ARIZONA TAX UPDATE
2014
IN THIS ISSUE
OVERVIEW
Sales Tax
Simplification: Delayed
Implementation
The following update provides an overview of Arizona tax developments that occurred in
2014, with a focus on the year’s tax legislation and court cases. We trust that you will
find this annual compilation of Arizona tax developments useful and interesting.
Income Tax Updates
Past editions of our Arizona Tax Update are also available on our website at
www.steptoe.com/aztaxupdates.
Property Tax Updates
Other Tax Updates
SALES TAX SIMPLIFICATION: DELAYED
IMPLEMENTATION
In 2013, Governor Jan Brewer signed House Bill 2111, Arizona’s transaction privilege
(sales) tax simplification bill. The legislation was initially set to go into effect on January
1, 2015; however, certain major aspects of the reform bill are being delayed until 2016.
The Department of Revenue decided to delay the implementation of the single point of
administration provisions until January 1, 2016. These provisions call for a single “online
portal” where taxpayers could access all necessary state and city tax licenses; file a
single return for all state, county, and city sales taxes; and pay all state, city, and county
sales taxes. Citing the scale and complexity of programming required to develop the
portal, the Department of Revenue announced that the 18 “non-program” cities
(generally, larger cities such as Phoenix, Mesa, Scottsdale, Chandler, Peoria, and
Glendale) will continue to license and collect sales tax from their taxpayers until January
1, 2016, when the Department of Revenue will take over.
The Department of Revenue also set the following internal deadlines for the
implementation of the single point of administration:
BEIJING
BRUSSELS


CENTURY CITY
CHICAGO
LONDON
LOS ANGELES
NEW YORK
PALO ALTO
PHOENIX
WASHINGTON
www.steptoe.com

July 1, 2015: New joint tax application with geo-coding
October 1, 2015:
o Enhance the AZTaxes.gov e-file system
o Release new forms for filing monthly sales tax returns, allowing taxpayers to
report data by business location
o Implement bulk filing capabilities so that taxpayers can file by business
location
o Generate location-based reporting as required by cities
October 2015 – December 2015: Implement an electronic license renewal
process for all taxpayers, including non-program city taxpayers
Implementation of the single-audit and contracting classification changes went into effect
January 1, 2015. Under the single-audit provision, a taxpayer will only be subject to one
audit for all state, city, and county sales taxes, regardless of whether the audit is
conducted by the Department of Revenue or by a city. Revenue will also be responsible
for training all state and city auditors. Finally, all appeals will be directed to the
Department of Revenue, and the Municipal Tax Hearing Office will be eliminated.
The general structure of the prime contracting
classification under the sales tax simplification
reforms remains unchanged. However, the following
changes went into effect on January 1, 2015:




Service contractor exemption. Starting
January 1, 2015, the gross proceeds of sales
or gross income derived from a contract for
the “maintenance, repair, or replacement of
existing property” is exempt from sales tax
under the prime contracting classification.
Building materials sold to service contractors
on exempt projects are taxable.
Project-specific exemption certificates.
The Department of Revenue will be required
to
issue
project-specific
exemption
certificates that contractors can use to
purchase building materials tax free. To
qualify for a certificate, the contractor:
o Must work on a job that is in the control
of a taxable prime contractor
o May only use the certificate for material
that will be incorporated into a taxable
construction project
o May not have a delinquent tax balance
o Must
submit
documentation
demonstrating that it meets these
conditions to the Department
Pre-construction services exemption. As
of January 1, 2015, gross receipts
attributable to design-phase and professional
services no longer need to be contained in a
separate contract in order to be exempt from
sales tax; rather, they only need to be stated
separately from the construction services in
the contract.
Owner-builder classification. This rarelyused classification found in A.R.S. § 425076 is repealed as of January 1, 2015.
2014 LEGISLATIVE UPDATES
Senate Bill 1301, Chapter 245. Legislature slips
some substantive changes into a bill making
technical corrections.
Among the numerous
technical changes made by this bill, the Arizona
Legislature made three substantive changes to sales
and use tax provisions. First, the bill provides
guidance regarding the exemption certificates that
contractors must obtain for each project where they
are entitled to purchase building materials tax free.
The provisions in this bill differ somewhat from the
provisions in House Bill 2389. Second, the bill
amends A.R.S. § 42-5039, enacted in 2014, to
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specify that the sales and use tax exemption for
destination management companies does not extend
to transactions that are not part of a qualified
destination management services contract. Third,
this bill extends the state and local tax exemption on
proceeds from renting real property for leases
between affiliated companies, businesses, persons,
or reciprocal insurers to include leases between
members of an individual’s family or persons who
have ownership or control of a business entity.
Senate Bill 1331, Chapter 121. Changes to a city
or town’s tax code must be reflected in the
official copy of the Model City Tax Code. This bill
specifies that any changes to a city or town’s tax
code resulting in a new or different tax rate that are
not reflected in the official copy of the Model City Tax
Code are void and have no effect. The official copy
of the Model City Tax Code is kept on file with the
Department of Revenue. The bill also clarifies that a
change resulting in a new or different tax rate
includes the adoption or repeal of any model or local
option and any other change that increases the
amount of tax a taxpayer must pay to the city or town.
This bill is retroactive to the adoption of the Model
City Tax Code on July 1, 1988.
Senate Bill 1413, Chapter 7. Sales and use tax
exemption for sales of electricity or natural gas to
a manufacturer. This bill creates a tax exemption
for the purchase price of electricity or natural gas by
a business principally engaged in manufacturing or
smelting if at least 51% of the electricity or natural
gas is used in those operations. Under this bill,
“principally engaged” means that at least 51% of the
taxpayer’s business is manufacturing or smelting.
For purposes of this exemption, processing,
fabricating, job printing, mining, electricity generation,
and the operation of a restaurant are not considered
manufacturing. The bill also allows cities and towns
to add the exemption, but adding the exemption is
not required.
