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ARIZONA STATE SENATE
Fifty-Fourth Legislature, First Regular Session
tax provisions; omnibus
Purpose
Conforms Arizona tax statutes to the Internal Revenue Code (IRC) as of January 1, 2019, and makes changes to Arizona brackets, deduction amounts, exemptions and credits. Creates a new classification under the transaction privilege tax (TPT) called marketplace facilitator, establishes a nexus test for out-of-state businesses and allows cities, towns and other taxing jurisdictions to levy a sales tax on certain items.
Background
The Arizona Legislature periodically updates statutory definition of the IRC to include any federal provisions that became effective in the preceding calendar year as a means of paralleling the computation of Arizona income tax and other statutory references throughout the Arizona Revised Statutes to the amended IRC. Tax conformity with the IRC is deemed necessary because the calculation of Arizona corporate income tax liability begins with federal taxable income. Similarly, federal adjusted gross income (FAGI) is the starting point for individual income tax assessment.
Major federal tax changes known as the federal Tax Cuts and Jobs Act (TCJA) were enacted on December 22, 2017. The changes reduced the overall federal tax burden to businesses and individuals through reductions to federal income tax rates, partly offset by a net expansion of the federal income tax base. Due to tax code conformity, these federal changes have the potential to impact state revenues.
On June 21, 2018, the U.S. Supreme Court overruled in South Dakota v. Wayfair, Inc. previous decisions made by the same court in 1967 (National Bellas Hess, Inc. v. Illinois Department of Revenue) and 1992 (Quill Corp. v. North Dakota), which both had held that only businesses with a physical presence inside a state can be required to collect that state's sales tax. If a business did not have nexus in the state, and therefore did not collect the tax, then the buyer was required to pay use tax instead.
The Joint Legislative Budget Committee indicates there would be a negative fiscal impact to the state General Fund of approximately ($217) million associated with this the conformity provisions of this legislation, but this fiscal impact may be at least partially offset with the additional revenue generated by the Wayfair provisions.
Provisions
Conformity
(Retroactive to Tax Year 2019, with certain exceptions)
1. Updates, retroactive to tax year (TY) 2018, the statutory definition of IRC to include all IRC provisions in effect as of January 1, 2019.
2. Updates for income tax purposes, retroactive to TY 2018, the definition of IRC to mean the IRC as amended and in effect on January 1, 2019.
3. Includes, retroactively for conformity provisions for TY 2018, provisions of the Bipartisan Budget Act of 2018 and the Consolidated Appropriations Act of 2018.
4. Allows taxpayers that take the standard deduction to increase their standard deduction by 25 percent of their charitable contributions that otherwise would have been deductible had they itemized their tax returns.
5. Establishes new tax brackets for TYs beginning from and after December 31, 2018:
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Single or Married Filing Separately |
Married Couple or Head of Household |
||
|
Taxable Income |
Tax |
Taxable Income |
Tax |
|
$0-$26,500 |
2.59% of taxable income |
$0-$53,000 |
2.59% of taxable income |
|
$26,501-$53,000 |
$686, plus 3.34% of the amount over $26,500 |
$53,001 - $106,000 |
$1,373, plus 3.34% of the amount over $53,000 |
|
$53,001-$159,000 |
$1,571, plus 4.17% of the amount over $53,000 |
$106,001-$318,000 |
$3,143, plus 4.17% of the amount over $106,000 |
|
$159,001 and over |
$5991, plus 4.50% of the amount over $159,000 |
$318,001 and over |
$11,983, plus 4.50% of the amount over $318,000 |
6. Requires, for each TY beginning from and after December 31, 2019, the Arizona Department of Revenue (ADOR) to adjust the income dollar amount for each rate bracket according to the average annual change in the Metropolitan Phoenix Consumer Price Index.
7. Prohibits the income dollar amounts for each rate bracket from being revised below the amounts prescribed in the prior taxable year.
