Arrrhg, taxes!
This post is in regards to determination of the taxes we collect as part of each sale due to the fact that we have a nexus in Cottonwood, Arizona, where all of our products ship from. Note however, that the information presented here would apply to most small business in Arizona selling general products online (exceptions apply of course).
After analyzing a number of different Arizona statutes and codes, we have come to the conclusion that we are liable for paying tax to Arizona and local jurisdictions on all sales that are shipped to customers inside the state of Arizona. Our obligation amounts to a fixed rate of 9.35% tax on each sale (5.6% state + .75% county + 3% city). Our reasoning for this determination is as follows…
Technically, any business selling products from Arizona is subject to paying a TPT tax for each sale to the State (most exceptions are defined in A.R.S. § 42-5061). The TPT tax is the Arizona equivalent of a sales tax in most other states. That business, however, has the choice to pass on the tax to the customer, and in most cases, it would be wise to do so.
A representative from AZDOR (the AZ Department of Revenue) helped to identify a particular regulation that defines the source of how the tax should be derived. A.R.S. § 42-5040 defines the source in our case to be the “seller’s business location… regardless of where the order is accepted or approved”. Thus, Arizona indeed has an “origin” based system of collecting taxes.
So, in general, business in Arizona should be liable for collecting, at a minimum, the AZ and local taxes for purchases sent both in and out of state. Furthermore, a business could collect an additional amount that would be due in certain circumstances to other states if they are licensed there, however, it is my understanding that according to federal law and court decisions, an Arizona business without nexus in another state is not obligated to collect taxes on behalf of that other state.
This has been a significant realization because, there are several other sources on the internet that suggest wrongly, that taxes should be calculated in Arizona based on the “destination” of the sale. One blog even went so far as to say that an Arizona business would have to register with every single city in Arizona if they want to sell to those cities. Some businesses even claim that they have been doing that. That blog stated “that online sellers are required under the Model Cities Tax Code to register for a sales tax permit in each city into which they make a sale.” I think that is the point at which they made the wrong assumption, because if you were to assume that the point of an online sale is where ever the buyer makes the purchase from, then they would be correct, but now we understand the source of the sale is actually defined to be at the sellers location. (Now if you were walking around making sales door to door, that might qualify you to have a nexus in that remote city, and that would be another case altogether, I haven’t thoroughly looked into that…)
What’s more, is that before someone at AZDOR directed me towards this statute, I had called earlier the AZDOR Model City Tax Code department and talked to someone briefly about the issue, and although I did not get any hard facts that I could rely upon, the agent I was talking to also suggested that I did need to register with every city in Arizona and collect for those localities. Thankfully, I did not blindly follow those instructions, but it just goes to show how confusing these tax laws can be. People in the AZDOR don’t even know how online retailers should be going about collecting tax.
So, to recap what we know so far: Arizona is in fact an “origin” based state for collecting taxes; and that goes for all sales, regardless of destination, in or out of state. For us, since we are based in Cottonwood, we should collect 9.35% tax (5.6% state + .75% county + 3% city) on each sale no matter the destination. HOWEVER, and that is a big HOWEVER, there’s a loophole!
The loophole is that the Arizona Administrative Code (A.A.C.) R15-5-170, is instructing to enforcement agencies to allow for Arizona businesses to deduct out of state sales from their TPT liability. So as long as (A.A.C.) R15-5-170 is in place, Arizona businesses can expect not to have to pay taxes on out of state sales. My understanding is that this doesn’t mean that the businesses are not liable for tax on these sales, it just means that they don’t have to worry about the state enforcing the liability.
Frankly, this seems like a cop-out of the Administration to enforce AZ TPT statutes as they were written, but on the other hand, it seems like a reasonable measure to put in place to ensure AZ TPT tax rates are comparable to the sales taxes of other states, to help keep a more level playing field until the Federal Government can step in with some new legislation on interstate commerce.
So that’s it! As of today (8/20/2018) Arizona businesses selling products online, that are fulfilled from a nexus inside Arizona, are currently only obligated to pay taxes on sales sent in-state.
Regarding Amazon Seller Accounts that are not FBA: Amazon currently allows for three different tax collection options. (1) By default Amazon does not collect taxes for merchants unless they have specifically set some tax options. (2) The “A_GEN_TAX” code is Amazon’s most simple algorithm that you can set for calculating destination based rates (determines local amounts based on ship-to address [or billing if no ship-to]), however it only applies to the state you add and are registered in. (3) Lastly, you can elect to set a “custom” tax rate for your state that will apply as a fixed rate to all the sales made within your state. This third option is the one that most Arizona based self fulfilled businesses should use.
What’s interesting to note however, is that Amazon does not provide a fourth option where a business could elect to collect a flat rate for all sales made both in and out of state. So even if I wanted to collect TPT tax for the state of AZ according to statute, I cannot with Amazon’s current setup (well, I could add the tax to the base price, but then I might find myself liable for tax on the tax if it wasn’t identified as such as part of the sale).
And finally, there were two distinct letters from AZDOR in response to my inquiry about the matter that I received that I found helpful in getting to the bottom of this. Each provided reference to a number of statutes and codes that would be relevant to a number of Arizona businesses with a similar sort of online presence. You can read the first in its entirety here, and the second, here.
One last thing to mention, as suggested in the second of the above AZDOR letters, is that local jurisdictions (city and county) may have differing rules about whether a business would be liable to pay their “piggyback” rate on sales made outside their jurisdiction, however, as far as I can tell, it’s likely that a business would be responsible for paying tax on these sales (outside the jurisdiction but within the state), since the State Agencies enforce policy of the Model City Tax Code.
Hopefully this collection of information may help other new Arizona businesses avoid the trouble of having to figure this out all over again.
Thanks,
Damian Green