House Bill 2046, Chapter 43. Use tax exemption
for out-of-state businesses and employees in
Arizona during a disaster. Effective January 1,
2015, this bill provides that out-of-state businesses,
temporarily in Arizona for the sole purposes of
assisting with disaster recovery efforts, are not
required to pay state or local use taxes on any
infrastructure brought temporarily into Arizona for or
during a disaster period.
For purposes of the
exemption, infrastructure is: 1) property or equipment
owned or used by communications networks; 2)
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electric generation, transmission, and distribution
systems; 3) gas distribution systems; 4) water
pipelines; 5) public roads and bridges; and 6) related
support facilities that serve multiple customers or
Arizona citizens.
The bill also exempts these
businesses, and persons in the state to assist with
disaster recovery efforts, from Arizona income and
property taxes.
House Bill 2283, Chapter 139. Changes to return
filing dates. If a taxpayer chooses to file a paper
return rather than to file electronically, the return is
now delinquent if it is not received by the Department
of Revenue on or before the second to last business
day of the month. This is the same due date for
taxpayers filing electronically. Under the old law,
returns were not delinquent if they were either
received by the second to last business day of the
month or postmarked by the 25th day of that month.
House Bill 2285, Chapter 54.
Updates to
definition of coal sales under the retail
classification. This bill clarifies that the transfer of
title or possession of coal from the owner or operator
of a power plant to a person in the business of
refining coal is not a sale if two requirements are met:
1) the transfer is for purposes of refining the coal; and
2) title or possession of the coal is transferred back to
the owner or operator of the power plant after the
refining process is completed.
House Bill 2288, Chapter 141. Reduces sales and
use tax reporting requirements effective. Effective
January 1, 2015, this bill increases the maximum
estimated annual sales and use tax liability that
permits filing an annual return from $500 to $2,000.
The bill also increases the estimated liability range
permitting quarterly filing of sales and use tax returns
from between $500 and $1,250 to between $2,000
and $8,000.
House Bill 2389, Chapter 263. Acceptance of
digital signatures; e-filing; sourcing rules;
transaction privilege licensing changes; new
exemptions under restaurant and nonexempt
food sales classifications; updates to prime
contracting classification; changes to procedures
involving municipal sales and use taxes.
Digital signatures and e-filing. Effective as of
October 1, 2014, the Department of Revenue may
accept digital or electronic signatures on tax returns,
statements, and other documents. Additionally, this
bill provides that starting January 1, 2015, all
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taxpayers required to file state, county, or city
transaction privilege tax returns may file those returns
electronically. Taxpayers conducting business at two
or more locations, or under two or more business
names, are required to file electronically. Previously,
taxpayers with a prior year’s TPT liability of $1 million
or more were required to pay electronically but there
was no mechanism for electronic filing. NOTE: The
on-line portal for city, county, and state TPT reporting
and payment has been delayed by the Department of
Revenue until January 1, 2016. See the note at the
start of this section for further details.
Sourcing rules. The bill clarifies that the new
sourcing rules in A.R.S. § 42-5040, passed in 2013,
apply to municipal sales taxes as well as city and
county taxes.
Transaction privilege tax licensing. Under this bill,
a taxpayer must apply to the Department of Revenue
for annual state and municipal sales tax licenses.
The state licenses will cost $12 and have no renewal
fee; however, the municipal licenses may cost up to
$50 per city with an annual renewal fee of up to $50.
Additionally, businesses must have a municipal
privilege tax license for all businesses operating in
two or more locations under two or more names,
even if the businesses will file a consolidated return.
Additionally, effective January 1, 2015, taxpayers
who continue in business without timely renewing
their municipal privilege tax licenses will face a civil
penalty of $25 per jurisdiction.
Exemption for certain food sales. Under this bill,
restaurants that contract with the Department of
Economic Security and sell food and drinks at low or
reduced prices to eligible elderly, disabled, or
homeless persons are exempt from transaction
privilege tax. Additionally, these sales are not subject
to tax under A.R.S. § 42-5102 covering nonexempt
food sales. These exemptions also apply at the
municipal level.
Prime contracting. Effective January 1, 2015, prime
contractors must obtain and provide to their
subcontractors certificates allowing the tax-free
purchase of building materials for each project where
the prime contractor is subject to the prime
contracting tax. Additionally, this bill creates tax
exemptions for:
1) the gross sales or income
attributable to a written contract for design-phase
services or professional services if the terms and
conditions are stated apart from the terms and
conditions for construction services; and 2) the gross
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proceeds or income derived from a contract with the
owner of real property or the improvements on real
property for the maintenance, repair, replacement, or
alteration of the property, as long as the contract is
not also for modification activities that exceed a de
minimis amount. For purposes of this exemption, a
modification is defined as construction, improvement,
movement, wreckage, or demolition. The second
exemption also applies at the municipal level.
nonprofit that solely provides graduate and
postgraduate education in health sciences. Health
sciences is defined as medicine, nursing, physician’s
assistant studies, pharmacy, physical therapy,
occupational therapy, biomedical sciences, podiatry,
clinical psychology, cardiovascular science, nurse
anesthesia, dentistry, optometry, and veterinary
medicine. The bill went into effect on January 1,
2015.
Municipal sales and use taxes. This bill makes
several changes to the collection and audit
procedures applicable to municipal sales and use
taxes.
First, effective January 1, 2015, the
Department of Revenue will collect and administer
any transaction privilege taxes or related taxes
imposed by cities and towns. Second, all audits of
transaction privilege taxes and related taxes –
whether state or municipal – will be administered by
the Department of Revenue according to its standard
audit manual.
The bill prohibits trained and
authorized auditors from representing taxpayers in
any tax matter. Finally, the bill provides that the
Municipal Tax Hearing Office will hear appeals for all
audits and assessments initiated prior to January 1
2015; after that date, appeals of audits and
assessments will be heard pursuant to A.R.S. § 426002.
2014 COURT DECISIONS
House Bill 2415, Chapter 228.
