Arizona restricts local TPT audits

Municipal transaction privilege tax audits in Arizona could soon become fewer and farther between, thanks to the enactment of House Bill 2380 on March 29, 2024. The law allows the Arizona Department of Revenue to deny municipality audit requests for taxpayers engaged in business in multiple jurisdictions in the state. It also prevents a local jurisdiction from auditing a business for transaction privilege tax (TPT) when the business operates in another city or town in Arizona.

Some context is in order.

Currently there must be an intergovernmental contract or agreement between the Arizona Department of Revenue and each city or town that allows the state taxing authority to collect and administer local TPT and affiliated excise taxes. Existing law also requires the director of the department to establish a unified audit committee with cities and towns, to coordinate and inform audit functions.

You’d think that would prevent a business from being audited by more than one jurisdiction in the state at a time, but apparently there was a need for more clarity. “It must be that the original agreement didn’t create an ironclad way for the Arizona Department of Revenue to reject local audits,” explains Scott Peterson, VP of Government Relations at Avalara. “The language of HB 2380 is very clear that it’s the department’s right to deny local audit requests. The earlier agreement just spells out the criteria.”

HB 2380 specifically authorizes the Arizona Department of Revenue to deny a city or town’s request to audit a taxpayer engaged in business in more than one city or town in the Grand Canyon State. Additionally, it requires the department’s unified audit committee to establish and publish uniform audit guidelines.

Note that HB 2380 does not actually prohibit municipalities from ever auditing businesses operating in multiple locations in the state. It simply gives the department the authority to prevent a local audit from occurring. The bill’s documentation explains that HB 2380 “prevents a city or town from conducting an audit on a taxpayer that is engaged in business in more than one city or town if the DOR denies the request” (emphasis added).

HB 2380 will take effect 91 days after Arizona’s legislative session concludes on April 20, 2024.

Another nail in the home-rule coffin?

Restricting a local jurisdiction’s ability to audit businesses is another restriction on home rule in Arizona.

With respect to sales tax, a “home-rule” state is a state where local taxing authorities (cities, counties, and/or special jurisdictions) have the ability to collect and administer local sales and use taxes.

State departments of revenue typically administer and collect state-level sales and use taxes in home-rule states, and they may administer and collect certain local, home-rule sales and use taxes as well. However, in home-rule states like Alabama, Alaska,* Colorado, and Louisiana numerous local governments administer and levy their own local sales and use taxes.

Home-rule jurisdictions may have different taxability rules than the state or other jurisdictions in the state. They may require businesses to register and file tax returns with the local taxing authority. In short, home rule amplifies the burden of sales tax compliance for businesses, especially businesses operating in more than one home-rule jurisdiction.

Arizona used to be one of the trickier home-rule states. In her 2013 State of the State Address, then Governor Jan Brewer called Arizona’s sales tax system “an accountant’s dream, but a business owner’s nightmare.” She said “compliance can be nearly impossible” for businesses serving customers in multiple cities, with multiple license requirements, multiple tax returns, multiple tax bases, and multiple audits. And she set about to simplify it.

Arizona House Bill 2111, signed into law in 2013, mandated the simplification of TPT, Arizona’s sales tax. Among other changes, it required the Arizona Department of Revenue to collect and administer all state and local TPT taxes — which the department has done since 2017. It also established a single-audit provision stipulating that audits be directed by state-trained staff and include any cities in which business is conducted.

The single-audit provision took effect January 1, 2015, but as Scott Peterson observed, the original agreement must not have been sufficient. The enactment of HB 2380 clearly gives the department the authority to reject local TPT audits, which should reduce the audit burden for taxpayers with more than one place of business in Arizona.

Learn more about sales tax audits, and what happens if you get audited.

*Alaska doesn’t have a statewide sales tax, so the Alaska Department of Revenue doesn’t administer any local sales taxes. However, the Alaska Remote Seller Sales Tax Commission administers remote sales taxes for participating jurisdictions in the Last Frontier. Learn more about online sales tax in Alaska.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.