If you are selling goods or products online and some of your customers are located in Arizona, you need to be aware of the state’s Internet sales tax rules. Keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both within individual states and at the federal level.
Instead of the more common term sales tax, Arizona law generally uses the term transaction privilege tax or TPT. The terms sales tax and transaction privilege tax are used interchangeably in this article.
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a physical presence. The physical presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail order businesses to collect sales tax on out-of-state sales. The decision has been extended to include online retailers. Generally speaking, physical presence means having:
The corollary to the physical presence rule is that, if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state.
Examples of Physical Presence
Example 1: You are an online retailer located in Raleigh, North Carolina and make a sale through your website to a customer in Tempe, Arizona—a state where your business has no physical presence: You are not required to collect sales tax from the Tempe customer.
Example 2: You are an online retailer located in Mesa, Arizona and make a sale through your website to a customer in Scottsdale, Arizona: You are required to collect sales tax from the Scottsdale customer.
Example 3: After several years of operating solely out of a store in Raleigh, North Carolina, you open a one-room satellite office just outside of Phoenix, Arizona—a state where previously you had no physical presence. A day later, you make a sale through your website to a customer in Tucson, Arizona: You are required to collect sales tax from the Tucson customer.
While the physical presence rule may seem clear, this is not necessarily the case. InQuill, the Supreme Court discusses not only physical presence, but also several types of potential nexus (connections) between a business and a state. Many states have used the term nexus rather than physical presence in their sales tax laws, regulations, or other official documents, and have sometimes defined nexus in ways that could go beyond physical presence.
The 2015 Tax Handbook prepared by Arizona’s Joint Legislative Budget Committee (JLBC) has a brief section on Internet taxation that makes clear that physical presence as defined in Quill is key. As an example of physical presence, the section refers to an Internet retailer with an in-state retail branch. However, according to the same section, a company with no physical presence in the state, but whose products are both available in independently owned Arizona stores and directly from the company via the Internet, is not responsible for collecting sales tax.
For guidance on how physical presence is determined under Arizona law, consult the Arizona Department of Revenue (DOR) webpage on the transaction privilege tax and nexus. The DOR provides a brief explanation of nexus on a special webpage. .
Some items sold via the Internet to Arizona customers may be exempt from sales tax under Arizona law. For example, machinery or equipment used in research and development is exempt from sales tax. Section 42-5159 of Arizona’s sales tax statute lays out in detail many of these exemptions.
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a use tax. For additional information, see the Arizona DOR’s webpage on the transaction privilege tax and nexus and the discussion of Internet taxation in the JLBC’s 2015 Tax Handbook.
At the federal level Congress has repeatedly considered legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The most recent form of a proposed federal law is the Marketplace Fairness Act of 2015. As in previous versions, the 2015 Act would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
In Arizona, the physical presence rule applies for Internet retailers. However, because the issue has been contentious in many places around the country, you should consider checking in periodically with the Arizona Department of Revenue to see if the rules have changed.
Updated: April 14, 2016