New prime
contracting sales tax deduction for waste
facilities. This bill creates a sales tax deduction for
the proceeds from constructing mixed solid waste
processing facilities located at municipal landfills.
The purpose of the facilities must be for recycling
solid waste or producing renewable energy from the
landfill waste.
The deduction is retroactive to
January 1, 2013.
House Bill 2546, Chapter 174. No municipal sales
tax on alarm monitoring services.
Effective
January 1, 2015, this bill prohibits municipalities from
imposing sales tax on alarm system monitoring
services.
House Bill 2701, Chapter 276. New sales and use
tax exemption for sales to health sciences
institutions. This bill adds an exemption from use
tax and the transaction privilege tax under the retail
and job printing classifications for the sale of tangible
personal property to a qualifying health sciences
educational institution. A qualifying health sciences
educational institution is defined as an entity
recognized as an Internal Revenue Code § 501(c)(3)
Winter 2015
KLP Enterprises, Inc. v. Ariz. Department of
Revenue, TX2011-000427 (Ariz. Ct. App. Oct. 16,
2014). Certain services provided to farmers are
subject to tax under the prime contracting
classification as “landscaping services.” In this
case, the taxpayer provided certain services to
farmers, including removing obsolete orchards, laser
leveling of fields, excavating dirt, installing and
repairing dirt berms, disking fields, rebuilding and
reshaping field borders, and removing soil from
irrigation ditches. The taxpayer did not collect sales
taxes for the performance of these services, relying
on a now-expired regulation, Arizona Administrative
Code (A.A.C.) R15-5-606, that exempted work
performed on improved farm land for purposes of
agricultural production from the prime contracting tax.
The Arizona Court of Appeals held that the regulation
in question had been superseded by a later enacted
statute, A.R.S. § 42-5075(J), which subjected
“landscaping activities” to the prime contracting tax.
The court also found that the services performed by
the taxpayer fell within the plain language of the
statute defining landscaping activities.
Additionally, the court denied the taxpayer’s estoppel
argument, holding that the taxpayer could not meet
any of the four requirements. The court said that the
Department of Revenue’s failure to repeal or amend
A.A.C R15-5-606 was not an “affirmative act” to
which estoppel would apply. The court also found
that the taxpayer did not demonstrate that its reliance
on the regulation was reasonable. Third, the court
found the taxpayer had not demonstrated that the
Department of Revenue’s actions would have caused
the taxpayer to change its position. Finally, and most
significantly, the court stated that failing to assess the
taxpayer would harm the public interest because “the
public is harmed when businesses do not self-report
or are incorrectly self-reporting” tax.
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INCOME TAX
2014 LEGISLATIVE UPDATES
Senate Bill 1081, Chapter 68.
Changes to
requirements to claim income tax credit for
excise taxes. Effective January 1, 2015, taxpayers
claiming the income tax credit for increased excise
taxes paid must have: 1) a valid social security
number; and 2) a valid social security number or
individual taxpayer identification number issued by
the IRS for the claiming taxpayer’s spouse and any
qualifying children.
Senate Bill 1300, Chapter 223. Conformity with
the Internal Revenue Code. This bill provides for
conformity with the Internal Revenue Code
retroactive to January 1, 2014. The bill does not
provide for complete uniformity in earlier years.
Senate Bill 1301, Chapter 245.
2014 tax
corrections; Arizona adjusted gross and taxable
income; long-term health savings accounts. In
addition to technical corrections, this bill made
numerous changes to the additions and subtractions
required to calculate Arizona adjusted gross income
for individuals and Arizona taxable income for
corporations. The bill also requires administrators of
long-term health savings accounts to make annual
reports to the Department of Revenue.
Senate Bill 1326, Chapter 120. Creation of new
donation funds. This bill creates the Sustainable
State Parks and Roads Fund. Taxpayers are able to
contribute any portion of their refund or make a
separate contribution to the fund.
Senate Bill 1484, Chapter 8. New income tax
credit for manufacturers investing in renewable
energy. This bill adds a new income tax credit for
certain investments in new renewable energy
facilities that produce energy for self-consumption
and use renewable energy resources, if that energy
will be used primarily for manufacturing. To claim the
credit, the taxpayer must meet the following three
requirements: 1) investment of at least $300 million
in new renewable energy facilities in Arizona; 2) at
least 90% of the energy produced by the facility is for
self-consumption within Arizona; and 3) the power is
used primarily for manufacturing. The credit is equal
to $1 million per year for five years for each facility,
up to a maximum of $5 million per year.
employees in Arizona during a disaster. Effective
January 1, 2015, this bill exempts out-of-state
businesses and individuals, temporarily in Arizona for
the sole purposes of assisting with disaster recovery
efforts, from requirements to file, remit, withhold, or
pay Arizona income tax. This bill also provides
exemptions for certain sales and property taxes
related to disaster relief efforts.
House Bill 2272, Chapter 168. Changes to certain
tax credits.
Credit for increased research activities. Effective
January 1, 2015, under this bill, a taxpayer can apply
to the Department of Revenue for certification of
additional income tax credits for increased research
activities. The bill also requires that certification must
be received before taxpayers can claim the credit.
Quality jobs tax credit. This bill amends the
“Quality Jobs Tax Credit” to allow taxpayers to claim
the credit in years two and three when a qualifying
employee leaves and is replaced with another
qualifying employee. This change is retroactive to
January 1, 2014.
Angel investor credit. The bill extends the time
period for qualified investors to apply for the “Angel
Investor Credit” from 30 days to 90 days. It also
doubles the maximum investment amount eligible for
the credit from any one investor from $250,000 to
$500,000. Finally, the bill extends the life of credit for
an additional five years, from June 30, 2016 to June
30, 2021.
Credit for investment in a qualified small
business. The bill extends the life of this credit by
five years, from December 31, 2019 to December 31,
2024.
House Bill 2823, Chapter 278.
