New AZ law limits how cities can collect sales-tax revenues

Douglas Dispatch
Saturday, May 25, 2013
Howard Fischer

PHOENIX - Saying it makes Arizona a friendlier place to do business, Gov. Jan Brewer signed a major overhaul Tuesday of how the state and cities collect sales taxes and audit businesses to ensure compliance.

The measure places some new limits on what cities can tax beyond what is already subject to the state sales tax. That should provide some assistance to firms that do business in several communities and now have a difficult time figuring out what products and services are subject to each city's tax.

Potentially more significant for businesses, the change eliminates the ability of each city to audit a company's books, a process that business owners say makes for multiple audits of the same transactions.

And it means that contractors who do home repairs and renovations will pay sales taxes on their supplies at the time of purchase.

That eliminates the requirement to compute and pay the levy when the project is completed. It also means contractors cannot cheat the system by buying supplies tax-free and then failing to report the sales they make.

For consumers, the most visible difference is likely to come if and when Congress approves the Marketplace Fairness Act, which would permit states to require firms that sell products on the Internet to collect the applicable sales tax. The main requirement of that federal legislation is that states have a simplified sales tax system.

This new law, which takes effect in 2015, puts Arizona into compliance and means Arizonans will start paying sales taxes on Internet purchases if Congress has acted by then on the now-stalled legislation.

Sen. Steve Farley, a Tucson Democrat, said ending the tax advantage that Internet companies enjoy over "brick and mortar" companies was a key reason he supported the legislation.

But Kevin McCarthy, president of the business-oriented Arizona Tax Research Association, said he does not believe that's why the law was changed.

"This was not about the Marketplace Fairness Act," he said. "It's about fairness for Arizona businesses."

Brewer called the move long overdue.

"We've been talking about simplifying the Arizona sales tax system since my days in the Legislature," said the governor, first elected as a representative in 1982.

The change did not come without a fight, mostly from the League of Arizona Cities and Towns.

Under current law, both state and local sales tax on construction are computed when - and where - a building is built, based on a formula that seeks to figure out how much of a project's total cost is in supplies.

Brewer's original proposal would have required all contractors to pay sales taxes on supplies at the time of purchase. That led to complaints from mayors, especially in rapidly growing communities with few building-supply stores, who feared that firms would buy all their materials in one place. That would be a tax boon for that city - and a potential big revenue loss for other communities where the actual home, office or industrial facility was being built.

The compromise keeps the current system in place for new construction, imposing the point-of-sale tax only for home repairs and remodeling. That was enough to get the cities to drop their objections - and enough to get the legislation approved with only one dissenting vote.

Sen. John McComish, R-Phoenix, said the real winners are companies that have had to struggle with the tax code.

"The way I described it is. our businesses were spending too much time keeping score and not enough time playing the game," he said. McComish said the less time companies have to spend figuring out what taxes are owed to which jurisdiction, the more time they have to sell their products.