Actually, there are really only two issues, but they are big issues.
Arizona’s Transaction Privilege Tax has always been an anomaly in the traditional state sales tax system. Contrary to some commentators, however, the recent amendments do not, and could not, impose an origin tax on Arizona retailers for remote sales delivered out-of-state. That is not to say that these amendments are benign. Oddly, the amendments provide incentives for Arizona residents shipping items out-of-state to purchase these items over the internet rather than visit Arizona retailers in person. Furthermore, these amendments create complexities for Arizona vendors shipping to foreign jurisdictions. Finally, these amendments create additional administrative problems for retailers that are difficult to address with existing software and invite double taxation problems that should not exist in a transaction tax world.
Background: Arizona Transaction Privilege and Use Tax
For retail sales, Arizona, like most states, has two complementary transaction-based taxes, but each tax is imposed on a different entity. The first tax, the Transaction Privilege Tax (TPT), is imposed directly on the retailer. Ariz. Rev. Stat. § 42-5001.13. A retailer will be subject to the TPT on the gross proceeds from a sale if “the location where the sale is made” is Arizona. Ariz. Rev. Stat. § 42-5034.A.9. A retailer subject to the TPT is allowed but not required to collect the amount of TPT it owes from its customers. Ariz. Admin. Code §§ 15-5-2002, 15-5-2210.
The second tax, the Arizona Use Tax, complements and backstops the TPT. The Use Tax is imposed on the use, storage or consumption in the State of tangible personal property purchased from an out-of-state retailer. Ariz. Rev. Stat. § 42-5155. Generally, the purchaser is liable for payment of Use Tax to the State, but a retailer is required to collect Use Tax from a purchaser if the retailer meets the constitutional nexus provisions. Ariz. Rev. Stat. §§ 42-5155, 42-5160. Use Tax is imposed only on transactions where TPT has not been imposed, i.e., a transaction is subject to either TPT or Use Tax, but not both. Ariz. Rev. Stat. § 42-5159.A.1.
The State and its courts have been clear that, while the location of the transfer of title or possession is relevant to the inquiry as to where the sale is made, it is the totality of the retailer’s business activities that identifies the location that may tax the proceeds. Exactly where that line is drawn, however, is not as clear. The Arizona Department of Revenue (DOR) has taken the position that, unless an exemption applies, a seller is subject to the tax if a purchaser buys a product at a store, even if the purchaser does not take possession in the state, and the product is shipped to a location outside of the state. The DOR is apparently taking the position either that the title transfers in the store, which cannot always be the case (a retailer could easily specify that title transfers to the customer outside the store, particularly if the retailer bears the risk of loss for the product while in transit), or that the transfer of title and possession are not the determinative factors.
The DOR has also taken the position that if a purchaser buys an item remotely, such as over the internet or by phone, the seller is subject to the TPT if it is engaged in retailing in the State and the product is delivered to Arizona. If the seller is not engaged in retailing in Arizona but does otherwise have constructional nexus with the state, the seller must collect the Use Tax.
Arizona recognizes that its use tax operates similarly to the traditional sales/use tax imposed by other states. As a result, Arizona allows purchasers a credit against the Use Tax for sales tax “paid in the state of purchase.” Ariz. Rev. Stat. § 42-5159.A.2; Ariz. Admin. Code § 15-5-2305.
2015 TPT Amendments Eliminating Interstate and Foreign Commerce Exemptions
Maintains Destination Sourcing for Remote Sales
Before the 2015 amendments, Arizona did not impose TPT on certain sales purchased at an Arizona store but shipped out-of-state. Specifically, former § 42-5061.A.14 excluded “[s]ales to nonresidents of this state for use outside this state if the vendor ships or delivers the tangible personal property out of this state” and former § 42-5061.A.35 excluded “[s]ales of tangible personal property that is shipped or delivered directly to a destination outside the United States for use in that foreign country.” Both of these exemptions have now been removed from the statute. H.B. 2701, 51st Leg., 2d Reg. Sess. (Ariz. 2014). Thus, unless another exemption applies, sales to non-residents of tangible personal property (except for motor vehicles) delivered and used outside of the State are now subject to the TPT, and sales to both residents and non-residents delivered and used outside of the country are subject to the TPT. The effect of the Amendments is that Arizona will now tax all sales of tangible personal property made at Arizona stores regardless of the delivery location.
