction privilege tax (TPT) when renting out your home (or other dwelling). For state and local governments, tax revenue represents a sizable portion of funding. The lodging industry’s movement toward more nontraditional rental options doesn’t excuse hosts from their tax obligations.
Much like hotel, motel, and B&B stays, short-term lodging in Arizona is subject to TPT. Whether you choose to rent your home through a marketplace like Airbnb or direct to the consumer, you open the door to tax liability at the state and local level.
Failure to comply with state and local tax laws may not catch up with homeowners in the short term. Increasingly, however, the sharing economy is being placed under the proverbial microscope. It’s recommended that you address compliance before tax authorities address it for you.
Take the time to understand when, where, and how you’re expected to collect, file, and remit TPT to the Arizona Department of Revenue. The sooner you understand your tax responsibilities, the better you can avoid potential late payment fines and interest penalties.
In its simplest form, transaction privilege tax management for your Arizona rental home can be summarized in three key steps: Registration, Collection, and Filing.
We’ve described each step below to help you better understand what’s required. That being said, taxes can be complicated. Questions pertaining to specific situations or out-of-the-ordinary conditions are best solved with a certified tax professional familiar with Arizona tax laws.
Step 1: Register with the appropriate government agencies
Prior to renting out a Arizona home, short-term rental hosts may be required to register with state and local tax authorities. Exact requirements depend on the location of your rental. For specific tax rate and licensing requirements, visit our Arizona transaction privilege tax lookup tool. It should be noted that collecting transaction privilege tax in Arizona prior to completing all necessary registrations is against the law.
For each completed registration you’ll be assigned a filing frequency. For the state, this is typically monthly, quarterly, or annually. At the local level it’s typically typically monthly, quarterly, annually or a combination depending on location.
Step 2: Collect TPT from short-term renters
Before collecting any transaction privilege tax from your guest, find out whether state or local transaction privilege tax has already been collected on your behalf. Some vacation rental marketplaces collect Arizona transaction privilege tax for their hosts.
At the time of this guide’s publication, Airbnb is collecting Arizona TPT on behalf of the host.
It’s important to note that TPT may be collected on your behalf at the state level, but not the local level. If you rent your lodging through a marketplace, be sure to identify which TPT (state, local, or both) is being collected to avoid mistakenly collecting tax twice or failing to collect. Do not assume all taxes are collected on your behalf.
If it turns out you have to collect transaction privilege tax from your guests, you’ll need to determine the appropriate tax rate to charge. This rate depends on the address of the vacation rental property. Avalara offers a tax rate lookup tool you can use to determine the appropriate taxes to collect and the correct rates to charge for your vacation rental home address.
Step 3: File TPT returns
Now, it’s time to file your TPT return with the Arizona Department of Revenue and any local tax jurisdictions with which you have registered. If you have multiple returns to file, it’s important to remember their due dates may not be the same. Also, in Arizona, registered vacation homeowners may be required to file state and local returns regardless of whether any TPT has been collected. Such returns are commonly known as “zero dollar returns.”
Take the time to double check your returns prior to submitting. Simple mistakes such as typos, missing signatures, and incorrect tax information can lead to unwanted delays. It’s not uncommon for well-meaning taxpayers to overlook basic details that may result in filings being rejected.
Due Dates and Penalties
Failure to file Arizona state and local transaction privilege tax returns on time may result in late fees, interest payments, and in extreme cases, legal action. This holds true regardless of whether any tax was collected during the filing period. Once you’re registered with the Arizona Department of Revenue, it’s important to stay on top of your filing deadlines.
Due dates for Arizona transaction privilege tax returns are as follows:
- Annually: Due the 20th of January
- Quarterly: Due the 20th of the month following the close of the quarter
- Monthly: Due the 20th of the month following the close of the filing period
In general, due dates for local transaction privilege tax returns in Arizona are the same as the state filing due dates. However, it’s always best to confirm this with your local tax authority.
If you’re already renting your home but not collecting TPT, understand you may be in violation of Arizona tax laws. Take the time to review your legal responsibility (with a tax professional, if necessary) and understand the risk of continuing to not collect TPT.
As tax revenue is a major source of state and local funding, tax authorities are becoming more aggressive in their efforts to identify individuals and businesses not in compliance with state and local tax laws.
Local Laws and Regulations to Consider
Business Licenses: Short-term rental hosts in Arizona may be required to register for a city license depending on location. Be sure to check with your local tax authorities for details.
