•••••••••• SERVING ARIZONA CLIENTS SINCE 1960
Sharon Shively and Matthew Meaker – Sacks Tierney P.A.
Ross Dietrich – Price Kong & Company, CPAs
Scott Morrison, Morrison, Clark & Conover, CPAs
4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ 85251
480.425.2600
www.sackstierney.com
•••••••••• SERVING ARIZONA CLIENTS SINCE 1960
• Generally, what was the law and what is the law now (as
of today)?
4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ 85251
480.425.2600
www.sackstierney.com
•••••••••• SERVING ARIZONA CLIENTS SINCE 1960
• On June 25, 2013, Governor Brewer signed HB 2111
(Arizona’s transaction privilege tax simplification bill),
which some consider one of her legacy
accomplishments.
• The legislation is intended to enact major changes to
Arizona’s sales tax structure.
• At this point, it is not entirely clear what changes are
going to take place and when.
4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ 85251
480.425.2600
www.sackstierney.com
•••••••••• SERVING ARIZONA CLIENTS SINCE 1960
• Contractors pay construction taxes on new projects upon
completion, based on 65% of the total sales prices of the
project.
• For example, a property owner contracts with a GC for
the construction of an improvement. The GC enters into
agreements with subcontractors. The property owner
will pay the GC pursuant to the contract and the GC will
pay the subcontractors pursuant to their agreements.
The taxed entity is the GC.
4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ 85251
480.425.2600
www.sackstierney.com
•••••••••• SERVING ARIZONA CLIENTS SINCE 1960
• How about a speculative builder?
• The speculative builder will enter into agreements with
subcontractors. If a contract to sell is in place prior to
completion of the construction, the speculative builder
will be taxed as a GC, otherwise it is the subcontractors.
• TPT is administered through the Arizona Department of
Revenue, along with a number of cities that collect and
audit the taxes themselves.
4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ 85251
480.425.2600
www.sackstierney.com
•••••••••• SERVING ARIZONA CLIENTS SINCE 1960
• Under the new law, contractors who only enter into
contracts with owners of real property to maintain, repair,
replace or alter their property are exempt from the TPT
prime contracting classification and will be subject to tax
at the point of purchase on the building materials.
– Maintain generally means the upkeep of property or equipment.
– Repair results in returning real property to a usable state.
– Replace is the replacement of something that exists with
something else, including upgrading.
– Alteration is the act of causing a direct physical change to real
property without causing a change to the identity.
4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ 85251
480.425.2600
www.sackstierney.com
•••••••••• SERVING ARIZONA CLIENTS SINCE 1960
• All other contracting activity remains taxable under the
current statutes.
• What if a company does both new construction and
repair work?
• The law, as it currently stands, could result in the
company needing to split a bulk purchase of, for
example wiring, paying taxes at the point of sale for one
half of the purchase price (repair jobs) and present the
tax-exemption certificate for the other half (new
construction).
4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ 85251
480.425.2600
www.sackstierney.com
•••••••••• SERVING ARIZONA CLIENTS SINCE 1960
• Under the new law, ADOR becomes the single point of
administration and collection for State, county and municipal TPT.
– As of now, this will not be the case on January 1, 2015.
– Contractors will continue to pay TPT to the state and most
municipalities like they currently are, although taxes for Bullhead
City, Somerton and Willcox will be paid to ADOR.
– The new goal is that January 1, 2016, ADOR will be the single
point of administration.
• This is going to be accomplished via an upgraded website.
– At this point, the website is not ready.
4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ 85251
480.425.2600
www.sackstierney.com
•••••••••• SERVING ARIZONA CLIENTS SINCE 1960
• Starting January 1, 2015, all contractors who do not file
electronically must have their returns received by ADOR
by the second to the last business day before the due
date.
• Even though there is a delay regarding being a single
source point for payment, ADOR will be a single point for
all audits for all cities.
• There will be standardized codes for businesses and
deductions.
– These have yet to be finalized.
4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ 85251
480.425.2600
www.sackstierney.com
•••••••••• SERVING ARIZONA CLIENTS SINCE 1960
 AZDOR’s “goal” is to simplify the manner in
which taxpayers report and pay TPT.
 Committed to making it as “easy” as possible.
 Created a broad reaching tax rewrite that is
intended to take effect on January 1, 2015.