Changes to
student tuition organization scholarships. This
bill removes some of the restrictions on the students
who qualify for student tuition organization
scholarships
funded
by
tax-credit
eligible
contributions from corporations and insurance
companies. The bill is retroactively effective to July
1, 2014.
House Bill 2377, Chapter 10. Arizona income tax
brackets. This bill provides that for the 2015 tax
year, Arizona’s income tax brackets will be indexed
for inflation.
House Bill 2046, Chapter 43.
Income tax
exemption for out-of-state businesses and
Winter 2015
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2014 COURT DECISIONS
Harris Corp. v. Ariz. Department of Revenue, 1CA-TX 11-0006 (Ariz. Ct. App. Nov. 26, 2013). The
definition of “business income” in A.R.S. § 431131(1) includes both a transactional and
functional test; liquidation exception rejected.
The taxpayer challenged the Department of
Revenue’s treatment of the gain from the sale of all
the stock of a subsidiary as business income. The
taxpayer contended that the dispositions were
nonbusiness income. The court of appeals held that
income is business income under A.R.S. § 431131(1) if it satisfies either of the two clauses in the
statute. Thus, business income is income arising
from transactions and activity in the regular course of
the taxpayer’s trade or business (the transactional
test). Business income is also income from tangible
and intangible property if the acquisition,
management, and disposition of the property
constitute integral parts of the taxpayer’s regular
trade or business operations (the functional test).
Also, relying on its interpretation of A.R.S. § 431131(1), the court of appeals held that there is no
“liquidation exception” from business income for the
proceeds from the final disposition of assets because
such an interpretation could not be reconciled with
the functional test, which requires the court to “look
beyond the regularity of a transaction and to consider
whether the use or disposition of the property forms
an integral part of the taxpayer’s business.”
First Data Corp. v. Ariz. Department of Revenue,
1-CA-TX 11-0008 (Ariz. Ct. App. Nov. 26, 2013).
IRC Section 338 election gave rise to business
income; court again rejects the “liquidation”
exception to the functional test. In this case,
decided the same day as Harris Corp., the court
applied its interpretation of A.R.S. § 43-1131(1) to a
sale of stock by the taxpayer. The taxpayer had
elected to treat this sale as a hypothetical sale of
assets pursuant to Internal Revenue Code Section
338(h)(10). The court held that under the “functional
test” for business income, which asks if the
acquisition, management, or disposition of property
constituted an integral part of the taxpayer’s business
operations, the hypothetical sale qualified as Arizona
business income. The court also rejected the
“liquidation exception” to the functional test.
Home Depot U.S.A., Inc. v. Ariz. Department of
Revenue, 1-CA-TX 12-0005 (Ariz. Ct. App. Dec. 5,
2013). Intellectual property holding company
unitary with taxpayer. The taxpayer challenged the
Winter 2015
tax court’s ruling that it needed to include the income
of its subsidiary, a company that held and managed
the taxpayer’s intellectual property assets, on its
combined Arizona income tax return. The court held
that, despite the fact that the “[t]he two companies do
not share headquarters, books and records, software
systems, bank accounts, purchasing, employees,
officers or directors,” the activities of the two
companies were “substantially interdependent” and
required unitary treatment. The court found that the
subsidiary’s management of the taxpayer’s
trademarks was “an integral component of [the
taxpayer’s] delivery of products to its customers,”
thus satisfying the test for unitary treatment set forth
in Ariz. Department of Revenue v. Talley Industries,
Inc., 182 Ariz. 17 (Ariz. Ct. App. 1994).
PROPERTY TAX
2014 LEGISLATIVE UPDATES
Senate Bill 1352, Chapter 249. Amendments to
property valuations and changes to procedures.
This bill allows an assessor to amend the valuation of
property within 60 days of mailing the original notice
of valuation, if the assessor discovers that property
characteristic data applicable to a grouping of
properties
delineated
by
neighborhood
or
classification resulted in an incorrect opinion of value.
It also allows a taxpayer whose property is
destroyed after the assessor closes the tax rolls to
file a notice of claim pursuant to A.R.S. § 42-16254 to
prorate the value of property from the date of
destruction. The value of the property will then be
prorated from the lien date to the date of destruction.
Under the former law, the value was “fixed” from the
date of destruction. The due date of a petition for an
assessor to review an improper valuation or
classification is changed to within 60 days of the
postmark date of the notice or amended notice of
valuation, eliminating the assessor’s option to deliver
by other means and adding the date of the amended
notice. The interest rate for refunds is now set by the
Department of Revenue pursuant to A.R.S. § 421123, which ties the rate to the federal short-term
rate, set monthly by the IRS, plus three percent.
Previously, interest was calculated at the statutory
rate of 10%. Additionally, the bill limits delivery of a
notification of a proposed correction that increases
the full cash value or changes the legal classification
of the property to certified mail, return receipt
requested. Taxpayers may now appeal any valuation
or legal classification as provided by the section. The
bill clarifies that any alleged error, which was already
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the subject of a notice of proposed correction or
notice of claim, can be adjudicated as part of the
administrative or judicial appeal for the affected tax
year, without requiring parties to first exhaust their
administrative appeal remedies. Finally, the bill
prohibits an independent review of the overall
valuation or legal classification of property that is not
the result of an error as defined in A.R.S. § 42-16257
and limits correction of errors to the valuation of real
property that has not been issued a certificate of
purchase.
House Bill 2046, Chapter 43. Property use tax
exemption for out-of-state businesses and
employees in Arizona during a disaster. This bill,
effective January 1, 2015, provides that out-of-state
businesses that are temporarily in Arizona for the
sole purpose of assisting with disaster recovery
efforts are not subject to property tax on property
brought temporarily into the state. The bill also
provides for similar exemptions for income and sales
and use taxes.
House Bill 2141, Chapter 133. Consolidation of
common area parcels. This bill requires county
assessors to automatically consolidate common area
parcel combinations within the same taxing district. A
“common area” is generally property owned by a
homeowners association or similar organization for
the use and enjoyment of member property owners.
