This southwestern state is best known for the Grand Canyon, the mile-deep chasm carved by the Colorado River. Flagstaff, a ponderosa pine-covered mountain town, is a major gateway to the Grand Canyon. Other natural sites include Saguaro National Park, which protects the cactus-filled Sonoran Desert Landscape. Tucson is home to the University of Arizona and to the Arizona-Sonora Desert Museum.
Southern Arizona is known for its desert climate, with very hot summers and mild winters. Northern Arizona features forests of pine, Douglas fir, and Spruce trees, the Colorado Plateau, some mountain ranges (e.g., the San Francisco Mountains), as well as large deep canyons, with much more moderate summer temperatures and significant winter snowfalls. There are ski resorts in the areas of Flagstaff, Alpine, and Tucson. In addition to the Grand Canyon National Park, there are several national forests, national parks, and national monuments in the state.
Business Climate
Early in its history, Arizona’s economy relied largely on the “five C’s:” copper, cotton, cattle, citrus, and climate (tourism). Copper is still extensively mined from many expansive open-pit and underground mines, accounting for two-thirds of the nation’s output.
Today, the composition of the state’s economy is moderately diverse; although health care, transportation and the government remain the largest sectors.
Arizona’s agricultural output is pretty evenly distributed between crops and livestock. About 47% of Arizona’s agricultural production is in livestock. The other 53% is in crops. In terms of revenue generated, Arizona’s top five agricultural products are cattle and calves, lettuce, dairy products, cotton and hay.
Tax Climate
Arizona’s top individual income tax rate is 4.54%. The top corporate income tax rate is 4.9%.
Apportionment: For tax year 2018, taxpayers may elect to apportion income using a three-factor formula with double-weighted sales or an alternative formula. Arizona uses a three-factor formula of property, payroll and double-weighted sales or an alternative formula, which affords greater weight to the sales factor, depending upon taxpayer election. For tax years beginning on or after Dec. 31, 2016, the alternative formula multiplies the income by the sales factor, and excludes the payroll and property factors.
Sourcing of services revenue: In Arizona, receipts from services are sourced based on the cost of performance. However, a “multi-state service provider” may elect to source sales from services to Arizona based on a combination of where the income producing activity occurs and where the market for the services is located. A multistate service provider is either a taxpayer that derives more than 85% of its sales from services, or, in taxable years beginning from and after Dec. 31 2019, sales from intangibles, to purchasers receiving the benefit of the service outside of Arizona, or a taxpayer that is a regionally accredited institution of higher education with at least one university campus in Arizona that has more than 2,000 students residing on the campus.
Arizona remains frustratingly undecided on whether it will conform to the Tax Cuts and Jobs Act. However, for tax years beginning in 2017 and thereafter, the IRC conformity date remains Jan. 1, 2017. It appears that as of Jan. 1, 2018, Arizona- mostly- conformed to the federal rules for adjusted gross income (AGI).
Sales Tax Structure
Despite recent activity in many states regarding economic nexus in light of South Dakota v. Wayfair, Arizona has not enacted economic legislation as yet.
Arizona has a Transaction Privilege Tax (TPT). The TPT is levied by the state of Arizona on certain persons for the privilege of conducting business in the state. TPT differs from the “true” sales tax imposed by many other U.S. states as it is imposed upon the seller or lessor rather than the purchaser or lessee. The state transaction privilege tax rate is 5.6%, and ranks 28th in the nation, as compared to the more “traditional” sales tax in most states. Local communities can also levy a transaction privilege tax, thereby increasing the overall rate.
Arizona is aggressive in its approach to taxation of technology products for sales tax purposes. All digital products are taxable. Prewritten computer software is taxable while custom computer software that is electronically downloaded is exempt. Lastly, SaaS is taxable. How products are produced, sold and delivered is critical to determining their tax status.
Many states have annual sales tax holidays, during which certain items the state wants to promote the purchase of (like school supplies, emergency preparedness supplies, or energy efficient appliances) can be purchased sales tax free. Arizona, however, does not currently have any scheduled sales tax holidays.
Random Facts
- Arizona leads the nation in copper production.
- Oraibi is the oldest Indian settlement in the United States. The Hopis Indians founded it.
- The famous labor leader, Cesar Estrada Chavez, was born in Yuma.
- The world’s largest solar telescope is located at Kitts Peak National Laboratory in the city of Sells.
- The age of a saguaro cactus is determined by its height.
Our team at Miles Consulting Group is available to discuss the specifics of your state tax situation, whether in Arizona or other states, we can help you navigate the complex tax structures arising from your multistate operations. Call us to help you achieve the best tax efficiencies.