 Problems on two tracks:
◦ IT track
◦ Substantive track
4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ 85251
480.425.2600
www.sackstierney.com
•••••••••• SERVING ARIZONA CLIENTS SINCE 1960
 Implementation will require an entire new
software program that will take a minimum of
one year to accomplish.
 Assumes the State has the funds to pay for
the development of the program.
 Implementation of online portal has been
delayed until January 1, 2016.
4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ 85251
480.425.2600
www.sackstierney.com
•••••••••• SERVING ARIZONA CLIENTS SINCE 1960
 Who is required to obtain TPT license under
the prime contracting classification?
◦ Prime contractor who performs, coordinates,
supervises modification work, including contracting
with subcontractors.
 Who is not required to obtain TPT license
under the prime contracting classification?
◦ Prime contractor who contracts with owners of real
property or the owners of improvements to real
property for maintenance, repair, replacement or
alteration of existing property. Tax at point of sale.
4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ 85251
480.425.2600
www.sackstierney.com
•••••••••• SERVING ARIZONA CLIENTS SINCE 1960
 Definition of “modification” versus
“maintenance, repair, replace and alter.”
 What if contractor does both?
 What about existing inventories purchased
exempt but will be used in MRRA not
modification? How/when to pay the tax?
 What about change orders?
4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ 85251
480.425.2600
www.sackstierney.com
•••••••••• SERVING ARIZONA CLIENTS SINCE 1960
 Cornerstone Legislation: “Legacy”
 Stakeholders efforts to clarify, define and
modify as necessary.
 Numerous meetings among stakeholders to
attempt to slow down the process so that
“roll-out” is successful.
◦ Special session
◦ Meet with AZDOR
◦ Meet with specific legislators
4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ 85251
480.425.2600
www.sackstierney.com
•••••••••• SERVING ARIZONA CLIENTS SINCE 1960
 AZDOR has issued several versions of FAQs
for circulation, review and comment.
 AZDOR to issue FAQs again November 13,
2014.
 Need a chance to review the (hopefully)
comprehensive FAQs to determine what
issues remain; whether modifications are
needed.
4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ 85251
480.425.2600
www.sackstierney.com
•••••••••• SERVING ARIZONA CLIENTS SINCE 1960
 November 2014 Election
◦ No change in makeup of chambers by number.
◦ Are changes in philosophy.
◦ Are changes in Chairmanships of committees.
◦ New Governor
4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ 85251
480.425.2600
www.sackstierney.com
ADOR New
Sales Taxes
November 19, 2014
Prime Contracting Changes Effective
January 1, 2015
• Prime contractors: This definition remains
intact. Prime contracting services are still
taxable on 65% of their gross receipts.
• Subcontractors working for a Prime Contractor
are exempt from sales taxes. The sales of
building materials to prime contractors or
subcontractors are exempt as before.
• No changes here.
New Exemption FROM Prime Contracting
Effective January 1, 2015
“Service” Contractors
•
Subject to Tax at Point of Purchase: Now exempted from
prime contracting on both the state and city levels. Contractors
who only enter into contracts with owners of real property OR
owners of the improvements to real property to maintain, repair,
replace, or alter (MRRA) their property will be subject to tax at
the point of purchase on the building materials used in those
projects.
•
No License Needed: Service contractors who only enter into
contracts with owners of real property OR owners of the
improvements to real property, to maintain, repair, replace, or
alter (MRRA) their property are not required to obtain or renew
TPT licenses.
•
Retail Tax: Service contractors will now pay retail tax at the
point of sale when materials are purchased.
This leads to Inventory Changes…..
Inventory Changes Effective
January 1, 2015
• Prime contractors: The sales of building
materials to prime contractors or
subcontractors are exempt.
• Service contactors: Service contractors
will now pay retail tax at the point of sale
when materials are purchased.
Prime and Service Contracting Inventory
• Prime Inventory – Must be purchased using
Resale Number and then held SEPARATELY
from Service Inventory
• Service Inventory – Must be purchased and
sales taxes paid at date of purchase then held
SEPARATELY from Prime Inventory.
Problems:
• Can you separate the inventories?
• Can you train the employees/purchasing
agents to carefully identify the type of contract
first before purchasing inventory?
• What do you do to pay the sales taxes on the
exempt materials you have on hand at
December 31, 2014?
