In a perpetually evolving tax landscape, tax administrators are constantly pushing the traditional bounds of the collection responsibility of taxpayer. The most recent developments are set against the backdrop of the current “physical presence” standard and state and federal attempts to repeal or overturn the Supreme Court case of Quill v. North Dakota.
Quill and the “Physical Standard”
In Quill the Court essentially provided that it is unconstitutional for US states to require a taxpayer to collect sales tax unless the taxpayer has sufficient physical presence or contact with the state in which they need to collect. The Quill holding is rooted in an understanding that sales tax compliance is sufficiently complex, and that to impose the requirements on sellers not physical located in the jurisdiction is an undue burden on interstate commerce.
The Court did not provide a definition of the standard, which resulted in a patchwork of definitions across the country. There is some consensus that if you have employees, offices, inventory and the like in the state that you may satisfy the standard.
Federal Legislative Backdrop
In light of this ambiguity and shortfalls in state revenue, various federal bills have been introduced that that would overturn Quill and revoke the physical presence standard. Most of these bills require some form of required simplification by states of their specific sales tax systems, reducing the compliance burden on the taxpayer. We have seen various states, including Alabama and South Dakota, that have gone so far as to ignore this standard altogether in their legislation, igniting legal battles with taxpayers. In contrast, other states are trying to align their tax systems to a simplified approach to tax administration and collection in anticipation of the eventual elimination of Quill.
Arizona’s Plan for Simplification
Our discussion will focus on the state of Arizona which has undertaken their own state tax simplification effort. Arizona started their simplification project in 2012 where they attempted to revamp their current complex sales tax system. This was an attempt to reduce complexity and increase taxpayer compliance. The result of that effort was legislation that called for all licensing and taxes to be paid and reported through a single location or portal.
This simplification effort stalled twice, as the changes originally slated to be implemented on January 1, 2015 were postponed to January 1, 2016. One can understand the source of the delay, given the complexity of their existing situation. It has taken the state several years to be ready to move from a scenario where home-rule cities administer their own tax to a unified state-administered system. As things stand at the moment, taxpayers in Arizona have to file the state return and potentially sixteen additional self-administered home-rule city or “non-program city” returns.
Implementing the Plan
Arizona was finally able to revamp its system in earnest effective for the June 2016 filings due in July. First, Arizona eliminated the existing TPT-1 return. Taxpayers must now either file the TPT-2 or the TPT-EZ. The TPT-2 should be utilized by those taxpayers who have two or more locations within the state. The TPT-EZ is intended for taxpayers who only have a single Arizona location.
Arizona also now requires taxpayers to report tax due to program cities by location code or location number on these two forms. This filing methodology is a form of outlet reporting similar to what is currently required in Missouri, Florida and Texas. Location codes are not required for state/county reporting. Some would argue that outlet reporting adds to complexity, but Arizona determined this step was needed to pave the way for the future state-level administration of non-program cities.
Effective for the January 2017 filing due in February, Arizona will require non-program cities (Apache Junction, Avondale, Chandler, Douglas, Glendale, Flagstaff, Mesa, Nogales, Peoria, Phoenix, Prescott, Scottsdale, Tempe, and Tucson) to begin reporting tax and deductions to the Arizona TPT-2 or TPT-EZ.
Arizona will require taxpayers to report city level tax by location, which means that these new “non-program” cities will require an associated outlet to report to either the TPT-2 or TPT-EZ. This means that the individualized non-program city level tax returns will no longer apply. This consolidation effort has been a challenge for Arizona because the state and the non-program cities have different tax reporting and deduction codes which now need to be unified. While the program and non-program cities will report to the state, the Native American communities will retain local reporting. The following Native America communities will retain their own separate reporting:
- Gila River Community
- Salt River
- San Carlos Apache
- Tohono Oodham
- Yavapi Prescott
Important Next Steps for Taxpayers
What does this mean practically to taxpayers? With this simplification, sellers must align their ERP systems and reporting systems to conform to this change. The long term benefit to taxpayers is that all of the Arizona tax administration will be done at the state level and there will be a single filing requirement. However, in order to accomplish this end state, taxpayers must ensure:
- The relevant non-program locals are registered and associated to a location with the Arizona Department of Revenue.
- That prior to the change, the relevant Arizona non-program city transactions are associated with the appropriate Arizona locations for reporting purposes.
The Path Ahead
While Arizona has made significant steps toward simplification, additional changes will be required to qualify to collect tax from sellers without physical presence under the Marketplace Fairness Act or the Remote Transactions Parity Act. Both federal bills require central sales tax administration, which Arizona will accomplish, but there are questions on whether the lack of administration of local tribal taxes will pose a challenge. These bills also require harmonizing of the state and local tax base.
To date, Arizona has not gone so far as to require all cities to share the state tax base. The non-program cities are still able to separately define taxability of goods and service in ways that vary from the state. So, while Arizona has made some great progress, they still have work to do if they want to qualify under these federal bills to close the tax gap by collecting tax from sellers who do not have a physical presence in Arizona. Also, while this change does provide some long term benefit, as with any significant change, taxpayers will have some short term work to do in order to conform to the new rules.
Learn more about how Sovos automated solutions can keep your business in compliance with complex reporting changes.
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