Positioned as a beacon of commerce and tourism in the Southwest, Arizona is not only renowned for its dramatic landscapes and cultural richness but also for its thriving business environment. However, navigating the intricacies of transaction privilege tax, also referred to as sales tax, in the Grand Canyon State requires an understanding of its particular rules and regulations.
This guide breaks down everything you need to know about Arizona’s sales tax, from determining the right sales tax rates to understanding exemptions and filing processes. By the end of this comprehensive guide, you’ll be equipped to handle Arizona’s sales tax with confidence and ease.
Sales Tax Nexus in Arizona
When a business creates either a physical or economic nexus, it is required to collect sales tax in Arizona.Physical Nexus
A physical nexus means having a significant physical presence or engaging in enough activities within a state to require the collection and payment of sales tax. The factors that determine a physical nexus in Arizona include:- Physical Location: This includes having an office, a place for distribution, sales, or showcasing products, a warehouse or storage facility, or any other place where you conduct business. This includes ownership or lease of real or personal property in Arizona.
- Inventory in the State: This covers situations where you store your products within the state, even if it’s done through a third-party fulfillment center or 3PL (like Amazon FBA) or an online marketplace.
- Employees, independent contractors, agents, or other representatives operating on your behalf.
- Delivery of merchandise into Arizona on vehicles owned or leased by the taxpayer.
- Ownership or lease of real or personal property in Arizona.
Economic Nexus
States have established regulations to collect sales tax from out-of-state sellers who meet certain revenue and/or transaction thresholds. This rule is known as economic nexus. Beginning 2021, the threshold for economic nexus in Arizona is $100,000 in gross revenue in the previous or current calendar year’s sales. The economic nexus law went into effect on October 1, 2019. This law allows Arizona to require out-of-state sellers to collect and remit sales tax if they meet the specified sales threshold. Graduated Thresholds: In 2019, the threshold was $200,000. In 2020, it was revised to $150,000. From Jan 1, 2021 onward, the threshold has been set at $100,000. While the nexus criteria mentioned above generally apply to most businesses, additional methods exist for establishing economic sales tax nexus. To access a comprehensive list of these rules, please refer to the governing laws for economic sales tax nexus requirements in Arizona.
Arizona Sales Tax on Goods and Services
One of the first things you need to know is whether the goods you’re selling or services you’re offering are taxable in Arizona.Tangible Products
Almost all goods are taxable in Arizona, including:- Cosmetics
- Electronics
- Clothing
- Textbooks – State university or community college-required textbooks are exempt.
- Furniture
- Jewelry
- Home Goods
- Groceries – Food purchased at locations where you can eat on-site, like restaurants, delis, food carts, and vending machines, typically are taxable.
- Feminine Hygiene Products (i.e. pads, tampons, and menstrual cups)
- Diapers
- Prescription Medications
- Medical Devices
- Agricultural Supplies: Seeds, fertilizers, and machinery used directly in farming are exempt.
Services
In Arizona, the majority of all service-based transactions, such as professional services, advertising, and cleaning services, are not subject to sales tax. However, there are specific situations where certain services are taxable. For instance, taxable services are:- Job Printing
- Pipeline
- Prime Contracting: the sales of construction materials to main contractors are usually exempt, but when sold directly to property owners who are handling their own building projects, these materials are taxable.
- Private Car Line
- Telecommunications
- Transient Lodging
- Transporting
- Utilities
Software-As-A-Service (SaaS)/Digital Products
SaaS is taxable in the state of Arizona. Digital products (i.e., ebooks, downloadable video content, mobile apps) are taxable.Shipping/Handling
Shipping and handling charges in the state of Arizona are not taxable. Shipping and handling charges are only exempt from sales tax when a customer’s total bill includes separate fees specifically for delivering items to them, regardless of delivery location, and these fees are clearly listed in the seller’s records.Sales Tax Permits and Licenses in Arizona
Now that you’ve got a handle on when sales tax nexus applies and which products are taxable in Arizona, the next important step is getting your Arizona Transaction Privilege Tax License , also known as a sales tax permit.Seller’s Permit
You can register for an Arizona sales tax permit online or by filing the paper form Arizona Joint Tax Application (Jt-1). Ensure you have specific information on hand when registering for a seller’s permit, including, but not limited to:- Business Identification Information (name, address, phone number, email address)
- Business Entity Structure (sole proprietorship, partnership, corporation, LLC, etc.)
- Federal Employer Identification Number (EIN or FEIN)
- Owner/Partner/Officer Information
- Business Activity Details (description of products or services sold, sales volume, date of the first sale or the expected date to start dates)
- North American Industrial Classification System (NAICS) code, which is used to classify the type of business activities they perform.