House Bill 2287, Chapter 205. Changes to right to
redeem and lien sales; civil penalties related to
reclassification. This bill requires persons bringing
action to foreclose the right to redeem to name the
county treasurer as a party to the action. It also
allows the sheriff to sell in a lien sale the personal
property to pay unpaid taxes, even if the highest bid
is insufficient to pay the outstanding taxes. Finally,
the bill eliminates the civil penalty if ownership of the
property has changed after the county treasurer has
given notification to a property owner that it has been
reclassified as class four due to the property owner’s
non-responsiveness.
House Bill 2395, Chapter 209.
Changes to
procedure for annual estimate on funds needed
by school districts.
This bill changes the
procedures for how county school superintendents
prepare and file their estimates for the money
required by the district for the coming year under the
budget adopted by the district’s governing board. It
also provides that the Property Tax Oversight
Commission shall now review the accuracy of the tax
Winter 2015
levy and rates prescribed by A.R.S. § 15-992. If a
school district disputes the commission’s finding that
the tax levy and rate are incorrect, the district may
request a hearing before the commission.
House Bill 2403, Chapter 264. Limitations on
value of real property with abandoned renewable
energy equipment. This bill adds Article 11, which
limits the assessed value on real property leased by
an owner to a tenant who utilized renewable energy
equipment on the property but defaulted on the lease
and abandoned the equipment. The assessed value
of property under this section is limited to the greater
of the total lease payments collected by the property
owner during the tax year or the assessed value of
the leased property if it were classified as Class Two
property. It also defines certain terms, including “full
cash value,” “depreciation,” and “original cost,” used
in valuing renewable energy equipment for property
tax purposes.
2014 COURT DECISIONS
Penn Racquet Sports, Inc. v. Maricopa County, 1CA-TX 13-0001 (Ariz. Ct. App. Dec. 10, 2013).
Inclusion of certain valuation factors in valuation
table is not an error subject to relief under error
correction statute.
In this case, the taxpayer
appealed a summary judgment denying relief under
the error correction statute for valuation of its plant
property. The taxpayer alleged that the Department
of Revenue erred by including valuation factors in the
property tax manual’s valuation tables that “trendedup” Class One property, and that the assessor erred
by using those valuation tables to assess the
property. The court held that the Department’s
alleged error was not an “objectively verifiable error
that does not require the exercise of discretion,
opinion or judgment,” and as such did not qualify for
relief under A.R.S. § 42-16251, the error correction
statute.
OTHER TAXES
2014 LEGISLATIVE UPDATES-LUXURY TAXES
Senate Bill 1180, Chapter 110. Changes to the
definitions of tobacco products and cider, and to
filing requirements. This bill changes the definition
of “tobacco products” to cigarettes, smoking tobacco,
snuff, chewing tobacco, cavendish, plug, or twist
tobacco, and cigars, as defined in § 42-3052,
paragraphs 5-9. The definition of cider is also
updated to include ciders made from pears and other
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pome fruits, in addition to apples. A.R.S. § 42-3001.
This bill adds wholesalers of alcoholic ciders to the
list of taxable entities, and removes wholesalers of
vinous liquors from that list. A.R.S. § 42-3353.
However, wholesalers of cider as defined in A.R.S. §
42-3001 are exempt from tax and the other
requirements of this section. A.R.S. § 42-3354.
House Bill 2674, Chapter 160. Legislature makes
significant updates to luxury tax regime for
tobacco products.
Payment and filing
requirements changed and penalties increased.
Effective January 1, 2015, any distributor that remits
taxes on tobacco products other than cigarettes must
pay that tax using monies immediately available to
the state on the date of transfer. Electronic payments
are permissible only with the approval of the state
treasurer.
Additionally, as of January 1, 2015,
distributors are required to file electronic reports and
returns using a new electronic filing program
developed by the Department of Revenue A.R.S. §§
42-3053(B)-(C). Civil penalties are imposed on any
taxpayer required to pay by electronic funds transfer,
who fails to do so, starting with the July 1, 2015
reporting period, unless the failure is due to
reasonable care and not willful neglect A.R.S. § 421125(O). Penalties for the failure to file a return or
report in the time and manner required by Titles 42 or
43 are increased to $500 per return or report. A.R.S.
§ 42-1125(K). Under prior law, penalties were only
imposed on taxpayers required to file a return and
were capped at $500 total.
than one business requiring licensing will only need
to submit one application.
Licenses are nontransferrable, including during sale, liquidation,
insolvency, and bankruptcy. If a licensed business
stays open in one of these situations, the trustee or
other appointee must obtain a license in his or her
name. Licensees must re-apply for a new license if
they change the legal status or structure of their
entity. Licenses must be displayed at each business
location.
This bill eliminates the option of an
individual who acquires unstamped cigarettes for his
own personal use to register with the Department of
Revenue. Licensees may not hold or store any
tobacco products, intended for sale or distribution in
Arizona, at a location inside or outside Arizona unless
that location has been disclosed to the Department of
Revenue. Additionally, tobacco products held or
stored for distribution or sale in Arizona, whether
inside or outside Arizona, shall be accessible to the
Department of Revenue during normal business
hours. Among existing reasons for revoking, refusing
to renew, or refusing to issue a license, the
Department of Revenue may now deny a license if
the applicant’s civil rights have been suspended
under A.R.S. § 13-904. If an applicant’s civil rights
have been suspended, he or she is ineligible to hold
a license for five years after his or her rights have
been restored. A person may not apply for or hold a
distributor’s license if he or she does not engage in
the activities of A.R.S. § 42-3201(A), and the
Department of Revenue may cancel or revoke that
license if the licensee fails to file a return for 12
consecutive months. A.R.S. § 42-3201.
Refunds based on breakage or spoilage. Under
this bill, luxury tax refunds will be granted if proof is
submitted to the Department of Revenue that the
luxury is unfit for sale due to breakage or spoilage.
Proof must be submitted within six months of the date
the luxury was received by the distributor or within
two months of when the luxury was returned to the
distributor, whichever comes later.