8. Eliminates, from subtraction from Arizona gross income, lottery prizes or winnings.
9. Eliminates the personal exemption.
10. Increases the standard deduction to:
|
Category |
Amount |
|
Single person or married filing separately |
$12,200 |
|
Head of household |
$18,350 |
|
Married filing jointly |
$24,400 |
11. Requires that the standard deduction is adjusted annually for inflation in the same manner in which the federal basic standard deduction is adjusted.
12. Increases the standard deduction, for TYs beginning from and after December 31, 2018, by an amount equal to 25 percent of the total amount of a taxpayer's charitable deductions that would have been allowed if the taxpayer elected to claim itemized deductions rather than elect the standard deduction.
13. Establishes a dependent tax credit for taxpayers for the following categories and in the following amounts:
|
Less than $200,000 for a single person, married filing separately or head of household, and less than $400,000 for married filing jointly |
|
|
$100 for each dependent under 17 years old |
$25 for each dependent at least 17 years old |
|
At least $200,000 for a single person, married filing separately or head of household, and at least $400,000 for married filing jointly |
|
|
$100 minus 5% for each $1,000, by which the taxpayer's FAGI exceeds the applicable threshold for each dependent under 17 years old |
$25 minus 5% for each $1,000, by which the taxpayer's FAGI exceeds the applicable threshold for each dependent who is at least 17 years old |
14. Adds the dependent tax credit to the income tax credit review schedule.
15. States that the purpose is to mitigate the costs incurred by taxpayers who care for dependents.
16. Clarifies the amount of dividend income from foreign corporations that can be subtracted from state income tax.
Wayfair
Liability
17. Exempts a marketplace facilitator from liability for failing to pay the correct amount of TPT for a marketplace seller if:
a) the failure to pay the correct amount of tax was due to incorrect information given to the marketplace facilitator by the marketplace seller, and the marketplace facilitator and the marketplace seller are not affiliated persons; or
b) the marketplace facilitator and the marketplace seller are not affiliated persons, and the failure to pay the correct amount of tax was due to an error other than an error in sourcing the sale.
18. Restricts the liability relief to the following percentage on taxable sales facilitated by the marketplace facilitator on behalf of a marketplace seller and sourced to Arizona:
|
Calendar Year |
Percentage |
|
2019 |
5% |
|
2020 |
3% |
|
2021 and thereafter |
0% |
19. Exempts a remote seller from liability for failing to pay the correct amount of TPT, if failure to pay the correct amount was due to an error other than an error in sourcing.
20. Restricts the liability relief for remote sellers to the following percentage of total tax due on taxable sales sourced to Arizona during the same calendar year:
|
Calendar Year |
Percentage |
|
2019 |
5% |
|
2020 |
3% |
|
2021 and thereafter |
0% |
21. Allows ADOR to waive penalties and interest if the marketplace facilitator or remote seller seeks liability relief, ADOR rules that reasonable cause exists and the marketplace facilitator paid tax on sales facilitated for a marketplace seller during the period for which relief is sought or the remote seller paid tax on sales during the period for which relief is sought.
22. Allows ADOR to determine the manner in which a marketplace facilitator or remote seller may claim the liability relief.
23. Specifies that if a refund claim is denied, the claimant may appeal the denial to the State Board of Tax Appeals.
24. Stipulates that an audit of a marketplace facilitator may not automatically cause an audit of a marketplace seller.
25. Defines affiliated person, for purposes of this section, as a person that:
a) has an ownership interest of more than five percent, whether direct or indirect, in that other person; or
b) is related to the other person because a third person, or a group of third persons that are affiliated persons with respect to each other, holds an ownership interest of more than five percent, whether direct or indirect, in the related persons.
Nexus
26. Specifies that any person that conducts retail business with purchasers in Arizona are subject to TPT and local excise taxes.
27. Specifies that the retail classification is also comprised of sales of tangible personal property by a marketplace seller that are facilitated by a marketplace facilitator in which the marketplace facilitator has remitted or will remit the applicable tax to ADOR.
