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. As you read, keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both at the state and federal level.
The federal government is currently considering legislation that would affect how online sales taxes are collected in all states. The proposed federal law, called the Marketplace Fairness Act of 2013, 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.
Below is an article on the current rules on Internet sales tax in Arizona. The new federal law scheduled to be voted on in May 2013 would affect all state Internet sales tax laws so be sure to check for updates in this area. (We will continue to keep you updated as well.)
A Note on Arizona’s Sales Tax Terminology
Instead of the more common term “sales tax,” Arizona law generally uses the term “transaction privilege tax” or “TPT.” As stated in a chapter of the 2011 Tax Handbook prepared by Arizona’s Joint Legislative Budget Committee (JLBC), the transaction privilege tax is simply “Arizona’s version of a sales tax.” The two terms are used interchangeably in this article.
The General Rule: Physical Presence in the State
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, a physical presence means such things as:
- having a warehouse in the state
- having a store in the state
- having an office in the state, or
- having a sales representative in the state.
For guidance on how physical presence is determined specifically under Arizona law, consult the Arizona Department of Revenue (DOR) webpage on the transaction privilege tax and “nexus.” In its Quill decision, the United States Supreme Court refers to several types of potential “nexus” between a business and a state. The type of “nexus” (or connection) the Supreme Court ultimately found relevant for mail-order businesses was, for all practical purposes, physical presence. Arizona government documents on the TPT, in turn, often refer to "nexus” rather than “physical presence.” The Arizona Department of Revenue provides a brief explanation of “nexus” on a special webpage; however, where the DOR’s explanation focuses on the 1977 United States Supreme Court case Complete Auto Transit, Inc. v. Brady, the controlling case for Internet retailers is Quill.
As you might expect, 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. In this regard, it is worth noting that the brief section on “Internet Taxation” in the 2011 Tax Handbook prepared by the Arizona JLBC makes clear that physical presence is key, giving as an example of physical presence an in-state retail branch. As part of the same brief discussion, the Handbook also asserts that 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.
Example 1: You are operating solely out of a store in Raleigh, North Carolina and make a sale 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 operating solely out of an office in Mesa, Arizona and make a sale 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 to a customer in Tucson, Arizona: You are required to collect sales tax from the Tucson customer.
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.
The Customer’s Responsibility
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 2011 Tax Handbook.
While you might not know it from looking solely at Arizona’s sales tax statute, the issue of whether to require online retailers to collect sales tax in states where they have no physical presence has been a matter of significant debate in many states around the country, as well as at the federal level. At this time, however, Arizona has not enacted any law that would require out-of-state retailers to collect sales tax from Arizona customers.
In Arizona, the physical-presence rule continues to apply for Internet retailers. However, because the issue is hotly debated in various quarters, you should consider checking in periodically with the Arizona Department of Revenue to see if the rules have changed. For more general information on taxes on Internet sales, see Nolo's article Sales Tax on the Internet. And, for information on the rules about collecting sales tax for Internet sales in any other state, see Nolo’s article, 50-State Guide to Internet Sales Tax Laws.