Interest is
calculated 60 days after the Department of Revenue
receives the claim for refund. Breakage is defined as
damage to the outer wrapping or container of the
product. Spoilage is the mutilation of the product or
its expiration. A.R.S. §§ 42-3008(A)-(D).
Limitations on retail sales. Retailers are prohibited
from using vehicles as a place of business for selling
tobacco products. This bill does not, however,
prohibit the lawful delivery of tobacco products by a
person with a valid license using a vehicle he owns,
operates, or contracts.
Retailers may sell any
tobacco product not otherwise prohibited for resale
by state or federal law. Retailers may not acquire or
possess unstamped cigarettes or other tobacco
products unless the retailer has a valid license.
A.R.S. § 42-3201.02.
Changes
to
licensing
requirements
and
procedures. A.R.S. § 42-3201 Licensing fees are
now due for each business location listed in the
license application, including when a current licenseholder updates an application by adding or replacing
business locations. The fee is $25 per location.
Potential licensees with controlling interests in more
Unstamped cigarettes: exceptions to tax stamp
requirements. This bill eliminates the option for
registered individuals to file a return and pay all
applicable taxes in lieu of purchasing official tax
stamps for cigarettes. A.R.S. § 42-3006. A licensed
distributor may submit a written request to sell,
distribute, or transfer unstamped cigarettes to
another licensed distributor; the Department of
Winter 2015
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8
Revenue will approve or deny such a request within
10 days of receipt. A.R.S. § 42-3203(D).
Unstamped
cigarettes:
storage
and
transportation. Unstamped cigarettes and untaxed
tobacco products may only be held, stored, or
transported in a vehicle in Arizona if: 1) the vehicle is
owned by a person who holds a valid license and
who is transporting the products between business
locations; and 2) the vehicle is transporting the
unstamped or untaxed luxuries to a licensed
distributor as part of a lawful sale or in interstate
commerce to a manufacturer, distributor, or retailer.
A.R.S. § 42-3201(D).
Tax stamps: payment of taxes. A person may not
sell cigarettes in Arizona unless applicable taxes
have been paid, as evidence by an Arizona tax
stamp. The Department of Revenue will now treat
taxes on non-cigarette tobacco products as paid at
the time of sale, distribution, or transfer if the
distributor reports and remits the taxes as prescribed
in A.R.S. § 42-3208. Such returns now constitute
official indicia that tobacco taxes have been paid on
those products. A.R.S. § 42-3202. Effective October
1, 2014, the discount rate on the face value of all
cigarette stamps sold is 96% (discounts prior to
September 20, 2014 ranged from 96% to 98%). Any
rebates or refunds requested on the stamps must
equal the face value of the stamp less than four
percent of face value. A.R.S. § 42-3206.
Waiver of bonding requirements. For purchases of
tax stamps on which the Indian Reservation Tobacco
Tax has been paid, a distributor may now ask the
Department of Revenue to waive the bonding
requirement if the distributor maintains a timely,
accurate, and complete filing and payment record for
two years and complies with all other requirements of
licensed distributors. A.R.S. § 42-3207(D). This
section is effective retroactively to March 31, 2012.
Tax refunds for non-cigarette tobacco products
and the Indian Reservation Tobacco Tax.
Distributors requesting a refund must now establish
entitlement to the refund by obtaining a report from
the retailer indicating the quantities sold and other
necessary facts.
The report is subject to the
following conditions: 1) it must be provided in the
form and manner required by the Department of
Revenue; 2) the Department of Revenue may use the
report to indicate which transactions require
additional information from the distributor; 3) the
burden of proof is on the distributor to demonstrate
Winter 2015
eligibility for the refund or credit, but the Department
of Revenue may also require the retailer who
prepared the report to establish its accuracy; 4) if the
retailer cannot establish accuracy, the retailer is liable
for the tax, penalties, and interest that the distributor
would have been liable for had the distributor not
otherwise complied with this subsection; 5) payment
of the liability by the retailer exempts the distributor
from liability; and 6) all amounts collected from a
retailer shall be treated as tax revenues collected
from the distributor. A.R.S. § 42-3208(G).
Limitations on unused/spoiled tax stamps. The
Department of Revenue will now only redeem unused
or spoiled tax stamps for two years from the date of
the request for redemption. The bill also specifies
that the Department of Revenue will not redeem lost
or stolen stamps. A.R.S. § 42-3209.
Filing requirements for cigarette and roll-yourown tobacco distributors. The filing deadline is
th
changed to on or before the 20 day of the month
after the month for which the return is being filed.
The return must now include the following
information, separately stated by brand and nonparticipating manufacturer: 1) the brand name of the
products; 2) the name and address of each
nonparticipating manufacturer identified on the return;
3) the number of individual cigarettes sold; 4) the
amount of luxury taxes paid or due on the cigarettes
and roll-your-own tobacco products, separately
stating the amounts paid by tax stamps, on roll-yourown tobacco containers, and any other excise taxes
paid; 5) the number of individual cigarettes received;
6) the number of individual cigarettes that the
distributor exported from Arizona without payment of
Arizona luxury taxes; 7) the number of individual
cigarettes for which the distributor received a refund
under A.R.S. § 42-3008; and 8) the invoice number
and a copy of each invoice relating to each of the
following transactions: the distributor’s purchase of
acquisition of any nonparticipating manufacturer’s
cigarettes received or sold by the distributor in
Arizona and the distributor’s export, if any, of any
nonparticipating manufacturer’s cigarettes from
Arizona. All filings must also separately state the
number of individual cigarettes in each package or
container
by
brand
and
nonparticipating
manufacturer. A.R.S. § 42-3211.
New stamp requirements for cigarettes sold onreservation to enrolled tribal members. Effective
January 1, 2015, distributors must affix a tax stamp
for on-reservation sales of cigarettes to enrolled
Steptoe Arizona Tax Update
9
members of that tribe. This stamp will only apply to
sales where the tribe does not impose a tax or
exempts its members from tax. If the tribe does levy
a tax on its members, the distributor will affix stamps
according to the rules in Chapter 5 [A.R.S. §§ 423201 to -3212]. A.R.S. § 42-3303.01.