These issues above deal directly with your
resale license so…
License Renewals Effective January 1,
2015
• Taxpayers who have a state TPT license
and/or a municipal excise tax license are
required to annually renew the license(s). The
license(s) for both the State and the cities are
valid for one calendar year and must be
renewed by January 1st each year.
• Taxpayers will be receiving a notice to renew
the State and Program City
licenses. Taxpayers must complete and
submit this renewal form to the Arizona
Department of Revenue even if the taxpayer’s
business information has not been changed.
There is no fee to renew the State TPT or
current Program City license.
UPCOMING:
• An electronic license renewal process for all
taxpayers, including non-program city
taxpayers between October and December,
2015, to be included in your Portal.
• Renewal notices will be sent in the month of
November. If you do not receive your notice
by December 31, 2014, please call 602-5425027. It may take up to forty five days to
process your renewal.
• This annual renewal means a decision is
required each year to be licensed or not
depending on what type of contractor you
are……
License Problems Effective
January 1, 2015
CRITICAL NOTES:
• You are responsible to renew or not renew your license
each year. Calendar it and do it early if possible!
• If you are now only a Service contractor and choose NOT
to renew your license then are you obligated to inform all
suppliers that you no longer qualify for the resale
exemption? We believe you are.
• If you are now only a Service contractor and DO renew
your license then are you obligated to inform all suppliers
when you don’t qualify for the resale exemption on the
Service purchases? We believe you are.
More License Problems
• If you are a Service contractor and might in
the future have an opportunity to enter into a
Prime contract situation that needs a resale
number, should you consider keeping your
license current? We believe you should.
• There is a way to obtain a contract specific
exemption license number for the above but it
is very problematic and could severely delay
your ability to purchase the items for resale.
Let’s discuss this……
Project Specific Exemption Certificates
Effective January 1, 2015
“In order to reign in abuse of exemption certificates,
the Department is required under House Bill 2111 to
issue project-specific exemption certificates that
contractors can use to purchase building materials
tax free.”
We put this here so that you could note the word
“abuse” used by the ADOR in their own literature.
To qualify for a project-specific exemption
certificate, the contractor must meet the
following conditions:
• The contractor may not work directly for the owner of the
real property, but rather must work on a job that is in the
control of a taxable prime contractor;
• The contractor may only use the exemption certificate for
material that will be incorporated into a taxable construction
project;
• The contractor may not have a delinquent tax balance;
• The contractor must submit documentation to the
Department showing that it meets these conditions.
It appears that this new exemption certificate requirement
applies only to subcontractors.
License Renewals
• ADOR has indicated that license renewals may
take up to 45 days so plan accordingly for any
project specific exemption certificates that you
might need.
Now how do you go about filing…..
How Will You File Sales Tax Reports
Effective January 1, 2015
• Business Owners MUST e-file their TPT returns
if they have more than 1 business location.
• There will no longer be the e-signature
document required when registering on
AZTaxes.gov
• ADOR expects to have a new Form TPT-1.
Filing in 2015:
• Program Cities: You will file only the ADOR TPT
reports for all cities for which the ADOR licenses
and collects TPT on behalf of. You will report all
monthly activity on the Arizona TPT form and pay
the TPT taxes due for the state and cities.
Except for:
• Non-Program Cities: Apache Junction,
Avondale, Chandler, Douglas, Flagstaff, Glendale,
Mesa, Nogales, Peoria, Phoenix, Prescott,
Scottsdale, Sedona, Tempe, and Tucson. These
cities will continue to administer their own privilege
taxes through the 2015 calendar year. You will
need to file separate TPT reports with these cities.
Filing in 2016:
• All cities will be Program cities. The only
TPT report to be filed each month will be
electronically with the Arizona Department of
Revenue. This TPT report will include the
activities in all cities.
Where do you go for the most current
information….
New “On-Line Portal”
Effective January 1, 2015
In 2012, the Arizona Legislature passed House Bill
2446, which required the Arizona Department of
Revenue (the “Department”) to establish a central
online portal where taxpayers could elect to report
city sales taxes for cities whose sales taxes are
not administered and collected by the
Department.
Then…
…came House Bill 2111 which dramatically
expanded the online portal. It requires that the
portal constitute a single point of contact where
taxpayers may obtain all necessary state and city
tax licenses, file a single return for state, county
and city taxes, and pay all state, county and city
sales tax.