Zoning Rules: Not all buildings are available for business, rental, or living usage. Most local governments have laws specifying how a home can be used. Before renting out your home, be sure to review city zoning and planning codes.
Building and Housing Standards: In most cities throughout the United States, minimal construction, design, and maintenance standards exist. Dwellings may need to meet stated criteria in order to operate legally. Contact your state and local governments for more details.
Special Permits: Check to see if your city or county requires any special permits in order to rent out your dwelling.
Homeowner Associations: Homeowner Associations (HOA) located in Arizona may have specific rules regarding vacation rentals as dictated in Declaration of Covenants, Conditions, and Restrictions (CC&Rs). Additionally, the CC&Rs may include a provision allowing for amendments to add further restrictions on the property in the future. It’s important to review this information to understand any vacation rental limitations inherent to your HOA. As a member, it’s your responsibility to understand the association’s covenants and rules.
Other Rules to Consider: This list should not be considered exhaustive. Other rules and regulations associated with leases/subletting, and condo or co-op rules may apply to your situation. A good place to start is by reviewing your signed lease and speaking with your landlord or property manager.
Commonly Asked Questions
Let’s face it, managing vacation rental taxes in Arizona can be complicated. As a vacation rental homeowner, you may encounter scenarios that leave you scratching your head. For example, who’s responsible for collecting transaction privilege tax if your long-term tenant subleases the room to a short-term guest?
To help you better understand your tax obligations, we’ve created a list of questions we frequently hear from vacation rental homeowners. Don’t see an answer to your question? Drop us a line and one of our tax experts will get in touch.
State and Local Taxes
What is the definition of “short-term rental” in Arizona?
Short-term rentals are defined by the Arizona Department of Revenue as periods of less than 30 consecutive days. Residents with a signed lease for continuous residence longer than this should not be charged transaction privilege tax.
Does the Arizona Department of Revenue require vacation rental owners to register with the state?
Yes. For the purpose of collecting TPT revenue, the Arizona Department of Revenue requires all vacation rental homeowners to register with the state prior to collecting TPT on vacation rental revenue.
What is the current transaction privilege tax rate in Arizona for short-term rentals?
The current state transaction privilege tax rate in Arizona is 5.6 percent. City and county taxes may also apply.
Do local jurisdictions in Arizona have vacation rental requirements?
Yes. Counties and some cities in Arizona require vacation rental homeowners to collect transaction privilege tax from transient occupants.
Need to look up a sales tax rate for a specific location? Choose from the list of cities in the right column or use our Arizona tax rate lookup tool to determine the tax rate and licensing requirements for your specific address.
Are there local registration requirements in Arizona?
Yes. Depending on location, vacation rental homeowners in Arizona may be required to register their dwelling with city or county tax authorities.
Are there any other licenses or permits needed for Arizona vacation rental property owners?
Yes. Short-term rental hosts in Arizona may be required to register for a city license depending on location. Be sure to check with your local tax authorities for details.
Collecting Transaction Privilege Tax
Who is required to collect and file transaction privilege tax in Arizona?
Whether you’re the property owner or not, if you collect payment from short-term guests who are not exempt from transaction privilege tax, you’re likely responsible for collecting, filing, and remitting transaction privilege tax to the Arizona Department of Revenue and, depending on location, local tax authorities. You may be the property owner, a renter subletting a room, a third-party property management firm, or other party.
NOTE: As of January, 2018, property management companies will no longer be permitted to report and remit TPT to the Arizona DOR using their own TPT license on behalf of property owners. All taxes must be filed and remitted using the property owners’ TPT license numbers.
What happens if I forget to collect transaction privilege tax from my guests?
Generally speaking, transaction privilege tax is collected from guests upon payment. However, the Arizona Department of Revenue places the legal responsibility for this tax revenue squarely on the shoulders of the host. Failure to collect tax from guests means the host will need to pay the tax or recoup the tax revenue from the guests.
Furthermore, the Arizona Department of Revenue has the authority to levy fines and charge interest on late payments and outstanding tax revenue.
Are there exemptions from transaction privilege tax in Arizona?
It’s important to remember short-term guests have rights and you need to understand and respect those rights. Tax exemptions are a prime example. Although uncommon, there are several situations where guests may be exempt from paying transaction privilege tax in Arizona. Examples include full-time students, active military personnel present in the community under official orders, and rental of accommodations in a migrant labor camp.
In most cases, substantiating documentation must be presented by the guest prior to payment. We encourage you to check with the Arizona Department of Revenue for explicit details.
