As a result of action taken during Arizona’s recently concluded legislative session, the state is making significant changes to the TPT (Transaction Privilege Tax). The changes include the following:

Simplified Municipal TPT Filing Process: Beginning January 1, 2014, taxpayers will no longer be required to file TPT returns with each municipality where the taxpayer does business. Under House Bill 2111 (“H.B. 2111”), signed into law by Governor Jan Brewer on June 25, 2013, the Department of Revenue (“Department”) will create an online portal to collect transaction privilege and affiliated excise taxes. The online portal will become the sole point for licensing, filing a return, and paying transaction privilege and affiliated excise tax for all state, county, and municipal jurisdictions. Also effective January 1, 2015, cities and towns that levy a local TPT must enter into agreements with the Department to provide for unified and coordinated auditing programs. Taxpayers with locations in two or more Arizona cities or towns will no longer be audited by multiple municipalities; rather, the state will conduct multi-jurisdictional audits.

Rate Change: The TPT rate has dropped from 6.6% to 5.6% on June 1, 2013, and the state rate for transient lodging dropped from 6.5% to 5.5%. The new tax rates will be reported to the Department beginning with the June 2013 TPT-1 due in July 2013. For quarterly filers, activity from June 1, 2013 through June 30, 2013 will be based on the decreased rate, and activity from April 1, 2013 through May 31, 2013 will be reported on a second row of the return. The annual filers will follow the same format on their December 2013 returns.

Contractor Exemption: H.B. 2111 also changed the incidence of tax for certain contractor-related transactions. Effective January 1, 2015, service contractors that work directly for the real property owner and whose work is limited to repair, maintenance, or replacement of existing property are exempt from the prime contracting classification. Rather, such contractors will be subject to a retail tax on materials purchased to be consumed in performance of their service. Under current law, contractors subject to the TPT under the prime contracting classification or the owner builder sales classification are subject to the tax measured by 65% of the amount that they charge their customers. Also effective January 1, 2015, the owner builder sales classification is repealed.

Orthodontic Devices Exemption: Retroactively effective for periods beginning from and after September 30, 2007, House Bill 2259 (“H.B. 2259”) exempts the sale of orthodontic devices in Arizona, so long as they are dispensed by a licensed dental professional to a patient as part of the practice of dentistry.

Commercial Lease Exemption: Effective September 13, 2013, House Bill 2324 (“H.B. 2324”) provides a municipal and state TPT exemption for the leasing of real property between affiliated companies, businesses, persons, or reciprocal insurers. “Affiliated companies, businesses, persons, or reciprocal insurers” means the lessor holds a controlling interest in the lessee, the lessee holds a controlling interest in the lessor, an affiliated entity holds a controlling interest in both the lessor and the lessee, or an unrelated person holds a controlling interest in both the lessor and lessee. “Controlling interest” is defined as direct or indirect ownership of at least 80% of the voting shares of a corporation or of the interests in a company, business, or person other than a corporation.

Computer Data Center Exemption: Effective September 1, 2013, House Bill 2009 (“H.B. 2009”) creates a tax incentive for certain computer data centers. Qualified owners, operators, and co-location tenants of computer data centers are eligible for an exemption from both state and municipal TPT and use tax for qualified equipment that is installed in the computer data center. The owner or operator of the computer data center must apply by submitting a certification form to the Arizona Commerce Authority (ACA) containing the following: 1) name, address, and phone number; 2) address of the data center; and 3) anticipated investment and job creation associated with the computer data center, whether it qualifies as a sustainable redevelopment project, and affirmation that the computer data center meets investment requirements. To qualify as a new computer data center, an owner or operator must make a minimum investment within five years of certification in the amount of: 1) $25 million if located in a county with a population under 800,000; or 2) $50 million if located in a county with a population greater than 800,000. To qualify as an existing data center, an owner or operator must, within five years of certification, demonstrate to the ACA that a minimum investment of $250 million was made during the 72-month period prior to the effective date of the bill.

