Arizona Sales Tax Changes

Beginning January 1, 2015, there are many changes coming to the states sales tax system that you should be aware of.

First, all city and state sales taxes will be reported and remitted from a single point.  Starting with January 2015 sales, a single return will be filed with the State of Arizona to calculate state and city sales taxes due.  Cities that currently administer their own sales tax reporting and collection systems will now be reported and remitted through the state.  For example, Phoenix, Scottsdale, Tempe, etc…  With the single reporting and remitting of sales taxes, any auditing of these reports will also be handled by a single auditor group trained and certified by the State of Arizona.

Second, there are changes to the contractor sales tax calculations and classifications.  Currently, contractors are subject to sales taxes as either ‘prime contracting’ or ‘owner builder sales’ classifications.  These contractors are subject to tax measured at 65% of the gross amount (less exclusions) charged to their customers for these services.  Beginning with January 2015 sales, contractors that work directly for a property owner and whose work is limited to the maintenance, repair, and/or replacement of existing property (excludes modification activities) are exempt from the ‘prime contracting’ classification.  Therefore these contractors are now subject to paying retail sales tax on materials purchased to be consumed in performance of their service.  The contractor will no longer be able to use an exemption certificate for purchasing materials tax free from vendors.  Because the contractor is paying the tax on the materials purchased, sales tax will not be charged on the services to the end user or customer.  This simplifies the need for filing and charging sales tax in the various cities where the service is performed (job sites) and paying the sales tax in the city where the materials are purchased.

Contractors that do not qualify for the exemption mentioned above are still subject to the prime contracting classification as currently enacted.  A trade or service provider who is hired as a subcontractor will still need to obtain a project specific exemption certificate from ADOR to buy materials tax exempt for the project.  The 65% of the gross amount charged to the customer is still subject to the sales tax rates in the city in which the services were performed.

Tangible personal property sales sourcing rules: New guidance provides that the taxable event is where a person is ‘engaged in business’, which includes: solicitation of the sales, acceptance of the order, and receipt of payment.  The location of the title transfer does not determine where the sale occurs.
Retail Sales are sourced:

1. To the seller’s business location if the seller receives the order at an AZ business location
2. To the purchaser’s AZ location if the seller received the order at a Non-AZ business location

1. To the lessor’s business location if the lessor has an AZ business location
2. To the lessee’s address if the lessor does not have an AZ business license.

Exemption for certain foreign sales tax repealed:  Beginning with January 2015 sales, any tangible personal property (“retail sales”) that are shipped or delivered directly to a destination outside the US for use in that foreign country is no longer exempt from sales tax.

As always, if you have any questions or concerns about the changes or how it could impact you or your business, please contact our office to discuss.