Arizona transaction privilege tax guide

Transaction privilege tax (TPT) is a tax on a vendor for the privilege of doing business in the state of Arizona. Arizona originally adopted TPT in 1933 when the rate for selling tangible personal property at retail was 2 percent. That rate is currently 5.6 percent. On top of the state TPT, there may be one or more local TPTs, as well as one or more special district taxes, each of which can range between 0 percent and 5.6 percent. Currently, combined TPT rates in Arizona range from 5.6 percent to 11.2 percent, depending on the location of the sale.

As a business owner selling taxable goods or services in Arizona, you are responsible for remitting gross receipts taxes levied on you for the privilege of conducting business in the state. TPT in Arizona is administered by the Arizona Department of Revenue (ADOR).

The cost of TPT may be passed on to your customers, but it’s your responsibility to manage your taxes and remain in compliance with state and local laws. Failure to do so can lead to penalties and interest charges.

When you need to remit Arizona TPT

In Arizona, TPT is levied on the sale of tangible goods and some services. To help you determine whether you need to remit TPT in Arizona, start by answering these questions:

1. Do you have nexus in Arizona?
2. Are you selling taxable goods or services to Arizona residents?

If the answer to both questions is yes, you’re required to register with the state tax authority, determine the correct amount of TPT per sale, file returns, and remit to the state. If you meet the criteria for remitting TPT and choose not to, you’ll be held responsible for the tax due, plus applicable penalties and interest.

The need to collect TPT in Arizona is predicated on having a significant connection with the state. This is a concept known as nexus. Nexus is a Latin word that means "to bind or tie," and it’s the deciding factor for whether the state has the legal authority to require your business to file and remit TPT.

Nexus triggers

TPT nexus used to be limited to physical presence: Arizona could require a business to register and remit TPT only if it had a physical presence in the state, such as employees or an office, retail store, or warehouse.

In June 2018, the Supreme Court of the United States overruled the physical presence rule with its decision in South Dakota v. Wayfair, Inc. States are now free to tax businesses based on their economic and virtual connections to the state, or economic nexus.

While physical presence still triggers TPT obligation in Arizona, it’s now possible for out-of-state sellers to have TPT nexus with Arizona.

Out-of-state sellers

Out-of-state sellers with no physical presence in a state may establish TPT nexus in the following ways:

• Owning or leasing real property in Arizona
• Delivering merchandise into Arizona on vehicles owned or leased by the taxpayer
• Having an employee present in Arizona for more than two days per year
• Having independent contractors or other non-employees represent the taxpayer in Arizona for more than two days per year, for the purpose of establishing and maintaining a market for the taxpayer
• Storing property for sale in the state, including merchandise owned by Fulfillment by Amazon (FBA) merchants and stored in Arizona in a warehouse owned or operated by Amazon

If you have TPT nexus in Arizona, you’re required to register with the ADOR and remit the appropriate tax to the state.

For more information, see the Arizona Department of Revenue Nexus Program TPT guidelines.

Trailing nexus

Nexus can linger even after a retailer ceases the activities that caused it to be “engaged in business” in the state. This is known as trailing nexus. As of May 2019, Arizona does not have an explicitly defined trailing nexus policy.

Fulfillment by Amazon (FBA)

If you’re an active Amazon seller and you use Fulfillment by Amazon (FBA), you need to know where your inventory is stored and if its presence in a state will trigger nexus. FBA sellers can also download an Inventory Event Detail Report from Amazon Seller Central to identify inventory stored in Arizona.

If you sell taxable goods to Arizona residents and have inventory stored in the state, you likely have nexus and an obligation to remit tax. To begin to understand your unique nexus obligations, check out our free economic nexus tool or consult with a trusted tax advisor.

Sourcing TPT in Arizona: which rate to collect

In some states, tax rates, rules, and regulations are based on the location of the seller and the origin of the sale (origin-based sourcing). In others, taxes are based on the location of the buyer and the destination of the sale (destination-based sourcing).

Arizona is an origin-based state. This means you’re responsible for applying the TPT rate determined by the ship-from address on all taxable sales.

After determining you have TPT nexus in Arizona, you need to register with the proper state authority and file and remit TPT to the state. We get a lot of questions about this and recognize it may be the most difficult hurdle for businesses to overcome. Avalara Licensing can help you obtain your Arizona business license and TPT registration.

How to register for an Arizona seller's permit

You can register for an Arizona transaction privilege license online through AZTaxes.gov. To apply, you’ll need to provide the ADOR with certain information about your business, including but not limited to:

• Business name, address, and contact information
• Federal EIN number
• Date business activities began or will begin
• Projected monthly sales
• Projected monthly taxable sales
• Products to be sold

Cost of registering for an Arizona transaction privilege license

The cost to register for a transaction privilege license in Arizona is $12.

Acquiring a registered business

You must register with the Arizona Department of Revenue if you acquire an existing business in Arizona. The state requires all registered businesses to have the current business owner’s name and contact information on file.

Streamlined Sales Tax (SST)

The Streamlined Sales and Use Tax Agreement (SSUTA), or Streamlined Sales Tax (SST), is an effort by multiple states to simplify the administration and cost of sales and use tax for remote sellers. Remote sellers can register in multiple states at the same time through the Streamlined Sales Tax Registration System (SSTRS).

As of May 2019, Arizona is not an SST member state.

Once you've successfully registered to collect Arizona TPT, you'll need to decide whether to pass that tax on to your customers, and if so, determine and apply the correct rate. Regardless of what you decide, you will be responsible for remitting timely TPT, filing timely returns with the Arizona Department of Revenue, and keeping excellent records. Here’s what you need to know to keep everything organized and in check.

