Arizona Sales Tax Nexus: Key Rules for Out-of-State Businesses

The Arizona Department of Revenue (ADR) published a Transaction Privilege Tax Ruling regarding how the State of Arizona determines substantial nexus for calculating Arizona’s transaction privilege tax, county excise tax, use tax, and city privilege taxes.

In addition, the ruling answers how businesses from other US states should determine an appropriate tax rate once the substantial nexus is established.

The Importance of ADR Decision

The ADR ruling explains that out-of-state businesses with a substantial nexus to Arizona are subject to sales tax, known as transaction privilege tax (TPT) in Arizona, county excise tax, use tax and city privilege tax. Moreover, the ruling emphasizes that a substantial nexus can be established through physical or economic nexus.

Regarding the physical nexus, which applies to all business activity classifications, an out-of-state business is considered to have a substantial connection to Arizona if it conducts non-transitory, that is, ongoing or significant, activities in the state that contribute to establishing or maintaining a market for the business. Once the nexus is established, businesses are treated the same way as local ones, and their revenue is taxed.

On the other hand, economic nexus only applies to retail, more precisely, remote sellers who are not selling through marketplaces, and marketplace facilitators, for sales on their behalf and behalf of at least one marketplace seller. For economic nexus to be established, the annual gross proceeds of retail sales or gross income from retail sales to customers in Arizona must exceed the threshold set at USD 100,000.

The ruling also provides several illustrative examples of the nexus and application of TPT, county excise taxes, use taxes, and city privilege taxes.

Conclusion

The TPT, or Arizona transaction privilege tax, is a tax on vendors for the privilege of doing business in that state. Since it is the same as a sales tax in other US states, the ruling and explanations provided are essential for all out-of-state companies to determine whether they have a substantial nexus in Arizona and whether they need to charge, collect, and remit TPT, county excise tax, use tax, and city privilege taxes.

Source: Arizona Department of Revenue