Making sense of Arizona’s use tax requirements
What is use tax?Arizona's use tax is an excise tax on "storage, use or consumption in this state of tangible personal property purchased from a retailer or utility business," as defined by ARS ? 42-5155. It is essentially the same as sales tax, with one major difference: Sellers pay sales tax, whereas buyers pay use tax. Vendors that either are physically located in Arizona or maintain some sort of business presence in the state are legally required to collect sales tax from Arizona customers and remit it to the Arizona Department of Revenue (ADOR). If a vendor does not have a business presence (also known as "nexus") in Arizona, then the vendor's Arizona customers must pay use tax equal to what the state sales tax would have been had the vendor collected it.
What is the use tax rate?As with sales tax, the Arizona use tax rate currently is 6.60%. Some Arizona cities add their own sales and use taxes, ranging from 1.45% in Scottsdale to 4.00% in Fredonia and San Luiz. All current sales and use tax rates are available on the ADOR website or, in a slightly more readable format, on the Arizona Tax Research Association website (see the links below). The use tax is subject to many exemptions, as defined by ARS ? 42-5159, but few apply to individual taxpayers, or online or out-of-state purchases. As with sales tax, use tax is not owed on casual sales, i.e., items purchased from people who are not regularly in the business of selling tangible personal property.
Why haven't I heard of the use tax?Arizona's use tax is nothing new. It's been around since 1956. But most individual Arizona taxpayers have been either unaware of the tax or unwilling to pay it, according to a report issued by the Arizona Legislature's budget staff. The recent rise of online retailers that are not required to collect Arizona sales tax has caused state lawmakers and revenue officials to take notice. Based on information from other states, the budget staff estimated that the state of Arizona could collect over $500,000 in additional tax revenue annually by adding the line item for use tax reporting to the state income tax return. But the figure could be much higher: A University of Tennessee study concluded that Arizona loses hundreds of millions of dollars annually through online purchases.
How do I comply?The regulations that will be used to administer and enforce the new use tax requirements are still being written. According to the ADOR, a lot will depend on how often you purchase merchandise from online or out-of-state vendors. If you make regular purchases of this type, you probably will be required to get a use tax license, for which there is no charge, and pay use tax monthly using Form TPT-1, the same form businesses use to report Arizona sales tax. If you buy merchandise online only occasionally, the rules likely will be simpler: HB 2332 gives the ADOR the authority to allow certain taxpayers to pay use tax quarterly or even annually, depending on the estimated use tax liability for the year. How you would go about paying use tax if it were paid quarterly or annually has yet to be determined. So for now your best bet is to save all receipts for your online purchases and watch the ADOR website or newspapers for further information.
How do I pay city use tax?The state of Arizona collects use taxes for smaller communities that have city use taxes. Larger cities, such as Phoenix, Tucson, and Tempe, collect city use taxes themselves. The rules governing local use taxes differ somewhat from city to city. For example, the city of Tucson exempts purchases of $1,000 or less per item for individual taxpayers. If the city in which you live collects its own use tax, you are responsible for paying the state of Arizona and the city their portions of the use tax separately. Contact the taxing authority in your city for details. Sound confusing? It can be, but that's the way it works.
Why does compliance to have to be so difficult?The Arizona Legislature could have lessened the burden on taxpayers by forgiving use tax obligations for those owing less than a specified threshold amount. The bill originally set a $50 threshold, but that provision was removed from the bill before it was finalized. Also, the Legislature could have followed other states in giving taxpayers the option of paying a standard estimated use tax amount in lieu of keeping records and paying the actual amount. SB 2332 does not specify such alternatives, prompting the ADOR to give taxpayers only one option: pay and report the actual use tax due. Why the new law does not provide a simplified method of use tax reporting is a public policy issue that is outside the scope of this legal guide.
If I don't comply, how will they catch me?The ADOR does not publicly reveal its audit practices, so unless you work for the agency, any answer to this question is pure speculation. It's possible that the ADOR's computers will flag returns on which the use tax total either is not reported or appears unreasonable in relation to the taxpayer's income. Also, many state revenue departments routinely conduct sales tax audits of large vendors, which can trigger audits of individual customers' tax returns. However, auditing online retailers that lack nexus to Arizona is problematic. Bottom line: Whether you choose to comply with the law is up to you, but there are ways of finding you.
What happens if I don't comply?If you do not pay use tax as required, the consequences are similar to those for any unpaid tax: The ADOR may assess accrued interest on the unpaid balance, fines, or both. So it's in your best interest to comply with the law. If you feel the recordkeeping requirements are unnecessarily burdensome, you may want to contact your state legislator about getting the law changed. If you have questions about how to properly report or remit use tax payments, be sure to consult with your tax adviser.
Legal disclaimerThis legal guide should not be construed as formal legal advice or the formation of a lawyer/client relationship.
Additional resources provided by the author
- Arizona HB 2332
- ARS § 42-5155, Levy of [use] tax; tax rate; purchaser's liability
- Transaction Privilege (Sales) Tax Rate Tables (ADOR)
- State and Local Use Tax Rates by City (Arizona Tax Research Association)
- ARS § 42-5159, [Use Tax] Exemptions
- ADOR Publication 610, Use Tax
- ADOR Publication 623, Nexus in Arizona
- Joan Bundy, Attorney at Law, Chandler, Arizona