Assigned to APPROP FOR
COMMITTEE
Assigned to APPROP FOR
COMMITTEE
ARIZONA STATE SENATE
Fifty-Third Legislature, Second Regular Session
TPT; digital goods and services
Purpose
Creates parameters for determining the taxable status of digital goods and services at the state and local levels.
Background
Transaction privilege tax (TPT) is a gross receipts tax levied by the State of Arizona for the privilege of conducting business in the state. Unlike a "true" sales tax imposed by many other states, TPT is imposed upon the seller of the item being taxed, rather than the purchaser. While the burden of the tax may be passed on to the purchaser, the seller is the party that is ultimately liable for payment of the tax to the state. TPT is currently imposed under 16 separate business classifications, including mining, retail, commercial lease, restaurant and personal property rental. Arizona cities and towns impose their own municipal privilege taxes under the Model City Tax Code (MCTC) under many of the same, or similar, business classifications as found in state statute.
According to the Arizona Department of Revenue (DOR), software and digital goods are generally taxed under the retail and personal property rental classifications. The retail classification applies to gross income that a business derives from the sale of tangible personal property (TPP), with exceptions. TPP is broadly defined as personal property which may be seen, weighed, measured, felt or touched, or is in any other manner perceptible to the senses. The personal property rental classification applies to gross income derived from leasing or renting TPP (A.R.S. §§ 42-5001; 42-5061; and 42-5071). Gross income derived from the sale of computer software is considered taxable, regardless of the method that a retail business uses to transfer the software to its customers. Gross income derived from the creation or modification of computer software for use by an individual customer, however, is tax exempt (A.A.C. R15‑5154).
Cities and towns apply the same essential interpretation of taxability as the state with respect to software and digital goods. Municipal taxation of gross income derived from leasing, licensing for use or renting TPP is addressed under MCTC § 450 while taxation of gross income derived from selling TPP at retail is addressed under MCTC § 460. Compared to state statute, MCTC is more explicit regarding the taxability of software, both in terms of definitions and regulatory treatment (MCTC § 115 and MCTC Reg. 115.1).
The Ad Hoc Joint Committee on the Tax Treatment of Digital Goods and Services (Committee) was established on June 8, 2017, by President of the Senate Steve Yarbrough and Speaker of the House of Representatives J.D. Mesnard, and expired on December 31, 2017. In its findings, the Committee concluded that businesses, taxpayers, DOR and local taxing authorities need statutory direction regarding what constitutes a taxable event for digital goods and services and recommended that the Legislature consider legislation intended to provide such clarity during the 2018 session.
JLBC estimates that this legislation would result in a revenue loss to the state General Fund (GF). The magnitude of the GF revenue loss, however, cannot be determined due to the lack of available tax data.
Provisions
1. Excludes the following from tax:
a) the gross income, gross receipts, gross proceeds, purchase price or sales price from selling, leasing, licensing, purchasing or using specified digital services; and
b) the gross income, gross receipts, gross proceeds, purchase price or sales price from selling, leasing, licensing, purchasing or using specified digital goods that are remotely accessed by a customer and not transferred electronically to the customer.
2. Stipulates that the following activities do not change the characterization of any specified digital good or specified digital service as being excluded from tax:
a) the ability to receive, view, save, listen to, or print a specified digital good or the output of a specified digital service;
b) the transfer of any transitory or temporary downloaded files such as cache files or user guides; or
c) the transfer or any transitory or auxiliary application, including applets, cookies or plug‑ins.
3. Specifies that the above exclusion from tax does not apply to services provided by a person that is subject to tax under the online lodging marketplace classification.
4. Expands the retail classification to include the selling, renting or licensing for use of:
a) prewritten computer software, regardless of delivery method; and
b) specified digital goods transferred electronically.
5. Requires a city or town to impose a tax on sales, rentals or licenses for the following, but only as a retail TPT or use tax under the MCTC:
a) the use of prewritten computer software, regardless of delivery method; and
b) specified digital goods transferred electronically.
6. Prohibits a city, town or other taxing jurisdiction from levying a TPT, sales, use or other similar tax on the following:
a) specified digital services; or
b) specified digital goods that are remotely accessed and not transferred electronically.
7. Stipulates that the ability to receive, save or print an output file or any other temporary downloaded file from any specified digital service does not change its characterization as an excluded service.