Sales of Gift Cards Exempt: Arizona House Bill 2336 (“H.B. 2336”) adds “cash equivalents” to the itemized list of transactions that do not constitute taxable proceeds. Like metal bullion and monetized bullion, the gross proceeds from the sale of cash equivalents are not taxable. The bill specifies that when the holder uses the cash equivalent to pay for a taxable good or service, that transaction is subject to tax. A cash equivalent is defined as an item or intangible sold to one or more persons through which a value denominated in money is purchased in advance and may be redeemed in full or in part for tangible personal property, services, or intangibles. Examples include gift cards, stored value cards (e.g., prepaid Visa or MasterCard), travelers’ checks, money orders, and any other prepaid intangible right to acquire tangible personal property. Cash equivalents do not include items not issued in a value denominated in money. They also do not include prepaid calling cards or prepaid authorization numbers for telecommunications services. Although never its official policy, the Department previously has issued informal guidance to taxpayers suggesting that they should collect tax both on the sale of cash equivalents and at the time they are redeemed. H.B. 2336 decisively removes any ambiguity from the transaction and is retroactive to January 1, 1999. All claims for refund arising out of the retroactive change made by H.B. 2336 must be made by December 31, 2013. The bill caps the total amount of refunds available at $10,000 and authorizes the Department, if needed, to reduce all claims filed proportionately to stay within that cap.

Food Exemption Incorporates SNAP Guidelines: Arizona Senate Bill 1179 (“S.B. 1179”) replaces statutory references to the Food Stamp Program established by the Food Stamp Act of 1977 with the Supplemental Nutrition Assistance Program (SNAP) established by the Food and Nutrition Act of 2008. It also prohibits the Department from including medicines or dietary supplements (such as vitamins and protein supplements) as food unless the item is otherwise deemed to be food. For example, the legislation specifically deems any ready-to-drink, nonalcoholic beverage to be food. The legislation specifies that the Department shall give strong consideration to specific items that are eligible for SNAP, as long as it is consistent with the intent of the Arizona law. The bill also temporarily repeals the Department’s obligation to issue advisory regulations and administrative rulings relating to tax exemptions for sales of food. S.B. 1179 applies retroactively to taxable periods beginning on or after December 31, 2001. All claims for refunds arising out of the retroactive change made by S.B. 1179 must be made by December 31, 2013. The bill caps the total amount of refunds available at $10,000 and authorizes the Department, if needed, to reduce all claims filed proportionately to stay within the cap.

Interlock Device Exemption: S.B. 1179 also amends the personal property rental classification to exempt the lease or rental of certified interlock or electronic monitoring devices from the TPT. The change is retroactive to September 1, 2004. All claims for refunds arising out of the retroactive change made by S.B. 1179 must be made by December 31, 2013. The bill caps the total amount of refunds available at $10,000 and authorizes the Department, if needed, to reduce all claims filed proportionately to stay within the cap.

Qualified Destination Management Companies: S.B. 1179 also exempts certain sales made by a qualified destination management company. A qualified destination management company is exempt from transaction privilege tax on the gross proceeds of sales or gross income derived from a qualified contract for destination management services. The bill defines “qualified destination management company” as a person that receives on an annual basis at least 80% of its gross proceeds of sales or gross income derived from destination management services. It defines “destination management services” as a business coordinating, designing, and implementing the delivery by a third party of four or more of the following: 1) transportation, 2) entertainment, 3) food or beverage, 4) recreational or amusement activity, 5) tours, 6) event venue, and 7) theme décor. The exemption is retroactive to January 1, 2002. All claims for refunds arising out of the retroactive change made by S.B. 1179 must be made by December 31, 2013. The bill caps the total amount of refunds available at $10,000 and authorizes the Department, if needed, to reduce all claims filed proportionately to stay within the cap.

TECHNICAL INFORMATION CONTACT:

Julie Chronis, Principal – Ryan, LLC