Collection of tribal excise taxes by Department of
Revenue: Under this new code section, A.R.S. § 423308, the Department of Revenue may enter into
intergovernmental agreements or contracts with
Indian tribes to collect and administer any tribal
excise taxes on tobacco products. Any agreement
entered into under this section must contain
provisions for a uniform or coordinated audit
procedure for both the Indian Reservation Tobacco
Tax and the tribe’s excise taxes. A.R.S. § 42-3308.
Definition of “units sold changed to include
reservation sales;” when reservation sales are
deemed to occur. This bill changes the definition of
“units sold,” as used in A.R.S. § 44-7101, to eliminate
the distinction between cigarettes subject to the full
suite of Arizona tobacco taxes and those subject to
the Indian Reservation Tobacco Tax; “units sold” now
refers to all sales of cigarettes to a consumer. The
bill also deems the “sale” of cigarettes subject to the
Indian Reservation Tobacco Tax or a tribal excise tax
to occur at the earlier of either when the tax is
collected or pre-collected or when an appropriate tax
stamp is affixed to the cigarettes. A.R.S. § 447101(k).
Requirements
for
nonparticipating
manufacturers.
In 1998, Arizona entered a
settlement agreement with tobacco manufacturers
obligating participating manufacturers to fund certain
public health initiatives.
A “nonparticipating
manufacturer” is a manufacturer of tobacco products
that did not participate in the settlement.
Certifications for nonparticipating manufacturers are
now due only to the attorney general, and not also to
the Department of Revenue.
Supplemental
documentation is no longer allowed to support a
certification rejected due to incomplete or incorrect
information. Manufacturers must instead submit an
entirely new certification to the attorney general.
A.R.S. § 44-7111(3)(a).
A nonparticipating
manufacturer must now include a list of all Arizona
resident and non-resident distributors to which it sold
cigarettes in the prior calendar year in its certification.
The bill also specifies that a supplemental
certification requesting an addition or modification
does not relieve brand families from the prohibitions
Winter 2015
of the section until the request is approved by the
attorney general and the directory of cigarettes
approved for stamping and sale is updated. A.R.S. §
44-7111(3)(a)(2).
Nonparticipating manufacturers
that are not also licensed distributors must now
certify that all sales or shipments made into Arizona
are made to licensed distributors. A.R.S. § 447111(3)(a)(3)(e). If a manufacturer is not listed in the
directory, it must submit an initial certification (which
has the same requirements as the annual
certification); the unlisted manufacturer will remain
subject to the prohibitions of this section until the
directory is updated. A.R.S. § 44-7111(3)(a)(6).
Bond certifications and materials, and the importer
declarations, must now be submitted as part of the
initial, annual, and supplemental certifications.
A.R.S. § 44-711(3)(e). This bill makes it unlawful to
sell, offer, or possess for sale in Arizona any
cigarettes from a manufacturer or brand family that is
not listed in the directory. Finally, manufacturers
subject to the requirements of A.R.S. § 447111(3)(a)(2) must now make their required escrow
deposits following each sales quarter. A.R.S. § 447111(5)(g).
Records requirements. Requirements are now
imposed on all tobacco products, not just cigarettes.
All retailers of tobacco products are required to keep
invoices or similar documentation issued by the
distributor when the retailer purchases the products.
A.R.S. §§ 42-3212(A)-(C).
Definitions. “Luxury, sales, transaction privilege, or
similar tax” means an excise tax levied exclusively on
tobacco products.
Certain other definitions are
modified slightly, including “brand family,” “cigarette,”
“cigarette
manufacturer,”
“master
settlement
agreement,”
“nonparticipating
manufacturer,”
“participating manufacturer,” “place of business,”
“tobacco product manufacturer,” and “vehicle.”
A.R.S. § 42-3301.
Authorized disclosure of confidential information.
The Department of Revenue may now disclose to the
attorney general confidential information for the
purposes of determining compliance with any health
control law relating to tobacco sales, and law relating
to cigarette ignition propensity standards. This bill
removes the prior limitation on disclosure of
confidential information relating to the master
settlement agreement, which limited disclosure to
luxury tax information relating to manufacturers,
distributors, wholesalers, and retailers. A.R.S. § 422003(T). The Department of Revenue may also
Steptoe Arizona Tax Update
10
share such information with federal, state, and local
law enforcement agencies for the purposes of
enforcement in other states, and may now also share
the information with a court, an arbitrator, a data
clearinghouse, or a similar entity, for the purpose of
assessing compliance with or making the calculations
required by the master settlement agreement
(including agreements regarding disputes under the
master settlement agreement), and with counsel for
the parties and any expert witnesses for the
proceeding, as long as the information remains
confidential. A.R.S. § 42-2003(V). This section is
effective January 1, 2015.
Inspection of records. All records inspections,
including of records stored electronically, conducted
by the Department of Revenue must occur during
normal business hours unless the inspector has a
judicial warrant or prior written consent of the
wholesaler, distributor, or retailer. The bill also
requires that a business cannot keep its books and
other records in a location that would require a
warrant to prior written consent for access and
inspection. If the business stores its books and other
records electronically, access will be given at the
place of business during normal business hours.
A.R.S. § 42-3151.
Senate Bill 1397, Chapter 253.
Changes to
licensing and procedures involving alcoholic
beverages for craft distillers, farm wineries, and
microbreweries. While this bill makes a number of
changes to the procedures and licensing surrounding
all sales of alcoholic beverages, the most significant
changes involve craft distilleries, farm wineries, and
microbreweries.
