Transaction privilege tax simplification

Photo by Jonathan Alvira.

At a retail location in Phoenix, the sales tax rate is 9.3 percent. In Avondale, just 20 miles west of Phoenix, it is 9.8 percent and in Chandler and Gilbert, there is a retail sales tax rate of 8.8 percent.

In May 2012, Governor Jan Brewer issued an executive order establishing the Transaction Privilege Tax Simplification Task Force, which recently released its draft report with recommendations for simplifying sales tax.

“Arizona has one of the most complex transaction privilege tax systems in the country,” the executive order said.

Though commonly referred to as sales tax, the transaction privilege tax (TPT) is not a true sales tax. According to the Arizona Department of Revenue, the tax is on the privilege of doing business in Arizona. This means that the seller is responsible for the tax.

The reason retail tax rates vary so much between Arizona cities and towns is that many of the different municipalities collect taxes on their own.

The Arizona Department of Revenue collects 6.6 percent in TPT on retail in the state. Each county collects an additional tax. In Maricopa County the rate is 0.7 percent and the City of Phoenix charges an additional 2 percent.

The Arizona Department of Revenue collects TPT on behalf of many Arizona towns; however, the larger cities have their own departments to deal with sales tax.

The Task Force

According to Governor Brewer’s executive order, “It is in the interest of taxpayers and state and local governments to make the tax code easier to understand, comply with and administer.”

The task force was created to develop proposals to simplify the TPT code and practice, focus on an option for a single administration, identify differences between state sales tax and the Model City Tax Code and standardize definitions of taxable transactions between jurisdictions.

The task force included municipal representatives from around the state, sales tax experts, Arizona business leaders who deal with the tax program, State Senator John McComish and State Representative Rick Gray.

In addition to the Transaction Privilege Tax Task Force, there were working groups for state and local standardization, online retail and contracting. Each group met once every month from August to November.

The recommendations included having taxes collected by a single entity, imposing a tax for online retail in Arizona and changing the practice for collecting contracting sales tax.

“It is not about more taxes or less taxes,” Hoffman said. “This is really about administrative efficiency.”

The task force released a draft report containing their recommendations November 27 and will adopt the final report at their final meeting today.

Online Retail

In its draft report, the task force recommended that the state Legislature pass legislation clarifying that taxable transactions are sourced at the destination to ensure that Arizona would benefit from a tax on online retail.

The Arizona Retailers Association is one group that was active in the online retail working group and commissioned a report by the economic consultants at Elliot D. Pollack and Company to look at the impact of taxation of online retail.

“The report looked at the untaxed portion of e-commerce in Arizona,” said Danny Court, Senior Economic Analyst at Elliot D. Pollack and Company.

In order to put together their report, they looked at how much money Arizona residents spend online and how much of that money is taxed.

“Because of activity occurring online, about $317 million in taxes each year is missed in Arizona and its cities and counties,” Court said.

Court said that adding sales tax to online purchases would put all retailers doing business in Arizona on a level playing field.

The report from Elliot D. Pollack and Company also predicted that if a tax on online transactions was put in place, there would be a 20-25 percent shift back to buying in stores from shopping online.

“All retailers should be collecting for online sales tax,” said Michelle Ahlmer, Executive Director at the Arizona Retailers Association.


“In Arizona the challenge is that we have, unlike many states, no central administration of this tax. Cities have their own collections and auditors,” said Dennis Hoffman, Professor of Economics at Arizona State University’s W.P. Carey School of Business.

This makes it so that businesses that operate in multiple jurisdictions have to keep track of the rates and pay taxes in each jurisdiction.

“The big issue has been simplification for two purposes,” Ahlmer said. “It makes Arizona more business friendly in general. If you operate in more than one major city, tax filings are more complicated.”

The task force recommended that instead of cities and towns collecting their own sales tax, the Arizona Department of Revenue administer TPT on behalf of the counties and municipalities in Arizona.

“We have a pretty good handle on collecting revenues and auditing,” said John Wayne Gonzales from the City of Phoenix Government Relations Department. “The Department of Revenue has a lot of responsibilities and our concern is, why would you want to take away the ability from our city to manage and collect its own taxes and conduct its own audits when we do a very good job of it, and hand it over to a statewide entity that’s doing collections throughout the entire state of Arizona?”

Establishing the Department of Revenue as the single administrator for statewide sales tax would take the authority from municipalities.

“So if we have concerns, if we have questions about certain companies and businesses, it may take longer to resolve those issues, which keeps a business in limbo,” Gonzales said.

If the Department of Revenue were to collect state, county and local sales taxes, it would take time for that tax revenue to get back to the municipalities.

“The tax would be administered by a central organization, the Arizona Department of Revenue, and would parcel it out to the different jurisdictions,” Hoffman said. “It would be up to governments to decide how to work together.”

According to Ahlmer, it costs more to deal with sales tax in Arizona, Alabama, Louisiana and Colorado for a nationwide retailer than in all other states combined.

Ahlmer said simplifying sales tax would be good for retailers in Arizona. “It would help with daily operations,” she said. “If a retailer has one location in Phoenix and one in Mesa, it would reduce the company’s operating costs.”


Contracting is another point where cities and towns disagree with the task force recommendations.

“Currently, contracting is designed to be collected at the point where service is delivered,” Hoffman said, “Prime contractors find that it is inefficient.”

When a contractor does a job, he takes 35 percent of the sale off the top for labor and the contracting sales tax is applied to the remaining 65 percent.

Under the current practice for contracting sales tax, some contractors have to deal with many different municipalities, keep track of where all the work is done and pay that sales tax in a number of different jurisdictions.

According to local business owner and task force member Linda Stanfield, it is difficult for contractors to comply with the current tax practices.

“When we work in more than one county and city or town in one day, we have to understand how each of their rules work, purchase and apply for all the licenses, report on each every month. Each of our front line employees has to learn all this and still do their specialized work the best they can, too — they have to be somewhat of a bookkeeper on the job to meet our very strenuous liability process to collect on behalf of each city, county and state.”

The task force recommended that the current tax practice should be switched to a tax on contracting materials at the point of sale.

This would mean that instead of taxes being collected in the jurisdiction where the contracting service is performed, the tax would be collected in the jurisdiction where the contracting materials are purchased.

“The reason why we would be concerned about this proposal is we know under the current system, we know how much revenue is coming into the city,” Gonzales said. “If we totally get rid of that formula and go strictly to a point of sales tax, we really don’t know if we will bring in the same amount of money, a less amount of money or more money. We just don’t know.”

According to the draft report from the Transaction Privilege Tax Task Force, “Cities and towns are concerned about the shifting of local sales tax revenues, particularly away from the smaller towns to the larger cities.”

If the majority of the state’s contracting materials are purchased in large cities as some predict, smaller towns could lose that part of their tax revenue.

The current structure for contracting sales tax was created mainly for building.

“When you build something like a new subdivision, we are responsible for developing the infrastructure of our city,” Gonzales said. “They need streets, piping to go in for water, parks, a fire station, streetlights. That costs money.”

The recommended change would redirect tax from where contracting services are provided to where the materials are produced, Hoffman said.

If a contractor was building a subdivision in Peoria but purchased the supplies in Phoenix, for example, the tax revenue for the project would go to Phoenix. Under the current tax practice the tax revenue would go to Peoria.

“The tax exists to offset the impact of development,” Gonzales said. “It doesn’t pay for itself.”

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