8. Imposes a use tax of 5.6 percent on the use or consumption in Arizona of prewritten computer software and specified digital goods transferred electronically as a percentage of the acquisition price. The use tax would apply to any purchaser that purchases prewritten computer software or specified digital goods transferred electronically for resale, but subsequently uses or consumes the items.
9. Specifies that each person using or consuming prewritten computer software or specified digital goods transferred electronically in Arizona is liable for the above use tax and that the person's tax liability is not extinguished until the use tax has been paid to the state.
10. Specifies that a receipt given to the purchaser by a vendor that maintains a place of business in Arizona or a vendor that is authorized by DOR to collect the use tax is sufficient to relieve the purchaser from further liability for the tax to which that receipt refers.
11. Specifies that all state use tax exemptions apply as if prewritten computer software and specified digital goods transferred electronically were TPP.
12. Requires each vendor that maintains a place of business in Arizona and makes sales of prewritten computer software or specified digital goods for use or consumption in Arizona to collect the use tax from the purchaser or user unless the property is exempt or the purchaser or user pays the tax directly to DOR.
13. Requires the following to file a return with DOR by the 20th day of the month next succeeding the month in which the property is brought into Arizona for use or consumption:
a) each vendor that is engaged in the business of selling, leasing, or licensing the use of prewritten computer software or specified digital goods transferred electronically, the use or consumption of which is subject to the use tax; and
b) each person who acquires any such property for use or consumption in Arizona and for which the use tax is not paid to the vendor.
14. Specifies that the above return would be on a DOR-prescribed form that shows the amount of property sold, leased, or licensed for use or consumption, or acquired for use or consumption in Arizona during the preceding month.
15. Outlines the process for the filing and payment of use tax to DOR.
16. Specifies sourcing for prewritten computer software and specified digital goods as follows:
a) to the seller's business location if the seller receives the order at an Arizona business location; and
b) to the purchaser's location in Arizona, provided that the seller receives the order at a business location outside of Arizona.
17. Defines prewritten computer software as computer software that is not designed and developed by the author or other creator to the specifications of a specified purchaser to a sale, including:
a) related computer software maintenance contracts;
b) combinations of two or more prewritten computer software programs or prewritten portions of computer software programs;
c) software designed and developed by the author or other creator to the specifications of a specific purchaser; and
d) prewritten computer software, or a portion of prewritten computer software, that is modified or enhanced to any degree.
18. Specifies that prewritten software does not include a portion of computer software that is modified or enhanced to any degree, if the modification or enhancement is designed and developed to the specifications of a specific purchaser, and for which the seller, lessor or licensor's books are kept showing separately the gross proceeds of sales or gross income derived from the modification or enhancement.
19. Defines specified digital goods as the following:
a) digital audiovisual works;
b) digital audio works, including ringtones; and
c) digital books, articles, periodicals and any other prewritten works.
20. Defines specified digital services as cloud-based or remotely-accessed computing services, including:
a) software as a service;
b) platform as a service;
c) infrastructure as a service;
d) application service providers;
e) hosting services;
f) data storage management;
g) data processing and information services;
h) streaming services;
i) digital authentication services;
j) any noncomputing service of which the principal value would have been considered to be intangible in nature but for the remote access or electronic transfer of the service, including the following if completed to the specifications of a particular user:
i. legal services;
ii. financial services;
iii. audit services;
iv. tax preparation services; and
v. accounting services; and
k) any other cloud-based or other remotely-accessed computing services.
21. Defines various other terms.
22. Contains a legislative intent clause, specifying the following:
a) that proceeds from sales, rentals and licenses for the use of prewritten computer software, regardless of delivery method, and specified digital goods that are transferred electronically to the purchaser be subject to TPT and use tax;
b) that proceeds from sales, leasing or licensing specified digital services, regardless of delivery method, and specified digital goods that are remotely accessed by the purchaser and not transferred electronically be excluded from state and local TPT and use tax; and
c) that this legislation is not intended to affect and may not be cited or applied in any pending administrative or judicial action relating to the construction, interpretation or application of any statutory or administrative provision regarding the taxation of digital goods and services.
23. Makes technical and conforming changes.
24. Becomes effective on the first day of the month following the month of the general effective date of the Fifty-Third Legislature, Second Regular Session.
House Action
WM 2/14/18 DPA 8-1-0-0
3rd Read 2/28/18 39-19-2
Prepared by Senate Research
May 1, 2018
FB/lb