Arizona’s Simplified Transaction Privilege Tax Process
If you do business in Arizona, it’s likely your sales are subject to the state’s Transaction Privilege Tax (TPT), which is essentially Arizona’s version of a sales tax. Like sales taxes in many states, the TPT varies in rate depending on location, as local jurisdictions can add their own tax onto the state rate. Previously, there were some local taxes that were administered by the state and others that weren’t which made the process of registering for a TPT license, as well as filing returns and making payments a hassle for companies doing business in multiple locations.
What Is the Transaction Privilege Tax?
The main difference between the TPT and a traditional sales tax is that, rather than being levied on purchasers, it’s levied on the vendor. The TPT covers specific types of business activities in the state, including retail sales, commercial leasing, personal property rentals, real property rentals, utilities, restaurants and bars, construction, communications, and more.
These categories encompass the sales of both goods and services, and the state rate is currently 5.6%. Although this is a tax on the vendor themselves, the cost is customarily passed on to the consumer, either through bundling in with the price of the purchase or listed separately. Either way, it has the same end result as a sales tax, and it’s commonly referred to as such.
Previously, the state administered the collection and then redistribution of some local TPT tax revenue, while other independent jurisdictions, or non-program cities, issued their own licenses and required returns and payments to be made directly to them. That created a two-step process for brick-and-mortar businesses operating in one location in the state, as they would have to register with the state and the local government in the area they were located.
For multi-location businesses and out-of-state vendors shipping to customers all over the state, however, the need to register with every non-program city and file returns with all of them made staying compliant a challenge and a time-consuming process. As of January 1, 2017, that piecework system has been replaced by a centralized system for registering for a TPT license as well as filing returns and paying both state and local taxes.
In order to facilitate a smooth transition to the new system, Arizona began introduction of the centralized reporting and filing in June of 2016 when the TPT-1 form was eliminated and replaced by the TPT-EZ and the TPT-2. The TPT-EZ can be used by businesses who operate only one physical location in the state, and so pay tax at only one rate, while the TPT-2 is for multi-location businesses. All of these forms are returned to the Arizona Department of Revenue, however, and registrations and renewals are processed through there as well.
What’s Not Changing
Although local jurisdictions will no longer issue Transaction Privilege Tax licenses or collect payments directly, their tax rates remain in effect. That means you’ll still have to keep track of the effective tax rate at the various locations throughout the state that you do business and make sure you’re collecting appropriately on those sales.
The types of goods and services that the Transaction Privilege Tax applies to can vary in different areas as well, so while you’ll always be liable for the state rate of 5.6% on all sales covered under state TPT regulations, what you’re selling may or may not be subject to local taxes as well depending on the details of the local statute.
The streamlining of this process is coming at a time when a lot of states are moving to simplify and centralize their sales tax administration. This is in part a response to the Supreme Court decision in the 1992 Quill Corp v North Dakota case in which the ruling stated that states could not compel out-of-state sellers with no physical presence in the state to collect and remit sales tax.
One part of the rationalization for that decision was that navigating the complex web of state and local taxes and registration requirements was too much of a burden for companies to comply with. A lot has changed since that decision was handed down, particularly due to the proliferation of online sales, and so many states are trying to remove obstacles to collecting sales tax from out-of-state sellers under certain circumstances.
At this point, there are 23 states that have signed on to the Streamlined Sales Tax Agreement, which requires members to centralize registration and reporting, as well as standardize the taxability of goods and services throughout the state. Although Arizona was one of the 32 states that originally joined the Streamlined Sales Tax Project in 2000, it hasn’t made the necessary changes to achieve full member status. This centralizing of TPT administration, however, is a big step in that direction.