New definitions for craft distillers, farm wineries,
and microbreweries. A “craft distiller” is a producer
or manufacturer of no more than 20,000 gallons of
distilled spirits per calendar year. A “farm winery” is a
producer or manufacturer of between 200 and 40,000
gallons of wine per calendar year. A “microbrewery”
is a producer or manufacturer of beer onsite for offsite consumption; beer produced shall not be less
than 5,000 gallons and nor more than 1,240,000
gallons per calendar year.
The definitions for
“domestic farm winery” and “domestic microbrewery”
are eliminated. A.R.S. § 4-101.
Licensing. If an application for a license is filed for a
location that, on the date of filing, has a valid license
of the same series, there is a rebuttable presumption
that the public convenience and best interest of the
Winter 2015
community at that location was established at the
time the location was previously licensed. This bill
extends this rebuttable presumption to include
applications for transferrable licenses as well as
nontransferable licenses. The presumption will not
apply to the new craft distiller licenses, microbrewery
licenses, or farm winery licenses. A.R.S. § 4-203(A).
The requirements that must be satisfied before the
director will issue a temporary special event license
are expanded to require approval by the County
Board of Supervisors or the governing body of the
city or town, unless the physical location of the
proposed event is fully within the licensed premises.
The bill limits the issuance of temporary special event
licenses to unlicensed locations to no more than 12
per year. Applications must be submitted at least 10
days before the planned event.
A.R.S. §§ 4203.03(B)-(D). The director is now allowed to issue a
special event license in conjunction with a wine
festival license and a craft distillery festival license.
Both of these licenses will permit the presence of
purchased alcoholic beverages in the possession of
the purchaser. A.R.S. § 4-203.03(F). This bill
doubles the number of wine festival licenses that may
be issued in a given year from 25 to 50 and doubles
the number of days which a winery may participate
from 75 to 150 per year. A.R.S. § 4-203.03. The bill
eliminates the January 1, 2015 sunset date on the
director’s ability to charge a fee for site inspections
conducted before the issuance of a restaurant
license. A.R.S. § 4-205.02(G). The bill allows the
director to reissue any license for a bar, beer, wine,
or liquor store that was revoked or reverted by a
county after July 1, 2014 and it eliminates the
January 1, 2015 sunset date on allowing the director
to charge a fee to process an application for sampling
privileges. A.R.S. § 4-206.01(B), (J). Under this bill,
the director may revoke or suspend a license for a
“serious act of violence” on the licensed premises or
the failure to report a serious act of violence, in
addition to the previously permitted reasons for
revocation or suspension. A.R.S. §§ 4-201(A)(14)(15).
Farm winery licenses. This bill changes reporting
requirements surrounding the amount of wine
produced from the end of the fiscal year to calendar
year end. License holders must surrender their farm
winery license before a producer’s license will be
issued if the license holder exceeds the amount
permissibly produced per year under the license.
Farm winery licenses will be limited to wineries with a
permit from the US federal government or with a
contract for a custom crush arrangement as
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11
described in A.R.S. § 4-205.04(E). Sales of wine
produced by a winery other than the farm winery
license holder’s winery is limited to no more than
20% of the license holder’s sales by volume. The bill
permits the director to issue licenses for groupings of
farms that have received approval for alternating
proprietorships and allows the holder of a farm winery
license to enter into “custom crush” arrangements.
The director is now allowed to authorize up to two
“remote” tasting and retail locations per licensee if the
licensee meets certain requirements and allows a
farm winery licensee to also hold a craft distiller
license. The bill also permits the director to charge a
license fee of $100 for a farm winery license. A.R.S.
§ 4-205.04.
Craft distiller licenses. This bill creates a new “craft
distiller” license, and adds such license holders to the
list of taxpayers who must pay tax for selling liquors
under a license issued by the department. The bill
also permits the director to charge an unspecified fee
for a craft distiller license. A.R.S. § 4-205.10; 4-209.
The bill also creates craft distillery fair and festival
licenses, and authorizes the director to charge an
unspecified fee for these as well. A.R.S. § 4-205.11.
Procedural changes.
This bill eliminates the
January 1, 2015 sunset date on permissible
Department of Revenue fees for procuring fingerprint
scanning equipment and fingerprinting services to
licensees and license applicants.
A.R.S. § 4112(G)(10).
It also expands the appropriate
situations for an extension of more than one year for
the department to take action or make a decision to
situations on the written request of the applicant or
licensee where the Director determines it is
supported by good cause. A.R.S. § 4-201.01(B).
Common carriers other than railroads are now
required to keep records of spirituous liquors shipped
into the states, and remit the records to the
department upon request. A.R.S. § 4-203.04(L).
Disposal of seized liquor. This bill allows for
disposal of seized or recovered liquor by public
auction or by authorizing a qualified person to recycle
the liquor, in addition to previously permitted
methods. A.R.S. § 4-205.05(A).
Exemptions.
This bill excludes ethyl alcohol,
spirituous liquors containing marijuana, and useable
marijuana from the medical purposes exemption.
The bill also adds a tax exemption for beer produced
for personal or family use that is not for sale. A.R.S.
§§ 4-226(C)(2), (C)(5).
Wholesale pricing. Wholesalers are now required
to set prices for liquor sold to cooperatives based on
the quantity of liquor being purchased. Wholesalers
are also now permitted to use “channel pricing” to sell
product to on-sale licensees at a different price than
off-sale licensees. A.R.S. § 4-227.01.
Imports. This bill increases the permissible amount
of wine an out-of-state winery may import under its
$25 license from 50 cases to 240 gallons per year.
A.R.S. § 4-209(B)(15).
STATE AND LOCAL TAX GROUP
The foregoing summaries are not intended as legal advice on any particular question of law. If you have
any questions or concerns about these or related developments, please contact our state and local tax
lawyers.
Winter 2015
Pat Derdenger
Dawn Gabel
Partner
+1 602 257 5209 direct
[email protected]
Partner
+1 602 257 5231 direct
[email protected]
Ben Gardner
Karen Lowell
Associate
+1 602 257 5291 direct
[email protected]
Associate
+1 602 257 5290 direct
[email protected]
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