Previously, taxpayers had to file a return with the
Department for state and county taxes, and cities
whose taxes were administered by the
Department, but taxpayers had to file a separate
return with each city that administered its own
sales taxes.
Payment to?
• Taxpayers who do not elect to report and pay
city taxes through the online portal, but
instead choose to submit paper returns, are
now required to file the paper returns and pay
the taxes owed to the Department rather than
sending the returns and payment directly to
the relevant city. (This appears to have been
amended to start January 1, 2016 with both
State and cities instead)
So you have a new Portal, what is expected to
change on the new TPT-1 Form…
Standardized Code Changes
Effective January 1, 2015
Standardized Business Codes-Transaction
Detail Column A
Beginning January 1, 2015, there will be one list
of business codes for the State/county and
cities.
For example, if you currently file under the retail
classification at the state/county level (business
class 017), you will file business code 017 for the
city in which you conduct business in. The
standardized list will be posted by ADOR once
they are finalized.
Standardized Deduction Codes-Schedule A
Beginning January 1, 2015, there will be one list
of deduction codes for the State/county and
cities. The standardized list will be posted by
ADOR once they are finalized.
• You may no longer use deduction codes
888(Other City-Exempt Income) or 999(Other
State-Exempt Income). Use of these codes
will be disallowed and penalties and interest
may apply. Indian land?
What about Exemption changes…
Tax Exemption Changes Effective
January 1, 2015
• Repeal of Sales Tax
exemptions. Current law contains an
exemption for sales of tangible personal
property to a non-resident of Arizona if
the property is shipped or delivered to
the purchaser outside Arizona for use
outside the state. Ariz. Rev. Stat. § 425061(A)(14).
Under House Bill 2111, this exemption is
limited to sales of motor vehicles only.
House Bill 2111, cont.
• House Bill 2111 also repeals the current exemption
for sales of tangible personal property shipped
directly to a destination outside of the United States
for use in a foreign country (currently, Ariz. Rev. Stat.
§ 42-5061(A)(35)). Such foreign sales are not
taxable under the foreign commerce clause of the
US Constitution and evidently the Legislature
thought that a separate statutory exemption was
unnecessary.
We believe that ALL sales to anyone inside & outside
the state of Arizona, except foreign destinations, are
now subject to retail sales tax on personal property.
Other Exemptions
Effective January 1, 2015
• Pre-construction services exemption modified. Arizona
law currently contains an exemption for the gross receipts
attributable to a “separate, written design phase services
contract or professional services contract.” Ariz. Rev. Stat.
§ 42-5075(N).
• This exemption is modified so that design phase services
and professional services no longer need to be contained
within a separate contract. Rather, the terms, conditions,
and pricing for the design phase services or professional
services merely need to be separately stated from those for
construction phase services in the contract.
• Owner-builder classification repealed. The rarely
applicable owner-builder tax classification contained in Ariz.
Rev. Stat. § 42-5076, is repealed.
Property Management Companies &
Residential Rental Property
• Property managers and property management companies
may no longer obtain a transaction privilege tax (TPT)
license on behalf of their clients.
• Effective January 1, 2015, each real property owner is
required to have a TPT license per location. To obtain a
TPT license, the property owner must apply using the
Arizona Joint Tax Application (JT-1).
• If a property owner would like a property manager or
property management company to file and pay their TPT,
the property owner must file a General
Disclosure/Representation Authorization Form (aka Power
of Attorney, Arizona Form 285) with the Arizona
Department of Revenue.
Other Things to Look for in the
Upcoming Months
•
Ability to look up taxing jurisdiction and applicable tax rate by
January 1, 2015.
•
Bulk filing by jurisdiction by January 1, 2015.
•
New joint tax application (JT-1) with jurisdiction address
functionality: July 1, 2015.
•
Enhanced AZTaxes.gov e-file system: October 1, 2015.
•
New TPT form for filing monthly TPT returns which will allow
taxpayers to report data by business location: October 1, 2015.
•
Bulk filing capabilities for taxpayers to file by business
location: October 1, 2015.
•
An electronic license renewal process for all taxpayers, including
non-program city taxpayers between October and December, 2015
•
Updates at https://www.azdor.gov/TPTSimplification/Updates.aspx