28. Requires a remote seller's payment of TPT if the remote seller's business with customers in Arizona that is not facilitated by a marketplace facilitator is more than $200,000 in 2019, $150,000 in 2020 and $100,000 in 2021 and each calendar year thereafter.
29. Requires a marketplace facilitator's payment of TPT if the gross proceeds of sales or gross income derived from the facilitator's business is more than $100,000.
30. Requires that all sales be aggregated for purposes of determining TPT requirements.
31. Provides TPT requirements if thresholds are met partway through the current and next calendar years.
32. Allows ADOR to adopt rules.
33. Requires a marketplace facilitator to report tax due from transactions facilitated on behalf of marketplace sellers.
34. Allows a marketplace facilitator to report the tax due from transactions made directly by the marketplace facilitator on a combined tax return or on a separate return.
35. Defines affiliated person, for purposes of this section, as a person that:
a) has an ownership interest of more than five percent, whether direct or indirect, in that other person; or
b) is related to the other person because a third person, or a group of third persons that are affiliated persons with respect to each other, holds an ownership interest of more than five percent, whether direct or indirect, in the related persons.
Municipal Taxation
36. Prohibits a city or town from requiring a person to obtain a business license if the person is required to pay tax in Arizona only because the person's business exceeds the marketplace or remote seller thresholds.
37. Exempts a marketplace facilitator and a remote seller from municipal privilege tax licensing.
38. Specifies that, with stated exceptions, this legislation supersedes all city or town ordinances or other local laws relating to the taxation of retail business activities.
39. Specifies that the municipal tax rate for retail businesses selling tangible personal property for marketplace facilitators is the municipal tax rate in effect in that city or town on September 30, 2019, until the city or town changes the tax rate.
40. Allows a city or town to levy a TPT on the gross proceeds of sales or gross income derived from:
a) a business of selling food at retail, subject to certain conditions;
b) a bookstore selling textbooks required by any state university or community college;
c) the sales of livestock and poultry feed, salts, vitamins and other additives for livestock or poultry consumption that are sold to persons for use or consumption by their own livestock or poultry;
d) the sale of nonmetalliferous mined materials at retail; and
e) the sale of works of fine art, at an art auction or gallery in Arizona to nonresidents for use outside Arizona, if the vendor ships or delivers to a destination outside Arizona.
41. Allows a city or town to exempt from use tax, proceeds from sales of paintings, sculptures or similar works of fine art if such works of fine art are sold by the original artist.
Definitions
42. Defines marketplace as a physical or electronic place, platform or forum, including a store, booth, internet website, catalog or dedicated sales software application, where products, including tangible personal property, are offered for sale.
43. Defines a marketplace facilitator as a person that facilitates a retail sale by a marketplace seller by listing or advertising for sale by the marketplace seller in a marketplace tangible personal property through agreements or arrangements with third parties collecting payment from the purchaser and transmitting that payment to the marketplace seller.
44. Specifies that a marketplace facilitator does not include a payment processor business that is appointed to handle payment transactions from various channels, such as charge cards, credit cards and debit cards, and whose sole activity with respect to marketplace sales is to handle transactions between two parties.
45. Defines marketplace seller as a person that makes retail sales through any physical or electronic marketplace that is operated by a marketplace facilitator.
46. Defines remote seller as a person that sells products for delivery into Arizona and that does not have a physical presence or other legal requirement to obtain a TPT license in Arizona other than because the person's business exceeds the stated threshold.
Miscellaneous
47. Includes a legislative intent clause.
48. Includes an applicability clause.
49. Exempts ADOR from rulemaking requirements.
50. Specifies that the tax reporting and payment requirements apply prospectively and apply to taxable periods beginning from and after September 30, 2019.
51. Provides a technical conditional enactment.
52. Makes technical and conforming changes.
53. Applies retroactively, with stated exceptions, to TYs beginning from and after December 31, 2018.
54. Becomes effective on the general effective date, with retroactive provisions as noted.
Prepared by Senate Research
May 21, 2019
CS/kja