Most retailers know it but most of their customers probably don’t: There is no sales tax in Arizona.
Instead, the state has what it calls a transaction privilege tax. It’s a tax levied on the seller of goods based on the gross proceeds derived as income from sales. A traditional sales tax is something the purchaser pays on goods or services.
It’s a distinction without a difference, perhaps, since the consumer ultimately pays the tax either way.
In any event, Arizona’s tax on sales causes enough logistical and accounting issues that reform is a significant talking point in the current session of the Legislature, though no bills had been introduced as of mid-week this week.
The Arizona Tax Research Association is pushing reforms to simplify what president Kevin J. McCarthy calls “the most administratively complex sales tax system in the country.”
Under the current system, the Arizona Department of Revenue collects taxes for the state, its 15 counties and 73 municipalities. There are 18 cities that collect their own taxes and perform their own audits, including Tucson.
Last year Gov. Jan Brewer organized a task force to work on simplification. In December it issued 10 reform proposals.
The reforms cover various issues about taxation, but in terms of retail taxes, the task force recommended implementing standardized administration for the transaction privilege tax, standardized definitions, the creation of an online portal for payments and elimination of many of the nearly 100 deductions and exemptions.
“We’re looking for the Legislature to study these recommendations,” McCarthy said.
He compared the process merchants are currently required to navigate to paying property taxes. Except that when owners pay their property taxes the check goes to one entity, usually a county treasurer, who then remits the money to all the taxing authorities such as a municipality, county, school district and any other special districts.
But in the case of transaction privilege tax, a business must remit tax payments to several governments and track numerous deductions.
As a major step toward simplification, McCarthy said his group would like the state to implement the proposal for a one-stop online portal for paying the transaction privilege tax.
“When you look around the country, everybody else thinks that’s OK,” he said.
But in the past, advocates for reform and groups such as the League of Arizona Cities and Towns, which represents municipalities, were unable to reach a resolution. In particular, cities and towns have had concerns that previous reform efforts really amounted to tax breaks by another name, resulting in their jurisdictions receiving less revenue.
This year, however, the two sides appear to have more common ground.
“We need to look at the glass as being half full,” said Ken Strobeck, president of the League of Arizona Cities and Towns.
On the proposal for a portal, Strobeck said his group would favor the online portal as a way to simplify the payment process.
“What that does is make use of technology,” he said. “If there’s a way to do things simpler, we’re all for it.”
He also said the league would favor a reduction in the number deductions and exemptions allowed.
Overall, Strobeck said his organization would support seven of the 10 task force recommendations as currently written.
The three proposals the league doesn’t support would require: the state to administer transaction privilege sales tax for all municipalities, the Department of Revenue to conduct all audits of the tax, and elimination of the tax on construction sales in favor of a tax at the point-of-sale for construction materials.