Some commentators have suggested that these amendments make the Arizona TPT a transaction tax that uses origin sourcing. The amendments do not do this. First, the amendments apparently only apply to sales that take place in person at stores in Arizona. Such sales, even of products shipped out-of-state, can hypothetically be interpreted as a destination sourced over-the-counter sale. These amendments do not change the rule for remote sales. The Arizona Department of Revenue’s position has always been and continues to be that sales over the internet delivered outside of Arizona are not subject to TPT, even if the retailer making the sale makes the sale in Arizona. Thus, an Arizona vendor, with a website on Arizona servers, making a sale over that website to an Arizona resident for delivery outside of the state is not liable to TPT on that transaction. This is classic destination sourcing.
Exacerbates Unlevel Playing Field for Brick-and-Mortar Merchants
Oddly, at a time when both states and the federal government are looking for methods to fairly and efficiently level the sales tax collection obligations between brick-and-mortar stores and remote sellers, Arizona seems to have amplified the problem. Previously, a nonresident could visit an Arizona stores, buy something and have it shipped out-of-state without triggering application of the TPT. After the amendments, if the nonresident does this, the TPT applies. Thus, to the extent Arizona retailers pass the TPT through to customers, Arizona non-residents have a financial incentive to bypass buying items to be used out of state from Arizona stores. This amendment was probably focused on trying to capture revenue associated with snowbirds that live part-time in Arizona, shop and have purchases sent to their other homes up north. However, Arizona brick-and-mortar retailers may not be thrilled by the new incentive to avoid in-store purchases.
Aggravates Existing Administrative and Double Taxation Problems with TPT
Numerous retailers have recently experienced significant problems regarding whether the TPT or the Use Tax applies, and on what transactions tax should be applied. By expanding the types of transactions subject to the tax, these problems are only further entrenched. Practically, for sales shipped to another jurisdiction, many retailers do not have the systems to determine and calculate a transaction tax based on anything other than a shipping address. The reason for this is obvious – the shipping address is the address typically used by other states. Thus, the Arizona TPT system creates a requirement that retailers determine two different jurisdictions for tax purposes. Similarly, there continues to be confusion regarding when Use Tax should be collected on sales made outside the State but shipped into the State.
Importantly, the Arizona TPT system creates the possibility that two states will impose a tax on the transaction, with no credit between the two. The new amendments will make this worse by expanding the transactions on which TPT is applied. Arizona will impose the TPT on transactions initiated in Arizona and shipped out of state, and the state of delivery will impose its use tax on the same. Even if the TPT may be credited against the delivery state use tax, retailer systems once again just cannot practically perform this calculation, correctly bill and correctly remit. To date, the Arizona DOR has been clear that they do not care about the double taxation or the administrative problems.
Practice Note: Complexities for Deliveries outside the United States
As noted, the amendments subject Arizona retailers to TPT on sales to all customers for which the goods are shipped out of the country. This could create the risk of double taxation if the destination country imposes a tax on the receipt of the goods. The foreign commerce clause prohibits states from imposing taxes that enhance the risk of double taxation. Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434 (1979). Arizona’s statute provides a safety valve for commerce clause problems created by the TPT by specifically exempting from the tax any products sold in transactions the Commerce Clause would prohibit § 42-5061.A.24. Thus, retailers delivering items outside the United States must determine whether application of the TPT would enhance the risk of double taxation in violation of the foreign commerce clause, therefore creating an exemption from the TPT.