My guests are not from Arizona. Do I need to collect transaction privilege tax?
Yes. transaction privilege tax is collected based on the location where it is applied and, with few exceptions, is applied to all short-term renters in Arizona. As mentioned in the prior questions, there are some exemptions to this rule, but they are not predicated on the state or country a person calls home.
Are apartment or condo rentals taxable?
Apartments and condominiums short-term rentals in Arizona are treated the same as single family home short-term rentals and taxed accordingly.
Transaction Privilege Tax Due Dates and Filing
What are the due dates for transaction privilege tax returns in Arizona?
Upon registering vacation rental properties with the Arizona Department of Revenue, you’ll be assigned one of the following filing frequencies and due dates.
- Annual Filing Frequency: Due the 20th of January. As an example, TPT collected in 2017 is due January 20, 2018. Annual filing frequencies are rarely assigned to vacation rental home owners.
- Quarterly Filing Frequency: Due the 20th of the month following the close of the quarter. As an example, TPT collected in Q1 (April, May, and June) is due July 20th.
- Monthly Filing Frequency: Due the 20th of the month following the close of the filing period. As an example, TPT collected in April is due May 20th.
Local TPT due dates will be unique to each city or county in which you are registered and assigned upon successful registration.
Are there options for outsourcing transaction privilege tax filing?
Yes. Many vacation rental hosts in Arizona file up to 16 state and local TPT returns annually. For many, this time burden is alleviated with filing solutions such as MyLodgeTax.
I didn’t rent my property during this filing period. Am I still required to file a TPT return with the Arizona Department of Revenue?
Yes. Vacation rental owners registered with the Arizona Department of Revenue are required to file returns each assigned filing period regardless of whether any TPT revenue was collected.
What happens if my assigned due date is on a weekend or holiday?
If the TPT return due date assigned by the Arizona Department of Revenue falls on a Saturday, Sunday, or state/federal holiday, returns and payments will be timely if they are postmarked on the first business day following the assigned due date.
Does the Arizona Department of Revenue offer a discount for on-time filing?
Yes! The Arizona Department of Revenue offers an accounting credit of 1 percent of the TPT collected for on-time filing paid in full up to an annual maximum of $10,000 as reimbursement for the cost of collecting and filing the tax. This credit applies only to state TPT and not city, county or other taxes.
Penalties and Interest Payments
Will I be assessed a penalty if my TPT return is filed late?
TPT returns filed late are assessed a penalty of 4.5 percent for each month (or any portion thereof) up to a maximum of 25% of the amount of tax reported on the return without any deduction for tax paid on or before the due date.
Late payment of TPT may be assessed a penalty of 0.5 percent per month up to a maximum of 10 percent. The total penalty is limited to 25 percent of the total tax due.
Does the Arizona Department of Revenue charge interest on an outstanding transaction privilege tax balance?
Outstanding TPT may be assessed interest daily at the federal rate. Interest accrues until the outstanding balance is paid. Contact the Arizona DOR for specific rate details.
What should I do if I am unable to file my return on time due to circumstances beyond my control.
Assessed penalties for late filing or paying of transaction privilege tax may be waived if hosts can show circumstances beyond their control prevented them from filing or paying transaction privilege tax returns on time. Examples include illness, natural disaster, accident, etc. Contact the Arizona Department of Revenue for more information.
I have rented my home for years without collecting TPT. What options do I have?
Vacation rental homeowners in Arizona who have failed to collect transaction privilege tax in the past may be able to take advantage of a voluntary disclosure agreement (VDA). A VDA offers an opportunity for vacation rental homeowners to proactively disclose prior period tax liabilities in accordance with a binding agreement with the Arizona Department of Revenue.
VDAs are offered to encourage cooperation with state tax laws and may result in some or all monetary penalty and interest payments being waived.
Other Common Questions
What is the difference between income tax and transaction privilege tax?
Income taxes are reported and paid annually to the federal and many state governments on “taxable” income, which is income after allowed expense deductions. Transaction privilege tax is a gross receipts tax levied by the state of Arizona for the privilege of conducting business in the state.
Does the 14-day rule apply to Arizona transaction privilege tax?
No, the 14-day rule applies to income tax and does not affect a vacation rental homeowner’s responsibility to collect and file transaction privilege tax in Arizona.
This guide to Arizona transaction privilege tax compliance should be considered an asset to help you understand and prioritize your vacation rental tax challenges. It should not be considered a substitute for professional tax advice.