Resale Certificate
A resale certificate is a document that allows businesses to buy products without paying sales tax on them, as long as they plan to resell those items to customers, who will then pay the tax. As a seller, you can also accept resale certificates from others looking to buy for resale. In Arizona, sellers use resale certificates to buy goods from their suppliers that they intend to resell. The issuance of the certificates is always done in good faith that the seller would report tax on the final sale of the items. You can fill out the Arizona Form 5000A provided by Arizona if you have a sales tax permit in the state after you receive your sales tax permit. If you don’t want the hassle of registering, sign up for our all-inclusive service that includes sales tax registration.Streamlined Sales Tax (SST)
The Streamlined Sales Tax (SST) is an initiative to simplify and standardize sales tax regulations across multiple states. However, Arizona is not a party to this program, meaning it does not follow the uniform rules and definitions established by SST but has its own sales tax regulations.Calculating and Collecting Sales Tax in Arizona
Sales Tax Computation
In Arizona, sales tax isn’t just one simple rate; it’s a combination of state and local taxes. To figure out the total sales tax for your calculation, you’ll need to add up the rates for the state, county, and city (if applicable) where your transaction occurs. Use TaxHero’s Arizona Sales Tax Calculator to compute for sales tax. Here’s an example. Suppose an out-of-state seller satisfies the economic nexus criteria in Arizona and sells to a customer in Phoenix, AZ, with a ZIP code of 85003. In that case, the seller has to charge the customer a total sales tax, which can be broken down as follows:
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Origin-based vs. Destination-based
When making in-state sales, it is important to determine if you are located in an origin-based or destination-based state to figure out what rate to charge for sales tax. Arizona is an origin-based state, meaning sales tax is determined based on the seller’s location. That means for an Arizona-based seller, sales tax is generally based on the location of the seller when selling within the state. For out-of-state or remote sellers, the sales tax rate is always determined by the buyer’s location. For instance, if you’re selling a product from Illinois to a customer in Phoenix, Arizona, where you have nexus, you’d apply Phoenix’s sales tax rate to that sale. To make life easier, consider using sales tax software or consulting a tax professional, like TaxHero, to ensure accurate tax calculations and collections. Understanding these tax rules helps you stay compliant, whether you’re in-state or out-of-state.Filing and Remitting Sales Tax Returns in Arizona
The next step after collection is filing and remitting your Arizona sales tax returns. Filing and remittance can vary in frequency, typically monthly, quarterly, or annually. It’s crucial to keep accurate records of your sales and tax collections and adhere to the filing schedule set by the state to remain compliant with Arizona’s sales tax regulations.Due Dates
In Arizona, the due date falls on the 20th day of the following month. For instance, sales tax collected in January is due by February 20th monthly filers. However, if this day is a holiday, weekend, or in the rare occurrence of a natural disaster, the deadline is typically extended to the next business day. For instance, if you’re a monthly filer and filing sales tax for the month of April, and the May 20th deadline falls on a holiday or weekend, you’ll have until May 21st, the following business day, to submit.Annual Prepayments
If your business has an annual Arizona sales tax liability of $1 million or more, you must make an estimated prepayment by June 20. This estimated payment should equal either half your actual sales tax for May or your total sales tax for the first 15 days of June. This prepayment will be credited against the total sales tax due when you file your June return in July. Even if your prior year’s sales tax was under $100,000, you may still need to make a June estimated payment if you expect your total current year liability to reach $100,000 or more.Filing Sales Tax Returns
To file your sales tax return for Arizona, a few options are available:- File online through the Arizona Department of Revenue.
- File by mail by using Form TPT-EZ for in-state, and TPT-2 for out-of-state/remote seller to file and pay through the mail.
- File with TaxHero – Let TaxHero take care of it so you don’t have to worry about missing a payment or return.
Timely Filing Discount
Some states offer a discount to businesses for collecting, filing, and remitting sales tax on time as an incentive to process sales taxes promptly. In Arizona, paying your sales tax on time earns you a 1% discount up to $10,000 annually. Additionally, filing online gives an extra 1.2% discount, capped at $12,000 a year. However, these discounts don’t apply to local TPT.Sales Tax Holiday
Currently, for 2023-2024, there are no planned sales tax holidays in Arizona.Arizona Sales Tax Penalties
Like in most states, sales tax is a big part of how Arizona generates revenue. Thus, maintaining compliance with sales tax regulations is of utmost importance. Failure to do so can lead to consequences and sales tax penalties. Therefore, it is crucial always to ensure you are up-to-date in filing, collecting, and remitting sales tax to the state. Here are the specific penalties for non-compliance with sales tax regulations in Arizona:- Civil penalties amounting to 4.5% of tax due per month or fraction (maximum 25%).
- On the criminal side, offenses can be classified as either misdemeanors or felonies, depending on the severity and specific circumstances.
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