How you determine Arizona TPT is influenced by how you sell your goods:

Brick-and-mortar store: Have a physical store? Brick-and-mortar point-of-sale solutions allow users to set the TPT rate associated with the store location. New tax groups can then be created to allow for specific product tax rules.

Hosted store: Hosted store solutions like Shopify and Squarespace offer integrated rate determination and collection. Hosted stores offer sellers a dashboard environment where Arizona tax collection can be managed.

Marketplace: Marketplaces like Amazon and Etsy offer integrated TPT rate determination and collection, usually for a fee. As with hosted stores, you can set things up from your seller dashboard and let your marketplace provider do most of the heavy lifting.

Mobile point of sale: Mobile point-of-sale systems like Square rely on GPS to determine sale location. The appropriate tax rate is then determined and applied to the order. Specific tax rules can be set within the system to allow for specific product tax rules.

Arizona TPT collection can be automated to make your life much easier. Avalara AvaTax seamlessly integrates with the business systems you already use to deliver TPT calculations in real time.

Tax-exempt goods

Some goods are exempt from TPT under Arizona law. Examples include food sold by qualified retailers, prescription drugs, and some medical devices.

We recommend businesses review the laws and rules put forth by the Arizona Department of Revenue to stay up to date on which goods are taxable and which are exempt, and under what conditions.

Some organizations are exempt from paying TPT under Arizona law. Examples include government agencies and some nonprofit organizations.

Tax holidays

Tax holidays exempt specific products from sales tax for a limited period, usually a weekend or a week. Approximately 17 states offer sales tax holidays every year.

As of May 2019, however, there are no TPT holidays in Arizona.

Once you're registered with the Arizona Department of Revenue and owe TPT, here are the main steps toward filing you're obligated to complete.

How to file

You’re required to remit TPT to the Arizona Department of Revenue by a certain date. The Arizona Department of Revenue will then distribute it appropriately.

Filing an Arizona TPT return is a two-step process comprised of submitting the required sales data (filing a return) and remitting the tax dollars (if any) to the ADOR. The filing process forces you to detail your total sales in the state, the amount of TPT due, and the location of each sale.

Arizona offers form TPT-1 for download, but "strongly encourages" taxpayers to utilize the AZTax.gov website for online filing.

Filing frequency

The Arizona Department of Revenue will assign you a filing frequency. Typically, this is determined by the size or sales volume of your business. State governments generally ask larger businesses to file more frequently. See the filing due dates section for more information.

Online filing

You may file directly with the ADOR by visiting their site and entering your transaction data manually. This is a free service, but preparing Arizona TPT returns can be time-consuming — especially for larger sellers.

Using a third party to file returns

To save time and avoid costly errors, many businesses outsource their TPT filing to an accountant, bookkeeper, or tax automation company like Avalara. This is a normal business practice that can save business owners time and help them steer clear of costly mistakes due to inexperience and a lack of deep knowledge about Arizona TPT code.

Filing when there are no sales

Once you have an Arizona transaction privilege license, you’re required to file returns at the completion of each assigned collection period regardless of whether any TPT is due. When no TPT is due, you must file a "zero return.”

Failure to submit a zero return can result in penalties and interest charges.

Closing a business

The ADOR requires all businesses to "close their books" by filing a final TPT return. This also holds true for business owners selling or otherwise transferring ownership of their business.

Timely filing discount

Many states encourage the timely or early filing of tax returns with a timely filing discount.

As of May 2019, the ADOR offers:

• Accounting credit of 1 percent to a maximum of $10,000 per calendar year for returns filed on paper
• Accounting credit of 1.2 percent to a maximum of $12,000 per calendar year for returns filed electronically.

Timing filing discounts only apply to state transaction privilege tax, not local TPT.

It's important to know the due dates associated with the filing frequency assigned to your business by the Arizona Department of Revenue. This way you'll be prepared and can plan accordingly. Failure to file by the assigned date can lead to late fines and interest charges.

The ADOR has separate due date for paper and electronic returns. Paper filing must be completed by the 20th of the month following the tax period. Due dates falling on a weekend or holiday are adjusted to the following business day. Electronic returns must be submitted by the last weekday of the month following the tax period. Below, we've grouped Arizona TPT filing due dates by filing frequency for your convenience.

All TPT payments must be submitted electronically, and are due the weekday before electronic returns are due.

Filing an Arizona TPT return late may result in a late filing penalty as well as interest on any outstanding tax due. For more information, refer to our section on penalties and interest.

In the event an Arizona TPT filing deadline was missed due to circumstances beyond your control (e.g., weather, accident), the ADOR may grant you an extension. However, you may be asked to provide evidence supporting your claim.

Hopefully you don't need to worry about this section because you're filing and remitting Arizona TPT on time and without incident. However, in the real world, mistakes happen.

If you miss a TPT filing deadline, follow the saying, “better late than never,” and file your return as soon as possible. Failure to file returns and remit tax on time may result in penalties and interest charges, and the longer you wait to file, the greater the penalty and the greater the interest.

If you’re in the process of acquiring a business, it’s strongly recommended that you contact the ADOR and inquire about the current status of the potential acquisition. Once you've purchased the business, you’ll be held responsible for all outstanding Arizona TPT liability.

If you’re collecting TPT from Arizona residents, you’ll need to consider how to handle taxes on shipping and handling charges.

Taxable and exempt shipping charges

For taxable sales:

• Separately stated delivery charges are generally exempt
• Delivery charges included in the sales prices are taxed with the sale
• Handling charges and combined shipping and handling charges are always taxable

For exempt sales:

• Delivery charges are exempt, regardless of whether they’re separately stated or included

There are exceptions to almost every rule with TPT, and the same is true for shipping and handling charges. Specific questions on shipping in Arizona and TPT should be taken directly to a tax professional familiar with Arizona tax laws.

For additional information, see Ruling LR13-003.