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Hidden City Tax Can Hit Anyone who Builds Commercial Building for Their Business (or a house) Part 2

This is Part 2 of a two part guide

3) Speculative Builder and Owner-Builder Taxes as Applied in Various Cities:

The following table provides the current city tax rates for the Speculative Builder Tax and the Owner-Builder Tax:

City/Town

Spec Builder Tax Rate

Owner-Builder Tax Rate

City Code Section

Avondale

2.5%

2.5%

§§13A-416, 13A-417

(2008 version)

Buckeye

3.0%

3.0%

§§18-416, 18-417

(2009 version)

Cave Creek

Not Published Online

§37.20

Chandler

1.5%

1.5%

§§62-416, §62-417

El Mirage

3%

3%

§§9-416, 9-417

(2009 version)

Fountain Hills

2.6%

2.6%

§§8A-416, 8A-417

(2008 version)

Gilbert

1.5%

1.5%

From City Brochure

Glendale

2.2%

2.2%

§§21.21-416, 21.1-417

Goodyear

Not Published Online

§8A-1-1

Maricopa

Mesa

1.65%

1.65%

§§5-10-416, 5-10-417

Paradise Valley

1.65%

1.65%

§§4A-416, 4A-417

(2009 version)

Peoria

1.8%

1.8%

§§12-416, 12-417

Phoenix

2.0%

2.0%

§§14-416, 14-417

Queen Creek

4.25%

4.25%

From City Brochure

Scottsdale

1.4%

1.4%

§§416, 417

Surprise

3.7%

3.7%

§§46-3.14-416, 46-3.14-417

Tempe

1.8%

1.8%

§§16-416, 16-417

Tolleson

2.5%

2.5%

§§8A-416, 8A-417

(2009 version)

4) When the Speculative Builder or Owner-Builder Taxes are Owing:

Arizona cities do not seem to have a good method for determining whether a successor to real property will be liable for either of these taxes because the previous owner did not pay. I spoke with a few tax audit officials at various cities in Maricopa County to gather information as to the potential for successor liability of these taxes. The cities will not tell a property owner whether the previous owner has paid its Speculative Builder tax because that information is confidential to the previous owner. However, if the previous owner did not pay, and the city does get around to auditing the subsequent owner, the city will likely charge late penalties and interest for the subsequent owner not paying the tax when it was due. This seems like a pretty bad system, and it is.

To be safe, a buyer/foreclosing party can request from the city a certificate of good standing, which will tell if the prior owner is current on privilege taxes. Since the Speculative Builder tax is not due until the property is transferred, this could assist the subsequent owner, after the transfer, in determining whether they will be liable for the tax. However, this will not be helpful in forecasting liability before the property transfer. It seems that the best way to deal with potential successor liability under the Speculative Builder tax is to take one or several of the following measures:

-Encourage the previous owner to communicate as to whether and when the tax will be paid.

-Write a provision into the transfer contract that the subsequent owner has a right to come after the previous owner if the tax goes unpaid.

-If dealing with a sale, withhold a portion of the purchase price to cover the applicable Speculative Builder or Owner-Builder tax and take the responsibility to pay it for the previous owner.

-Simply hope that the previous owner will pay and hope the city will not get around to auditing the subsequent owner. (This, of course, carries the risk of having to pay penalties and interest if the city comes to collect later on).

5) Arizona State and Municipal Builder/Construction Tax

State and municipal taxes were outside of the scope of this guide, but are briefly mentioned here. The state of Arizona does not have a Speculative Builder tax, but does have privilege tax categories for “Prime Contracting" and “Contracting-Owner Builder." It appears that the State and Municipal combined tax rate for “Contracting-Owner Builder" is 6.3%. Although there may be applicable exemptions, deductions, etc., this tax rate seems to apply to persons who sell real property within 24 months of an improvement that is substantially completed, in order to tax the sale of the improvements. A.R.S. §42-5076. A quick search for explanatory material on the state tax turned up a letter ruling document that seems to be on point as to when these two categories of state privilege tax will apply. LR05-007 (found at: http://www.azdor.gov/LegalResearch/LetterRulings.aspx under the “Transaction Privilege (Sales)" dropdown box selection)(or try the direct link at: http://www.azdor.gov/LinkClick.aspx?fileticket=4bDv-5ZB2M0%3d&tabid=107&mid=490).

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