Sales and Use Taxes in Arizona

April 13, 2006

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In Arizona the transaction privilege tax is a tax on the privilege of doing business in the state. This transaction privilege tax is in effect a sales and use tax. The tax is measured by the amount or volume of business transacted by persons on account of their business activities. This transaction privilege (sales) tax is on the seller, not the buyer.

Sales and use tax rate. The Arizona sales and use tax rate ranges from 3.125 to 5.6 percent on the state level. Local governments in Arizona are allowed to assess a local sales and use tax. Some Arizona local governments administer their own sales tax system so be sure to check with your local government officials to find out the rules that will apply in your area.

Generally, all sales are taxed at a 5.6 percent sales tax rate. This includes all sales at retail, plus all of the following activities:

amusement
job printing
membership camping
mining
owner-builder sales
personal property rental
pipeline
prime contracting
private car line
publication
restaurant
telecommunications
transient lodging
transporting
utilities

Activities that are taxed at different rates are mining (3.125 percent), and transient lodging (5.5 percent).

Tax-exempt items. Arizona includes many specific items that are exempt from sales tax. Examples include food sold for home consumption and prescription medication.

Responsibility for paying sales tax. In Arizona the transaction privilege (sales) tax is imposed on the retailer or other person conducting the business. The retailer or other person is responsible for paying the tax to the Arizona Department of Revenue. The seller may (or may not) pass the tax onto the purchaser, but any excess tax collected must be remitted to the state.

Use tax. Arizona use tax is imposed on the storage, use, or consumption in Arizona of tangible personal property purchased from a retailer. The use tax is at the same rate that is applied for sales tax. The use tax complements the sales tax because only one of the taxes can apply to a given transaction. If a purchase from an out-of-state retailer is subject to another state's sales tax, then the purchaser may take a credit against the Arizona use tax equal to the amount of sales tax paid in the state of purchase.

Responsibility for collecting use tax. Although the use tax is imposed on consumers, retailers are required to collect it from purchasers when applicable. The tax must be shown separately on the invoice and constitutes a debt owed by the retailer to the state. An Arizona purchaser who holds an Arizona transaction privilege tax license must remit use tax to the Department of Revenue if the purchaser buys tangible personal property from an out-of-state retailer that is not licensed to collect the use tax.

Obtaining tax permits in Arizona. Every person receiving gross proceeds of sales upon which the transaction privilege (sales) tax is imposed must obtain a privilege license. The license is obtained from the Department of Revenue. The fee for the license is $12 and there is no expiration date. Retailers required to collect the use tax must also register with the Arizona Department of Revenue.

Leases. Arizona taxes the leasing or renting of tangible personal property. Arizona also imposes a surcharge on the rental of a motor vehicle for a period of 180 days or less. Leases or rentals of real property used for commercial, residential or agricultural purposes are not subject to sales tax in Arizona. The leasing area is full of exceptions and specific situations that could affect whether or not you are subject to the tax — be sure to check on your specific transaction.

The following discussions address additional sales and use tax issues that many small business owners face: