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STATE OF ARIZONA 2002 Tax Handbook Prepared by the Staff of the Joint Legislative Budget Committee JLBC CONTENTS Page No. Foreword ..................................................................................................................................................................................... i Overview of Arizona Taxes ..................................................................................................................................................... iii GENERAL FUND SALES AND USE TAXES A. Transaction Privilege Tax................................................................................................................................................. 1 B. Use Tax................................................................................................................................................................................ 16 C. Severance Tax on Metalliferous Minerals ....................................................................................................................... 19 D. Jet Fuel Excise and Use Tax.............................................................................................................................................. 21 E. Rental Occupancy Tax...................................................................................................................................................... 23 D. Severance Tax on Timber.................................................................................................................................................. 25 INCOME TAXES A. Individual Income Tax....................................................................................................................................................... 27 B. Corporate Income Tax....................................................................................................................................................... 44 PROPERTY TAXES ................................................................................................................................................................... 53 LUXURY TAXES AND LICENSES A. Luxury Tax on Cigarettes and Tobacco.......................................................................................................................... 67 B. Luxury Tax on Liquor ........................................................................................................................................................ 71 C. Alcoholic Beverage License Fees ................................................................................................................................... 74 INSURANCE PREMIUM TAX................................................................................................................................................ 79 ESTATE TAX............................................................................................................................................................................. 83 OTHER REVENUE SOURCES A. Bingo License and Lieu Tax............................................................................................................................................. 85 B. Boulder Canyon Projects - In Lieu Payments ................................................................................................................. 87 C. Commercial Nuclear Generating Station Assessment ................................................................................................... 88 D. Lieu Tax on Private Railroad Car Companies .................................................................................................................. 91 E. Pari-Mutuel Tax.................................................................................................................................................................. 93 F. Voluntary Contributions by Municipalities .................................................................................................................... 96 Contents OTHER FUNDS PAYMENTS IN LIEU OF PROPERTY TAXES A. Aircraft License Tax........................................................................................................................................................... 99 B. Flight Property Tax............................................................................................................................................................ 101 C. Vehicle License Tax........................................................................................................................................................... 105 D. Voluntary Contributions by Districts .............................................................................................................................. 110 E. Voluntary Contributions by the Game and Fish Commission ...................................................................................... 113 F. Watercraft License Tax..................................................................................................................................................... 115 G. Government Property Lease Excise Tax........................................................................................................................... 117 HIGHWAY USER TAXES A. Aviation Fuel Tax............................................................................................................................................................... 121 B. Motor Carrier Fee ............................................................................................................................................................... 123 C. Motor Vehicle Fuel Tax..................................................................................................................................................... 126 D. Use Fuel Tax....................................................................................................................................................................... 129 MISCELLANEOUS REVENUE SOURCES A. Intrastate Utility Corporation Assessments ................................................................................................................... 131 B. Lieu Tax on Workers' Compensation Insurance Premiums .......................................................................................... 134 C. Telecommunication Services Excise Tax......................................................................................................................... 137 D. Underground Storage Tank Tax...................................................................................................................................... 141 E. Unemployment Insurance Tax......................................................................................................................................... 144 F. Water Use Tax.................................................................................................................................................................... 151 Joint Legislative Budget Committee 1716 West Adams Phoenix, Arizona 85007 Phone: (602) 542-5491 Email: jlbcwebmaster@azleg.state.az.us JLBC Website: http://www.azleg.state.az.us/jlbc.htm i FORWARD The 2002 Tax Handbook provides Legislators and the interested public with collection and distribution numbers for the taxes levied by the state, as well as summaries of all tax law revisions enacted in the 1996 through 2002 legislative sessions. A listing of tax law changes prior to the 1996 legislative session is available on the Joint Legislative Budget Committee (JLBC) web-site located at www.azleg.state.az.us/jlbc.htm. The 2002 version of the Tax Handbook makes some changes to the format used in previous editions. Foremost among these is an emphasis on describing and displaying the dollar impact of tax law changes. In the 2002 Tax Handbook, we attempt to describe in the narrative the impacts, if quantifiable, of tax law changes passed in recent sessions. In addition, an itemized list of incremental tax law changes has been included for every tax category that experienced a tax law change with an incremental impact in FY 1996 through FY 2002. By including this information we hope the handbook will be more useful to readers. The organization of the 2002 Tax Handbook has been revised from earlier handbooks. The chapters are organized by revenue category under General Funds and Other Funds. The sections within each chapter are generally organized from the largest revenue category to the smallest. Each entry in the handbook has been organized into a consistent format which includes the following sections (where applicable): · Description – a comprehensive narrative description of the tax or revenue source. · Distribution – a 20-year history of collections and a description of how the tax is distributed by fund, or shared with other jurisdictions such as cities and towns. · Who Pays the Tax – a description of who is legally responsible for the payment of the tax or fee. · Tax Base and Rate – a definition of the tax base, a discussion of exemptions if any, and a description of the tax rate(s). · Tax Refunds and/or Credits – a description of circumstances under which tax refunds are made, and/or credits are allowed. · Payment Schedule – due dates, delinquency dates, and payment schedules, as well as an explanation of how the tax or fee is remitted to the state. · Impact of Tax Law Changes – includes tax law changes from 1996 through 2002. As noted above, tax law changes prior to 1996 are available on the JLBC web-site. Finally, because fiscal year 2002 only recently ended, actual revenue collections for FY 2002 are unavailable, and are not included. iii OVERVIEW OF ARIZONA TAXES Taxes represent the most visible and important revenue source for Arizona. Other forms of revenue such as fees, assessments, and federal grants do exist, but taxes are the primary method by which the state provides goods and services to its citizenry. There are many different types of taxes. Some are obvious and well known, such as the sales tax and the income tax. Others are more obscure, such as the telecommunication services excise tax and the intrastate utility corporation assessment. Taxes also vary widely in terms of their revenue generating capacity. The state sales tax produces $3 billion per year, while at the other end of the spectrum, voluntary contributions by the Game and Fish Department produce just $12,000 a year. The revenues from Arizona’s different taxes are deposited in a number of funds. The largest fund is the General Fund. In FY 2002, total General Fund revenue was $6.7 billion. The state budget is paid for from this fund. While revenues from numerous taxes are deposited in the General Fund, there are 3 taxes that constitute the bulk of General Fund collections: the sales tax, the individual income tax, and the corporate income tax. In FY 2002, the Big Three, as they are called, represented approximately 87% of General Fund revenues, which is lower than in the past few years. In FY 2002, the Legislature enacted approximately $500 million in non-tax revenue enhancements in order to overcome revenue shortfalls for the fiscal year, and to provide a balanced budget. These actions resulted in a higher relative percentage in the “other “ category, and lower percentages in the individual and corporate income tax categories, where the primary shortfalls occurred. It also should be noted that the chart below does not include Proposition 301 sales tax revenues. A discussion of Arizona’s taxes usually begins with the Big Three, but it should not end there, for the state levies many other taxes. Some of the other taxes generate sizable amounts of revenue, but because their collections are not deposited in the General Fund there is a tendency for these taxes to get overlooked. For example, the motor vehicle fuel tax generated $436 million in FY 2001 and the unemployment insurance tax over $200 million. However, their collections were deposited in the Highway User Revenue Fund and the Unemployment Compensation Fund, respectively. Sources of FY 2002 General Fund Revenue Other 13% Individual Income Tax 33% Sales Tax 48% Corporate Income Tax 6% iv This handbook provides a listing and description of the taxes levied by the State of Arizona. It shows revenue collection amounts and tax distributions by fund. In addition, this year’s book makes an effort to estimate the dollar impact of tax law changes that have incremental impacts in FY 2002 and FY 2003. The table below summarizes the impacts of these tax law changes. ESTIMATED IMPACT OF TAX LAW CHANGES Revenue Category FY 2002 FY 2003 Sales and Use Tax $ (1,764.6) $ (40.0) Individual Income Tax $ 19,825.3 $ 4,434.5 Corporate Income Tax $ (37,459.6 $ 22,267.0 Property Tax $ (2,234.9) $ (1,738.3) Estate Tax $ 0.0 $ (18,830.0) GENERAL FUND SALES AND USE TAXES - 1 - TRANSACTION PRIVILEGE TAX DESCRIPTION The transaction privilege tax is Arizona’s version of a sales tax. Across the United States, there are 13 states that levy a transaction privilege tax, 17 states that employ a sales tax, and another 15 states that impose a hybrid tax. All three types of taxes are levied upon consumer spending, but they differ with regard to the legal burden of the tax. Under Arizona’s transaction privilege tax, the seller is responsible for remitting to the state the entire amount of tax due based on the gross proceeds or gross income of the business. The seller may include the tax in the purchase price or absorb the tax. Because of its similarity to the sales tax, the transaction privilege tax is often referred to as a sales tax. The sales tax consists of many different tax categories. The largest of these, the retail sales tax, comprises half of total sales tax revenues. Other large sales tax categories include contracting, utilities, and restaurants and bars. Chart 1 illustrates the relative importance of the major categories. A full listing of all sales tax classifications is provided in Table 2. The sales tax is the state’s single largest revenue source, representing approximately 53% of total General Fund revenues in FY 2002 (including the sales taxes collected under Proposition 301). A significant portion of state sales tax revenues is shared with the counties and cities. This revenue sharing occurs through the distribution base, described in further detail in Distribution Section below. Beginning in June, 2001, the sales tax rate for most categories rose from 5.0% to 5.6%, with the extra 0.6% being dedicated to education. This tax increase was approved by voters, and is commonly known as Proposition 301. DISTRIBUTION Transaction privilege tax revenues are shared with Arizona’s counties and cities through a complex system of formulas established in statute. See Table 1 for amounts distributed. Legislative changes to the state sales tax usually have local government impacts, unless otherwise specified through hold harmless provisions (provisions designed not to harm local governments). Distribution. The Department of Revenue transmits all sales tax revenues to the State Treasurer, separately accounting for payments of estimated taxes, the transient lodging tax, transaction privilege and severance taxes on mining and timber collected from businesses located on Indian reservations, and education sales taxes. The aforementioned tax collections have dedicated uses. All other transaction privilege tax revenues are credited to a clearing account. Revenues designated by statute for the distribution base (see Tables 1 and 2) are divided among the state, the counties and the cities. The remaining monies (non-shared) are directly credited to the General Fund, except as needed for school capital finance pursuant to A.R.S. § 42-5030.01, part of the Students FIRST legislation [A.R.S. § 42-5029]. Components of Sales Tax Revenues Other 19% Restaurants & Bars 8% Utilities Retail 8% 50% Contracting 15% Chart 1 Transaction Privilege Tax - 2 - Table 1 TAX COLLECTIONS AND DISTRIBUTION (20 year history)* Fiscal Year General Fund Cities Counties Total FY 2001 $2,984,082,031 $312,676,402 $506,661,075 $3,803,419,508 FY 2000 $2,829,307,415 $299,386,513 $485,126,158 $3,613,820,086 FY 1999 $2,577,768,324 $272,402,244 $441,400,596 $3,291,571,164 FY 1998 $2,367,883,017 $253,826,710 $411,300,801 $3,033,010,528 FY 1997 $2,211,158,987 $240,264,373 $389,324,389 $2,840,747,749 FY 1996 $2,103,275,229 $233,196,324 $377,871,323 $2,714,342,876 FY 1995 $1,968,613,472 $219,908,226 $356,339,289 $2,544,860,987 FY 1994 $1,787,609,451 $200,069,251 $304,745,483 $2,292,424,185 FY 1993 $1,626,535,290 $184,318,955 $280,754,631 $2,091,608,876 FY 1992 $1,503,124,515 $170,654,277 $259,940,595 $1,933,719,387 FY 1991 $1,447,942,088 $163,823,044 $249,535,260 $1,861,300,392 FY 1990 $1,442,587,551 $159,021,328 $242,221,287 $1,843,830,166 FY 1989 $1,340,809,656 $151,056,680 $230,089,535 $1,721,955,871 FY 1988 $1,249,832,747 $136,876,722 $208,490,623 $1,595,200,092 FY 1987 $1,199,589,750 $129,753,925 $197,641,179 $1,526,984,854 FY 1986 $1,150,175,481 $122,598,867 $186,674,822 $1,459,449,170 FY 1985 $1,070,654,725 $114,972,699 $174,179,683 $1,359,807,107 FY 1984 $ 854,824,687 $105,144,271 $181,255,017 $1,141,223,975 FY 1983 $ 616,291,719 $ 93,527,936 $135,951,094 $ 845,770,749 FY 1982 $ 580,882,821 $ 91,596,747 $129,829,407 $ 802,308,975 * The figures displayed in this table include revenues collected from the sales tax and its affiliated taxes – the use tax, mining and timber severance taxes, jet fuel taxes, and the rental occupancy tax. Revenues collected from the 0.6% education tax go directly toward education programs. For a more extensive discussion of the specific uses of education tax revenues, please refer to pages 180-181 of the FY 2002 and FY 2003 Appropriations Report. Monies in the distribution base are allocated on a monthly basis in the following way: – 25% is paid to the cities in proportion to their population based on the last U.S. decennial or special census. – 40.51% is paid to the counties according to the formula described below. – The remaining 34.49% is retained by the state and used to make various allocations and appropriations specified by statute. In total, the counties receive 40.51% of distribution base revenues. This amount is divided among the 15 counties in the following way: 1) 38.08% is paid by averaging: (a) The proportion that the population of each county bears to the total state population based on the most recent census, and; (b) The proportion that the distribution base monies collected during the month in each county bear to the total of distribution base monies collected statewide for the month. 2) 2.43% is distributed to counties receiving less under the population formula than under the old property valuation formula, to hold the counties harmless from the change in distribution methods that occurred with the passage of Laws 1994, 8th Special Session, Chapter 8. Any amount left after this distribution is distributed based on the new population formula. The remaining 34.49% of distribution base revenues is allocated for various purposes, including school capital finance, multipurpose facilities, counties that enter into an intergovernmental agreement with the Department of Transaction Privilege Tax - 3 - Transportation for construction of a bridge, and the Tourism and Sports Authority (TSA). The TSA’s share of distribution base monies is equal to the amount of sales taxes collected at Arizona Cardinals football games. In addition, some monies are transferred to the Water Quality Assurance Revolving Fund, as required by A.R.S. § 49- 282. After these distributions have been made, the remainder is credited to the General Fund. From this amount, the following distributions are subject to appropriation: 1) The Department of Revenue receives monies sufficient to cover administrative expenses. 2) The Department of Economic Security receives monies for the purposes stated in Title 46, Chapter 1 (public welfare, out-of-wedlock pregnancy prevention, and aging). 3) The Tourism Fund receives 3.5% of last year’s gross transient lodging tax revenues, 3.0% of last year’s gross amusement tax revenues, and 2.0% of last year’s gross restaurant and bar tax revenues. 4) The Arts Endowment Fund receives the amount by which amusement tax revenues for the current fiscal year exceed the revenues that were derived from the amusement tax in FY 1994, up to a maximum of $2,000,000. This distribution will expire at the end of FY 2007. 5) The Shooting Range Relocation and Assistance Fund receives $50,000 derived from retail sales taxes collected during the current fiscal year. WHO PAYS THE TAX Persons or companies engaging in business in the state are legally responsible for payment of the tax. However, in practice transaction privilege taxes are passed on to consumers [A.R.S. § 42-5001]. TAX BASE AND RATE In general, the tax base is the gross proceeds of sales or gross income derived by a person from a taxable business. However, there are variations between the tax bases of the different classifications of the transaction privilege tax, as specified in A.R.S. § 42-5061 – A.R.S. § 42-5077. Notably, the contracting tax has a unique tax base. The tax base for contractors is 65% of the value of a contract, based on the assumption that labor costs represent 35% of the value of a contract [A.R.S. § 42-5023]. Exemptions. There are numerous (over 100) sales tax exemptions provided in statute, such as exemptions for food and medicine. The effect of these exemptions is to reduce the size of the tax base. See Table 2 for specific tax exemption statutes for each sales tax classification. For a complete list of all sales tax exemptions, see the Department of Revenue’s publication, The Revenue Impact of Arizona’s Tax Expenditures [A.R.S. § 42-5002 and A.R.S. § 42-5061 – A.R.S. § 42-5077]. Tax Rates. Once the net tax base is computed, it is multiplied by the applicable tax rate to derive the total tax due. The tax rates vary according to the business classification of the taxable activity. Most categories, however, are taxed at the rate of 5.6%. Table 2 on the following page lists the tax rates for each classification. In addition, a complete list of sales tax rates by all Arizona cities, including the tax rates levied by state, county, and city governments, is provided in Attachment A at the end of this section [A.R.S. § 42-5010]. TAX REFUNDS AND/OR TAX CREDITS Motion Picture Production Tax Refund. Sales tax refunds are rare. However, statute does permit refunds for motion picture companies and commercial advertising production companies that satisfy certain criteria [A.R.S. § 42-5015]. Telecommunications Service Assistance Program. Local exchange telephone companies may claim a tax credit for rate reductions given to elderly low-income persons [A.R.S. § 42-5016]. Accounting Allowance. A taxpayer may claim a tax credit of 1% of the amount of tax due, not to exceed $10,000 in any calendar year. This credit is designed to reimburse taxpayers for expenses incurred in accounting for and reporting sales tax payments [A.R.S. § 42-5017]. Transaction Privilege Tax - 4 - PAYMENT SCHEDULE Due Dates. Transaction privilege taxes are due to the Department of Revenue every month on or before the 20th day of the month after the month in which the tax accrues. For example, for taxable sales made in January, a tax payment is due to the Department of Revenue by February 20 [A.R.S. § 42-5014]. Table 2 TRANSACTION PRIVILEGE TAX CLASSIFICATIONS Classification A.R.S. Exemption Statute Tax Rate Distribution Base 1/ Non-Shared Base 2/ Education 3/ Retail 42-5061 5.6% 40% of first 5.0% 60% of first 5.0% 0.6% Increment Transporting 42-5062 5.6% 20% of first 5.0% 80% of first 5.0% 0.6% Increment Utilities 42-5063 5.6% 20% of first 5.0% 80% of first 5.0% 0.6% Increment Telecommunications 42-5064 5.6% 20% of first 5.0% 80% of first 5.0% 0.6% Increment Publication 42-5065 5.6% 20% of first 5.0% 80% of first 5.0% 0.6% Increment Job Printing 42-5066 5.6% 20% of first 5.0% 80% of first 5.0% 0.6% Increment Pipeline 42-5067 5.6% 20% of first 5.0% 80% of first 5.0% 0.6% Increment Private Car Line 42-5068 5.6% 20% of first 5.0% 80% of first 5.0% 0.6% Increment Transient Lodging 42-5070 5.5% 50% 50% None Personal Property Rental 42-5071 5.6% 40% of first 5.0% 60% of first 5.0% 0.6% Increment Mining 42-5072 3.125% 100% 0% None Amusement 42-5073 5.6% 40% of first 5.0% 60% of first 5.0% 0.6% Increment Restaurant and Bar 42-5074 5.6% 40% of first 5.0% 60% of first 5.0% 0.6% Increment Prime Contracting 42-5075 5.6% 20% of first 5.0% 80% of first 5.0% 0.6% Increment Owner Builder 42-5076 5.6% 20% of first 5.0% 80% of first 5.0% 0.6% Increment Membership Camping 42-5077 5.6% 40% of first 5.0% 60% of first 5.0% 0.6% Increment 1/ Represents the portion of revenues that is designated for the distribution base. 2/ Represents the portion of revenues that is designated for the non-shared base. 3/ Represents the portion of revenues that is designated for education. Delinquency Dates. Tax payments are delinquent if not postmarked on or before the 25th day of the month or received by the Department of Revenue on or before the next-to-last business day of the month. Alternative Payment Schedules. The department may authorize different payment schedules depending on the taxpayer’s estimated tax liability or transient nature of the business. Taxpayers with an estimated annual tax liability of $500 or less may pay on an annual basis. Taxpayers with an estimated annual tax liability of between $500 and $1,250 may pay on a quarterly basis. Taxpayers whose business is of a “transient character” may be required to pay on a daily, weekly, or transaction-by-transaction basis. Estimated Tax Payments. Taxpayers who pay income taxes and whose business had an annual sales tax liability in the preceding calendar year of $100,000 or more must make a single estimated advance payment in June of each year. Normally, the full June tax bill would be due on July 20. This estimated payment is in addition to the regular June sales tax liability (which represents May sales). The amount of the estimated payment is equal to either 1) one-half of what was owed in May of the current year, or 2) the actual tax liability for the first 15 days of June. Estimated payments are due by June 20. In July of each year, those taxpayers who made estimated payments in the preceding month may subtract the amount of June’s estimated payment from their July tax bill. Transaction Privilege Tax - 5 - When the estimated payments program was first enacted in 1989, the estimated payments provided a one-time boost to state revenues by advancing a portion of the next fiscal year’s revenues into the current fiscal year. If the program is ever eliminated (as is periodically proposed), it would entail a one-time cost to state revenues. This is because every July taxpayers make a “claim” for the preceding month’s estimated payment, and every June taxpayers make a counterbalancing estimated payment. Eliminating the June payment leaves the July claim without a counterbalance – and the state with a one-time cost. Collection. The Department of Revenue may enter into agreements with cities and towns that levy transaction privilege taxes to provide a uniform method of administration, collection, and auditing of sales taxes. In FY 2000, the department collected transaction privilege and use taxes for some 75 Arizona cities and towns (see the department’s 2001 Annual Report) [A.R.S. § 42-6001]. IMPACT OF TAX LAW CHANGES The following section is a summary by year of tax law changes that have been enacted by the Legislature since 1996. A listing of tax law changes prior to the 1996 legislative session is available on the JLBC web-site located at www.azleg.state.az.us/jlbc.htm. The estimated dollar impact of the tax law changes is summarized by fiscal year in the following table: Table 3 ESTIMATED MARGINAL DOLLAR VALUE OF TAX LAW CHANGES 1/ Fiscal Year Impact 2003 $ (40,000) 2002 $ (1,764,600) 2001 $ (4,892,000) 2000 $ (8,402,300) 1999 $ (3,684,200) 1998 $(59,907,900) 1997 $(23,449,300) 1/ Excluding Proposition 301 revenue. Estimates made by JLBC Staff 2002 TAX LAWS Laws 2002, Chapter 288 requires the Tourism and Sports Authority (TSA) to select a site host for the multipurpose facility by September 12, 2002, or seek voter approval for the continuation of the TSA. If the voters terminate the TSA, the requirements that the Department of Revenue separately account for revenue collected in connection with a multipurpose facility, and that the tax revenues collected on professional athlete income be distributed to the TSA, would be repealed. Laws 2002, Chapter 307 clarifies the definitions of lawn maintenance service and landscaping activities, and that income received from landscaping activities are subject to the contracting classification of the sales tax. The fiscal impact of this legislation can not be determined. (Effective September 1, 2002) 2001 TAX LAWS Laws 2001, Chapter 137 provided exemptions from the retail sales and use taxes for food and drinks purchased by hotels and served to guests. This bill is estimated to have minimal fiscal impact. (Effective June 8, 1994) Transaction Privilege Tax - 6 - 2000 TAX LAWS Laws 2000, Chapter 33 clarified that the post-construction treatment of real property for termite and other wood-destroying pests is exempt from the prime contracting tax, but pretreatment remains taxable. This act is estimated to have no fiscal impact. (Effective January 1, 1994) Laws 2000, Chapter 214 allowed contractors to deduct the cost of solar energy devices that they install from their prime contracting tax base, up to a maximum allowable deduction of $5,000. This provision is estimated to have a General Fund cost of $(40,700) in FY 2001. The deduction is set to expire at the end of 2010. (Effective January 1, 1997) Laws 2000, Chapter 297 continued the Municipal Tax Code Commission for another five years, until 2005. The Commission exists to promote uniformity and consistency among the sales taxes levied by the different Arizona cities. (Effective July 1, 2000) Laws 2000, Chapter 359 provided contracting tax exemptions for the construction of a spaceport launch site and for domestic violence shelters. The launch site exemption is estimated to have no fiscal impact to the existing revenue base, since there are currently no launch sites in the state. This provision becomes effective July 18, 2000. The domestic violence shelter exemption is projected to cost the General Fund $(18,400) in FY 2000 and another $(18,300) in future years. This provision becomes effective retroactive to July 1, 1999. Laws 2000, Chapter 372 established a Tourism and Sports Authority in Maricopa County, subject to voter approval in November 2000, for the purpose of financing a new football stadium for the Arizona Cardinals, promoting tourism in Maricopa County, making additional Cactus League stadium improvements, and constructing new recreational facilities. The Authority would receive funds resulting from a countywide 1% increase in the transient lodging tax and a 3.25% increase in the car rental tax (less $2.50 on each car rental dedicated to Cactus League stadium improvements). The tax increase would become effective upon the Governor’s signature within 30 days after the election. In addition, the Authority would receive the transaction privilege taxes collected at Cardinals football games. This is estimated to reduce General Fund sales tax collections by $(1,512,500) beginning in FY 2002. The Authority would also receive the income taxes paid by Arizona Cardinals football players. This provision has an estimated cost of $(2,718,600) beginning in FY 2002. Conditional upon voter approval, this legislation would also provide the Office of Tourism with an alternative funding source. The funding formula would annually provide the Office of Tourism with 3.5% of transient lodging tax revenues collected in the previous year, 3.0% of amusement tax revenues collected in the previous year, and 2.0% of restaurant and bar tax revenues collected in the previous year. This new funding formula would generate about $1,695,800 more in FY 2002 for the Office of Tourism than it is otherwise expected to receive. This provision would become effective July 1, 2001. The voters approved this measure in the November 2000 election. Laws 2000, Chapter 375 changed the method for funding the Office of Tourism by directing 52.66% of the state’s share of the distribution base monies collected from the transient lodging tax to the Tourism Fund. However, the act stipulates that this change is repealed if Maricopa County voters approve Laws 2000, Chapter 372 in the November 2000 elections, as Chapter 372 provides an alternative funding formula for the Office of Tourism. The revised funding method in Chapter 375 has no fiscal impact, since it is intended to merely replace – not augment – the General Fund appropriations that the Office of Tourism currently receives. This provision becomes effective July 1, 2001. As Maricopa County voters did approve Laws 2000, Chapter 372, this act (Chapter 375) was repealed. The act also authorized Pima County to hold an election on whether to raise the county’s transient lodging tax rate by 1% in order to promote tourism in that county. This provision has no state fiscal impact. If approved, the additional tax would become effective on the first day of the month beginning 90 days after the election and would be in effect for 30 years. This tax increase was subsequently rejected by the voters of Pima County. Laws 2000, Chapter 397 prohibited the imposition of transaction privilege taxes on interstate telecommunication services. The act also prohibited the state and cities from levying sales taxes on Internet access fees. The bill has no Transaction Privilege Tax - 7 - fiscal impact for the state since no state taxes are currently being levied on interstate telecommunications services or Internet access. (Effective July 18, 2000) Laws 2000, Chapter 401 provided sales and use tax exemptions for purchases of aircraft, navigational, and communication instruments and other accessories and related equipment made by persons holding supplemental air carrier certificates under federal aviation regulations. It authorized refunds for taxes paid since the bill’s retroactive date, but the total amount of refunds is capped at $10,000. This act is estimated to cost the state $10,000 in FY 2001. (Effective June 1, 1998) Laws 2000, 5th Special Session, Chapter 1 (referred to and approved by voters as Proposition 301 in the November 2000 general election) raised the transaction privilege tax from 5.0% to 5.6% in order to increase funding for K-12 and higher education. It also provided for the distribution of the increased tax rate to various education related areas including debt service on school improvement revenue bonds, increased teacher salaries, technology and research, school safety programs, and the classroom site fund. (Effective May 31, 2001) 1999 TAX LAWS Laws 1999, Chapter 87 expanded the transaction privilege and use tax exemptions for machinery and equipment used to meet or exceed the rules and regulations of the United States Nuclear Regulatory Commission. This provision is effective retroactive to May 19, 1977. Refunds are authorized for past taxes paid, but the total amount of refunds is capped at $10,000. The bill also clarified that electricity sold to out-of-state customers is exempt from the sales and use taxes, and provided sales and use tax exemptions for railroad equipment used to transport persons or property. The electricity provision is effective January 1, 1999. Laws 1999, Chapter 153 revised the definition of expendable materials. Current law specifies that expendable materials used in industry are not deductible from the transaction privilege and use tax base. This act defined expendable materials as those items that are ancillary to the operation or use of tangible personal property that is already deductible under current law. The cost or useful life of the property does not determine whether it can be included under the allowed deductions. The bill is effective retroactive to May 19, 1977, and refunds are authorized for taxes paid since that date. The total amount of refunds is capped at $100,000. Laws 1999, Chapter 162 made various changes to the statutes governing multipurpose stadium districts. Payments of transaction privilege tax revenues to stadium districts were increased by allowing a diversion of taxes paid by businesses adjacent to a multipurpose facility. It authorized payments to a county stadium district of one-half of all sales tax revenues received two months prior from persons doing business at a multipurpose facility site or in the construction of a multipurpose facility. The payments are limited to the net new revenues and are continued for a length of 10 years. The diverted transaction privilege taxes may be used for operation and maintenance expenses, as well as to retire bonds. (Effective July 1, 1998) Laws 1999, Chapter 165 repealed or limited the use of tax increment financing to pay for large municipal projects. Retroactive to January 1, 1999, it repeals the ability of cities to use tax increment financing for redevelopment zones. Effective September 1, 1999, it also repeals the ability of counties to use tax increment financing for construction of theme parks. In addition, it conditionally repeals the ability of multipurpose facility districts to levy a transaction privilege tax to finance projects. This conditional repeal is effective November 3, 1999, unless by this date, in at least one district, voters have voted to fund a project. Laws 1999, Chapter 167 allowed a sales and use tax deduction for machinery or equipment used in connection with natural gas pipelines to meet or exceed federal and state pollution standards. (Effective August 6, 1999) Laws 1999, Chapter 180 provided an exemption under the retail sales classification of the transaction privilege tax for sales of spirituous, vinous, or malt liquor by licensed liquor wholesalers. Refunds are authorized for taxes paid by liquor wholesalers since December 31, 1990, but only if the taxpayer furnishes evidence that the refund amount will be paid to the person actually bearing the incidence of the tax. (Effective January 1, 1991) Laws 1999, Chapter 183 returned to qualifying Indian tribes the amount of transaction privilege tax revenue received from all sources located on the Indian reservation in order to provide support for community colleges owned and operated by the tribes on their reservation. The amount of sales tax revenue transferred to a qualifying Transaction Privilege Tax - 8 - tribe is limited to a maximum of $1,500,000 in FY 2001 and $1,750,000 each fiscal year thereafter. (Effective July 1, 2000) Laws 1999, Chapter 225 established the Uniform Transaction Privilege Tax Study Committee to study the impact of eliminating the Model City Tax Code and replacing it with a uniform state and local transaction privilege tax base. The Committee is required to submit its findings by December 15, 1999. (Effective August 6, 1999) Laws 1999, Chapter 246 extended transaction privilege and use tax exemptions to sales of tangible personal property used in environmental remediation. It also expanded the existing prime contracting tax exemption to contracts for specified activities related to environmental remediation. (Effective January 1, 1997) Laws 1999, Chapter 264 established the Study Committee on Internet Privacy, Jurisdiction, Regulation, and Taxation to analyze Internet taxation, privacy, and regulation issues. The Committee is required to report its findings by December 1, 1999. (Effective August 6, 1999) Laws 1999, Chapter 267 provided sales and use tax exemptions for tangible personal property sold to a nonprofit charitable organization that provides apartment housing to low income persons over the age of 62 in a facility that qualifies for a federal housing subsidy. It also allowed a prime contracting tax deduction for income derived from a contract entered into for the construction of such housing facilities for low income persons. (Effective July 1, 2001) Laws 1999, Chapter 288 allowed all counties except Maricopa County to establish a capital projects tax to pay for the purchase or construction of buildings, roads, or other facilities. The tax base is the same as the transaction privilege tax base. The tax rate may not, in combination with the county excise tax for roads, exceed 10% of the transaction privilege tax rate. The capital projects tax is not permitted to last for more than 20 years. (Effective August 6, 1999) Laws 1999, Chapter 290 made a number of procedural and administrative changes relating to the Department of Revenue and the enforcement of tax statutes. It required a person operating a business under two or more names to obtain a transaction privilege license for each name. It also stipulated that if a purchaser provides incomplete or inaccurate information to a seller in order for a transaction to be deducted from the sales tax, that purchaser becomes liable for the tax and any penalties and interest that the seller would have been required to pay if the purchaser had provided accurate information. In addition, it clarified that an organization that qualifies under the Internal Revenue Code as a charitable organization is exempt from the transaction privilege and use taxes. (Effective August 6, 1999) Laws 1999, Chapter 304 exempted from the transient lodging classification of the transaction privilege tax any activities that are already taxed under a different classification. This bill was needed to prevent double taxation in cases in which businesses engaged in transient lodging charge fees for amusement activities that they provide. Under current law, these fees were subject to both the transient lodging and amusement taxes. The bill is intended to rectify this problem. Also, the act granted amusement tax exemptions for the income received from sales to persons or entities engaged in the transient lodging classification under certain circumstances. Because of a drafting error in the way this bill was written, it would have resulted in far-reaching unintended consequences. Instead of applying to only the transient lodging, transportation, and amusement classifications, it actually applied to all classifications within the transaction privilege tax. To correct this error, the bill was repealed and replaced by Laws 1999, 2nd Special Session, Chapter 2. Laws 1999, Chapter 322 earmarked $50,000 of retail sales tax collections to the Shooting Range Relocation and Assistance Fund in each fiscal year. (Effective August 6, 1999) Laws 1999, 2nd Special Session, Chapter 2 fixed a drafting error in Laws 1999, Chapter 304. It corrected the inadvertent granting of a transaction privilege tax exemption to businesses that have proceeds subject to taxation under more than one sales tax classification. Instead, this bill provides exemptions from only the transient lodging, transportation, and amusement tax classifications to businesses that receive proceeds from bundled activities that are subject to taxation from more than one classification. The effect of the bill is to prevent double taxation. (Effective June 30, 1993) 1998 TAX LAWS Transaction Privilege Tax - 9 - Laws 1998, Chapter 88 provided an exemption under the transporting classification of the transaction privilege tax for the proceeds of sales resulting from the shipment of freight or property, by a railroad operating exclusively in Arizona, as part of a single shipment that involves more than one railroad and that originates or terminates across the state line. (Effective January 1, 1988) Laws 1998, Chapter 90 exempted from the prime contracting tax the gross proceeds of sales or gross income attributable to the purchase of machinery, equipment, or other personal property. The act provided contracting tax exemptions for purchases used in a wide range of activities, including qualifying health care organizations, manufacturing, telecommunications, and oil and gas extraction, among others. (Effective January 1, 1999) Laws 1998, Chapter 105 codified the historical tax treatment of pipelines, the machinery and equipment used to operate pipelines, and the use of pipelines by hospitals. Specifically, it extended retail and use tax exemptions to include the parts used to operate pipes and valves that are at least four inches in diameter and used to transport oil, natural gas, artificial gas, water, or coal slurry. In addition, an exemption from the pipeline classification of the transaction privilege tax is provided for the income derived from pipeline services to qualifying hospitals and qualifying health care organizations if the oil and gas being transported is used to provide health and medical related educational and charitable services. (The provision regarding parts used to operate pipes and valves is effective December 3, 1981. The health care provision is effective July 2, 1989.) Laws 1998, Chapter 132 exempted from the retail and use tax the chemicals used directly in the production process of a printing operation. A printing operation is defined as a commercial printing operation and includes job printing, engraving, embossing, copying, and book binding. (Effective January 1, 1999) Laws 1998, Chapter 165 increased the threshold limits for quarterly and annual payments of the sales tax. Previously, taxpayers were allowed to make quarterly payments if their annual sales tax liability was between $200 and $500, and annual payments were permitted if their annual liability was less than $200. Under this act, quarterly payments are allowed for taxpayers with a sales tax liability between $500 and $1,250, and annual payments are permitted for those with a liability of less than $500. (Effective January 1, 1999) Laws 1998, Chapter 177 authorized transaction privilege tax exemptions for leases or rentals of aircraft, flight simulators, or similar training equipment to students or staff by nonprofit educational institutions that offer degrees in aviation or aerospace related fields. (Effective July 1, 1988) Laws 1998, Chapter 206 exempted prepaid calling cards that are taxable under the retail classification of the sales tax from the telecommunications classification of the sales tax. (Effective January 1, 1999) Laws 1998, Chapter 221 allowed sales and use tax exemptions for the lease or purchase of new alternative fuel vehicles and for the lease or purchase of equipment used to convert a conventional vehicle to an alternative fuel vehicle. (Effective January 1, 1999) Laws 1998, Chapter 225 authorized Maricopa County to levy a jail facilities excise tax, subject to voter approval in the 1998 general election, that would raise the transaction privilege tax rate in the county by one-fifth of one percent for nine years or until $900 million is collected, whichever comes first. The County Board of Supervisors is permitted to modify the tax rate. Monies collected are to be used to finance and construct new jail facilities, to maintain and operate jail facilities, and to fund specified programs to reduce the expense of jail facilities. This measure was approved by voters. (Effective August 21, 1998) Laws 1998, Chapter 272 prohibited cities, towns, and other taxing jurisdictions from levying any taxes or fees on the gross proceeds of sales or gross income derived from incarcerating or detaining prisoners in a privately operated prison. (Effective April 1, 1987) Transaction Privilege Tax - 10 - Laws 1998, Chapter 286 provided a broad range of sales tax exemptions and income tax credits designed to promote the use of pollution control devices. Exemptions from retail, contracting, and use taxes are given for the purchase of machinery or equipment used to control agriculture pollution and for the construction or improvement of property used to control agriculture pollution. This provision is effective January 1, 1999. In addition, the act provided retail and use tax exemptions for the purchase of machinery or equipment used for poultry farming, and a contracting tax exemption for the construction of an environmentally controlled poultry facility. This provision is effective January 1, 1998. Sales and use tax exemptions are also extended to include the purchase of machinery or equipment used in a number of industries to meet or exceed government pollution standards. This provision’s retroactive date of May 19, 1977 allows taxpayers to file for refunds of taxes paid subsequent to this date for purchases of environmental protection equipment. Refund claims must be made by December 31, 1998, and the total amount of the refunds is capped at $100,000. The act also specified that the diversion of gas from a pipeline by a person in the business of operating a pipeline, for the sole purpose of fueling compressor equipment to pressurize the pipeline, does not constitute a sale of the gas to the operator of the pipeline and is therefore not subject to the transaction privilege tax. This provision is effective January 1, 1992. Retail and use tax exemptions are extended to machinery or equipment that enables a television station to comply with the Telecommunications Act of 1996 and the Federal Communications Commission Order that mandates television stations to originate and broadcast digital television signals. However, the exemption may not be claimed for the repair or replacement of machinery and equipment for which an exemption has already been claimed. This provision is effective August 21, 1998 and is discontinued after November 1, 2009, or after a station has ceased analog broadcasting, whichever comes first. Finally, the act provided a contracting tax exemption for the income derived from the installation or maintenance of clean rooms that have received a retail tax exemption. This provision is effective retroactive to January 1, 1990, and refunds are authorized for tax payments made subsequent to this date. Laws 1998, 5th Special Session, Chapter 1 changed the distribution of the transaction privilege tax beginning in FY 2000. The newly created School Facilities Board is authorized to allocate monies from the state’s share of the distribution base and from the non-shared base to various school capital funds in order to finance school facilities. This provision is part of the Students FIRST legislation enacted in response to a court decision that required Arizona to alter the way schools are financed in this state. (Effective July 9, 1998) 1997 TAX LAWS Laws 1997, Chapter 3 provided an exemption from the commercial lease classification of the transaction privilege tax for the lease of another person s land to mine minerals (known as profit a prendre rights). The practice of taxing royalties within commercial lease agreements is also prohibited. However, the exclusion does not apply to any commercial uses that the leaseholder has to the property that are separate from the profit a prendre rights. The bill also applied the standard four year statute of limitations for Department of Revenue assessments if a taxpayer fails to report income derived from granting a right of profit a prendre. (Effective March 23, 1968) Laws 1997, Chapter 4 allocated an amount of sales tax revenue to low-wealth school districts based on a distribution formula. This bill was in response to the Roosevelt v. Bishop court case regarding school capital finance, but it was ruled unconstitutional by the court and repealed. (Effective July 1, 1997) Laws 1997, Chapter 61 clarified that cleanrooms and related machinery and equipment are exempted from sales and use taxes. The bill codified the historical administrative practice of valuing and assessing cleanrooms. (Effective July 21, 1997) Laws 1997, Chapter 109 allocated $5 million of state transaction privilege taxes over a 12-year period to Maricopa County to aid in building the Gila River Bridge. The bridge is to provide direct access to commercial, residential, and recreational facilities. (Effective October 1, 1997) Transaction Privilege Tax - 11 - Laws 1997, Chapter 110 exempted for hire commercial vehicles that are less than 12,000 pounds from the transporting classification of the transaction privilege tax, provided that an annual light motor vehicle fee of $64 has been paid for the vehicle. Payment of the fee does not, however, exempt a person from paying sales tax on transactions involving the retail sale of property or freight transported in a light motor vehicle. (Effective October 1, 1997) Laws 1997, Chapter 116 provided transaction privilege tax and use tax exemptions for wireless telecommunication equipment sold to consumers as an inducement to enter into or continue contracts for telecommunication services. The bill excludes from the transaction privilege tax the compensation received by a retailer for selling or transferring wireless telecommunication equipment to a customer as an inducement to contract for service. It also specifies that sale of such equipment to a person who holds the equipment for sale or transfer to a customer as an inducement to enter into or continue a contract for telecommunication services is a sale for resale, and consequently exempt from taxation. (Effective January 1, 1990) Laws 1997, Chapter 150 recodified Title 42 of the Arizona Tax Code, which regards property, transaction privilege, use, and luxury taxation. The bill made numerous technical changes, removed references to gender, and restructured and renumbered several statutes. It provided that the interpretation of the tax code is not to be changed solely due to changes made by the recodification. Immunities, exemptions, claims, proceedings, etc. that existed before the recodification are to remain in effect. (Effective January 1, 1999) Laws 1997, Chapter 165 allowed municipalities to each designate a commercial enhancement reuse district. These districts are required to be 25 acres or less, have recreational, commercial, and retail facilities, and have developed a lake facility by December 31, 2004. The bill provides exemptions from the prime contracting tax and the use tax for lake facility construction costs of up to $125 million. Lake facility developments must contribute to the long-term vitality of the commercial enhancement reuse district and entail an investment of at least $40 million. (Effective July 21, 1997) Laws 1997, Chapter 178 provided transaction privilege and use tax exemptions for sales of alternative fuel to a used oil fuel burner who has received a permit from the Department of Environmental Quality to burn used oil or used oil fuel. (Effective July 21, 1997) Laws 1997, Chapter 227 exempted sales of printed, photographic, electronic, or digital media materials purchased by publicly-funded libraries for public use from the transaction privilege and use tax. (Exemptions for printed or photographic materials are effective beginning August 7, 1985. Exemptions for electronic or digital media materials are effective beginning July 17, 1994.) Laws 1997, Chapter 245 authorized refunds for prime contracting taxes paid by a contractor for tangible personal property incorporated or installed in an unlicensed residential care facility operated in conjunction with a licensed nursing care institution. The refunds are given for contracting taxes paid between January 1, 1982 and July 17, 1993. Claims for refunds must be submitted by October 31, 1997, and contractors that request refunds are required to remit the refunds to the residential care facility. The residential care facility must, in turn, return the refund monies to past, current, or future residents who have paid or are paying the taxes. Finally, the interest rate paid for refunds is set at 1% per year compounded annually until June 30, 1998, and the maximum amount of refunds issued in FY 1999 is capped at $2 million. (Effective July 21, 1997) Laws 1997, Chapter 274 provided a transaction privilege and use tax exemption for food and beverage items sold to a commercial airline to be consumed by passengers on flights. The act also authorized sales and use tax exemptions for the purchase of tangible personal property by contractors for use in environmental remediation. (Exemptions for airline food and beverages are effective beginning January 1, 1982. Exemptions for property used for environmental remediation are effective on July 1, 1997.) Laws 1997, Chapter 287 assured $18 million annually in funding for the Water Quality Assurance Revolving Fund (WQARF) beginning July 1, 1999. This funding level is achieved by combining a transfer of $15 million from the corporate income tax with monies collected from various fees and appropriations. At the end of the fiscal year, if the corporate income tax transfer together with the total of the fees and appropriations is not sufficient to reach the $18 million level, the State Treasurer shall adjust the $15 million transfer of corporate income tax revenues upward Transaction Privilege Tax - 12 - in the necessary amount. If corporate income tax revenues are insufficient to supplement collected fees and appropriations, transaction privilege tax revenues are to be used. (Effective April 29, 1997) Laws 1997, Chapter 297 allowed two or more municipalities located in the same county to create a multipurpose facility district for the purpose of financing and constructing a multipurpose facility. A multipurpose facility is defined as a facility designed to accommodate sporting and entertainment, cultural, civic, meeting, or convention events. The bill authorized the use of transaction privilege tax collections and excise taxes to finance the acquisition of land, construction, maintenance, operation, and marketing of the facility. Upon voter approval, a multipurpose facility district is authorized to levy a transaction privilege tax of up to 5% of the state tax rate that was in effect on January 1, 1990 on businesses conducting sales in the district. In addition, districts with a facility that costs at least $200 million to construct and that have issued bonds are to receive from the State Treasurer half of the state transaction privilege taxes paid each year by businesses at the facility. These payments from the state continue for 10 years after the bonds are issued or until the bonds are paid in full, whichever comes first. Other funding mechanisms for generating revenue during national championship sporting events or international games hosted in the multipurpose facility are also authorized to secure the bonds, subject to voter approval. These include receiving the incremental increases in municipal transaction privilege tax revenues associated with such sporting events or international games hosted in the facility; surcharges on car rentals or recreational vehicle spaces during these events; and the imposition of an additional 1% sales tax on businesses in the transient lodging and restaurant and bar classifications during these events. (Effective July 21, 1997) Laws 1997, 1st Special Session, Chapter 3 modified the distribution of the transient lodging classification so that in FY 1998 and FY 1999 a total of 3% of the state share of the revenue collected from this classification in the prior fiscal year is deposited in the Tourism Fund. (Effective June 26, 1997) 1996 TAX LAWS Laws 1996, Chapter 93 expanded military reuse zone sales tax incentives by allowing a deduction from the prime contracting classification of the transaction privilege tax for the gross income received from a contract entered into for the construction or alteration of any building or road that provides aviation or aerospace services and that is located in a military reuse zone. (Effective April 5, 1996) Laws 1996, Chapter 99 exempted the following from the transaction privilege, use, or other similar tax: 1. Sales of warranty or service contracts. 2. Sales of motor vehicles to nonresidents if the vehicle will be used outside the state and the vendor delivers the vehicle to a destination outside the state. 3. Interest on finance contracts. 4. Dealer documentation fees on the sales of motor vehicles. (Effective July 20, 1996) Laws 1996, Chapter 141 increased the bed tax in Pima County for the benefit of spring training facilities for major league baseball teams. The act raised the bed tax rate from an allowable maximum of 1% to an allowable maximum of 2% from January 1, 1997 through December 31, 2012. During this time, up to one-half of the revenue collected from the tax will be used to enhance spring training facilities, and the remaining money will continue to go to Pima County for tourism. On January 1, 2013, the bed tax will revert to the original 1% for tourism and the additional tax for spring training baseball facilities shall be eliminated. (Effective July 20, 1996) Laws 1996, Chapter 186 established the Arizona Arts Endowment Fund to create a public-private partnership for the support of the arts in Arizona. The Arts Endowment Fund is funded by an annual appropriation from the state General Fund in an amount equal to the difference between the FY 1994 collection of amusement taxes and the current fiscal year s collection of amusement taxes, up to $2 million. Any money above $2 million more than FY 1994 amusement tax collections is to be deposited into the General Fund. This funding provision expires after FY 2007. (Effective July 1, 1997) Transaction Privilege Tax - 13 - Laws 1996, Chapter 317 reduced the tax reporting burden on small business taxpayers and the cost of tax administration on state government by allowing an alternative method for payment of transaction privilege taxes. Taxpayers may elect to pay by electronic funds transfer provided that payment is made by the twenty-fifth day of the month after the month that the tax was accrued. This payment due date is consistent with the due date of the mailed transaction privilege payments. The act further stipulated that taxpayers subject to the annual estimated transaction privilege taxes must make any electronic funds transfer by June 25. For tax reporting periods after December 31, 1996, the Department of Revenue may authorize quarterly and annual payments for taxpayers that have established sufficient payment history to indicate that they are current and in good standing. (Effective July 20, 1996) Laws 1996, Chapter 319 allowed a prime contracting tax deduction for the installation, assembly, repair, or maintenance of machinery, equipment, or other tangible personal property, provided that the property is deducted from the tax base of the retail classification, and not permanently attached to a building, highway, road, railroad, excavation, or manufactured building or other structure. The term permanently attached is defined to mean at least one of the following: Incorporated into real property. Being so affixed to real property that it becomes part of the real property. Being attached to the real property in a manner which would damage the property if it was removed. If a deduction for machinery, equipment, or other tangible personal property has been utilized under the retail classification in order to facilitate the installation, assembly, repair, or removal of this machinery or equipment, then a deduction for the same machinery or equipment is not permitted under prime contracting activity. The act also expanded the deduction from prime contracting activities for military reuse zones (see Chapter 93) to include the construction, addition, alteration, repair, or removal of any manufactured buildings. (Effective July 1, 1997) Laws 1996, Chapter 322 exempted machinery and equipment used for motion picture, multimedia, or interactive video production in a sound stage complex from the transaction privilege and use taxes, provided that the sound stage complex is constructed after June 30, 1996 and before January 1, 2002. The exemption applies only to machinery and equipment purchased within five years after construction of the complex begins. The act also eliminated a provision that would have repealed the tax exemption for solar energy devices. This exemption will continue to provide a retail sales tax deduction for the sale of a solar energy device whose value is $5,000 or less and which results in a tax benefit of no more than $250 per device. (Effective July 20, 1996) Laws 1996, Chapter 326 exempted from the transaction privilege tax the activities and events, or fees and assessments, received by homeowners' organizations, unless they are taxable under other statutes. Homeowners' organizations are defined as mandatory membership organizations whose primary purpose is to provide for the acquisition, maintenance, or management of their property. Moreover, no part of the organization s net earnings may inure to the benefit of any private shareholder or individual. (Effective January 1, 1994) Laws 1996, 6th Special Session, Chapter 1 excluded from the transaction privilege and use tax bases any tangible personal property used to receive, produce, generate, transmit, etc., telecommunications information by either a direct broadcast satellite television or data transmission service, or any satellite television or data transmission facility if the following conditions are met: 1. Over two-thirds of the information transmitted by the facility during the test period is to or on behalf of one or more direct broadcast satellite television or data transmission services. 2. Over two-thirds of the transmissions by or on behalf of the direct broadcast television or data transmission services must be transmitted by the facility to or on behalf of those services. Transaction Privilege Tax - 14 - The act defined the test period as the 365-day period beginning on the later of the date on which the tangible personal property is purchased or the date on which the direct broadcast satellite television or data transmission service first transmits information. If a seller is entitled to the transaction privilege and use tax deduction for tangible personal property sold to a satellite television or data transmission facility, the purchaser must establish that the above requirements have been satisfied. If the purchaser cannot establish this, the purchaser becomes liable for any tax, penalty, and interest. (Effective January 1, 1996) Transaction Privilege Tax - 15 - Attachment A STATE AND LOCAL RETAIL SALES TAX RATES BY CITY, JULY 2001 County County Cities by County State Gen. Fund Road Jail City 2001 Rate Cities by County State General Fund Road Jail City 2001 Rate Apache County 3.00 9.10 Queen Creek 5.60 - 0.50 0.20 1.00 7.30 Eagar 5.60 0.50 - - 2.00 8.10 Scottsdale 5.60 - 0.50 0.20 1.40 7.70 St. Johns 5.60 0.50 - - 3.00 9.10 Surprise 5.60 - 0.50 0.20 2.00 8.30 Springerville 5.60 0.50 - - Tempe 5.60 - 0.50 0.20 1.80 8.10 Cochise County Tolleson 5.60 - 0.50 0.20 2.00 8.30 Benson 5.60 0.50 - - 2.50 8.60 Wickenburg 5.60 - 0.50 0.20 1.00 7.30 Bisbee 5.60 0.50 - - 2.50 8.60 Youngtown 5.60 - 0.50 0.20 2.00 8.30 Douglas 5.60 0.50 - - 2.50 8.60 Mohave County Huachuca City 5.60 0.50 - - 1.00 7.10 Bullhead City 5.60 0.25 - - 2.00 7.85 Sierra Vista 5.60 0.50 - - 1.50 7.60 Colorado City 5.60 0.25 - - 2.00 7.85 Tombstone 5.60 0.50 - - 2.50 8.60 Kingman 5.60 0.25 - - 2.00 7.85 Willcox 5.60 0.50 - - 2.00 8.10 Lake Havasu City 5.60 0.25 - - 2.00 7.85 Coconino County Navajo County Flagstaff 5.60 0.50 - 0.30 1.51 7.91 Holbrook 5.60 0.50 - - 3.00 9.10 Fredonia 5.60 0.50 - 0.30 2.00 8.40 Pinetop-Lakeside 5.60 0.50 - - 2.50 8.60 Page 5.60 0.50 - 0.30 2.00 8.40 Show Low 5.60 0.50 - - 2.00 8.10 Sedona 5.60 0.50 - 0.30 3.00 9.40 Snowflake 5.60 0.50 - - 2.00 8.10 Williams 5.60 0.50 - 0.30 3.00 9.40 Taylor 5.60 0.50 - - 2.00 8.10 Gila County Winslow 5.60 0.50 - - 3.00 9.10 Globe 5.60 0.50 0.50 - 1.50 8.10 Pima County Hayden 5.60 0.50 0.50 - 1.00 7.60 Marana 5.60 - - - 2.00 7.60 Miami 5.60 0.50 0.50 - 1.50 8.10 Oro Valley 5.60 - - - 2.00 7.60 Payson 5.60 0.50 0.50 - 2.00 8.60 Sahuarita 5.60 - - - 2.00 7.60 Winkelman 5.60 0.50 0.50 - 2.50 9.10 South Tucson 5.60 - - - 2.50 8.10 Graham County Tucson 5.60 - - - 2.00 7.60 Pima 5.60 0.50 - - 1.00 7.10 Pinal County Safford 5.60 0.50 - - 2.00 8.10 Apache Junction 5.60 0.50 0.50 - 2.20 8.80 Thatcher 5.60 0.50 - - 2.00 8.10 Casa Grande 5.60 0.50 0.50 - 1.80 8.40 Greenlee County Coolidge 5.60 0.50 0.50 - 2.00 8.60 Clifton 5.60 0.50 - - 2.00 8.10 Elroy 5.60 0.50 0.50 - 2.00 8.60 Duncan 5.60 0.50 - - 2.00 8.10 Florence 5.60 0.50 0.50 - 2.00 8.60 La Paz County Kearny 5.60 0.50 0.50 - 2.00 8.60 Parker 5.60 0.50 - 0.50 2.00 8.60 Mammoth 5.60 0.50 0.50 - 2.00 8.60 Quartzsite 5.60 0.50 - 0.50 2.50 9.10 Superior 5.60 0.50 0.50 - 2.00 8.60 Maricopa County Winkelman 5.60 0.50 0.50 - 2.50 9.10 Avondale* 5.60 - 0.50 0.20 2.00 8.30 Santa Cruz County Buckeye 5.60 - 0.50 0.20 2.00 8.30 Nogales 5.60 0.50 - - 1.25 7.35 Carefree 5.60 - 0.50 0.20 2.00 8.30 Patagonia 5.60 0.50 - - 3.00 9.10 Cave Creek 5.60 - 0.50 0.20 2.50 8.80 Yavapai County Chandler 5.60 - 0.50 0.20 1.50 7.80 Camp Verde 5.60 0.50 - 0.20 2.00 8.30 El Mirage 5.60 - 0.50 0.20 3.00 9.30 Chino Valley 5.60 0.50 - 0.20 2.00 8.30 Fountain Hills 5.60 - 0.50 0.20 1.60 7.90 Clarkdale 5.60 0.50 - 0.20 2.25 8.55 Gila Bend 5.60 - 0.50 0.20 3.00 9.30 Cottonwood 5.60 0.50 - 0.20 2.20 8.50 Gilbert 5.60 - 0.50 0.20 1.50 7.80 Jerome 5.60 0.50 - 0.20 3.00 9.30 Glendale 5.60 - 0.50 0.20 1.30 7.60 Prescott 5.60 0.50 - 0.20 2.00 8.30 Goodyear 5.60 - 0.50 0.20 2.00 8.30 Prescott Valley 5.60 0.50 - 0.20 2.00 8.30 Guadalupe 5.60 - 0.50 0.20 2.00 8.30 Sedona 5.60 0.50 - 0.20 3.00 9.30 Litchfield Park 5.60 - 0.50 0.20 2.00 8.30 Yuma County* Mesa 5.60 - 0.50 0.20 1.50 7.80 San Luis 5.60 1.00 - 0.50 2.50 9.60 Paradise Valley 5.60 - 0.50 0.20 1.40 7.70 Somerton 5.60 1.00 - 0.50 2.50 9.60 Peoria 5.60 - 0.50 0.20 1.50 7.80 Wellton 5.60 1.00 - 0.50 2.50 9.60 Phoenix 5.60 - 0.50 0.20 1.80 8.10 Yuma 5.60 1.00 - 0.50 1.70 8.80 SOURCE: Arizona Tax Research Association *Note: The Yuma County rate includes a half-cent sales tax for general operations and a half-cent sales tax for capital projects. Pre 1996 History - 16 - USE TAX DESCRIPTION The use tax is assessed on items purchased in other states and brought into Arizona for storage, use, or consumption, and for which no tax (or tax at a lesser rate) has been paid in another state. The use tax serves to protect Arizona retailers from out-of-state competition by attempting to ensure that in-state and out-of-state purchases are taxed at an equal rate. Beginning in June, 2001, the use tax rate rose from 5.0% to 5.6%, with the extra 0.6% being dedicated to education. This tax increase was approved by voters, and is commonly known as Proposition 301. DISTRIBUTION Use tax revenues are virtually all deposited in the General Fund, except that 20% of use tax revenues collected from the sale of electricity are deposited in the distribution base. Table 1 USE TAX COLLECTIONS Fiscal Year State General Fund Fiscal Year State General Fund FY 2001 $196,147,647 FY 1991 $82,625,028 FY 2000 $175,730,649 FY 1990 $61,708,485 FY 1999 $147,642,017 FY 1989 $64,805,718 FY 1998 $136,473,801 FY 1988 $61,797,123 FY 1997 $119,600,758 FY 1987 $52,549,878 FY 1996 $113,964,912 FY 1986 $59,415,099 FY 1995 $104,480,933 FY 1985 $27,423,193 FY 1994 $97,492,637 FY 1984 $20,807,747 FY 1993 $84,424,541 FY 1983 $15,702,202 FY 1992 $83,023,743 FY 1982 $13,795,054 SOURCE: Department of Revenue, Annual Reports WHO PAYS THE TAX The tax is paid by persons who make retail purchases of tangible personal property outside this state and store, use, or consume the item in Arizona. If a sales tax has already been paid on the item in another state, the Arizona use tax does not apply. The use tax is due, for example, when an Arizona resident purchases a good over the Internet from an out-of-state retailer and has the item delivered to this state. In practice, the use tax is primarily paid by businesses. Individuals are also liable for the use tax but rarely pay it, because individuals are often unaware of the tax or are unwilling to “voluntarily” report a taxable transaction [A.R.S. § 42-5155]. TAX BASE AND RATE The tax base is the sales price of tangible personal property purchased at retail in another state and brought to Arizona for storage, use, or consumption. Statute mentions a few special cases in which the use tax is also applicable, including tangible personal property provided under the conditions of a warranty or service contract, motor vehicles removed from inventory, and motor vehicles used by motor vehicle manufacturers [A.R.S. § 42-5155 – 5158]. As with the retail sales tax, the law provides a number of exemptions from the use tax. The effect of these exemptions is to reduce the size of the use tax base [A.R.S. § 42-5155]. Use Tax - 17 - The use tax rate is 5.6%, the same as the Transaction Privilege Tax rate for retail sales. However, if the item has already been taxed in another state at a rate less than 5.6%, the use tax rate is reduced by the amount of the tax already imposed by the other state [A.R.S. § 42-5155 and § 42-5159]. PAYMENT SCHEDULE Use taxes are due to the Department of Revenue on the 20th day of the month after the month in which the tax accrues. For example, for taxable sales made in January, the tax payment is due to the department by February 20 [A.R.S. § 42-5162]. Tax payments are delinquent if not postmarked on or before the 25th day of the month or received by the Department of Revenue on or before the next-to-last business day of the month [A.R.S. § 42-5162]. The department may allow taxpayers whose estimated annual use tax liability is between $500 and $1,250 to make quarterly tax payments. Also, the department may permit taxpayers with an estimated annual tax liability of less than $500 to make an annual payment. If good cause is shown, the department can allow a two-month extension for filing the tax return [A.R.S. § 42-5162]. IMPACT OF TAX LAW CHANGES The following section is a summary by year of tax law changes that have been enacted by the Legislature since 1996. A listing of tax law changes prior to the 1996 legislative session is available on the JLBC web-site located at www.azleg.state.az.us/jlbc.htm. The following tax law changes apply only to the use tax. Tax law changes that apply to both the use tax and the transaction privilege tax are included in the Transaction Privilege Tax section of the Tax Handbook. There were no changes enacted to this tax in 1996, 1998 and 2000. 2002 TAX LAWS Laws 2002, Chapter 338 provides that businesses that purchase at least $500,000 worth of tangible personal property annually may obtain a use tax permit and pay use taxes directly to the Department of Revenue (DOR). Previously, out-of-state vendors were required to register with DOR, and collect the use tax from the purchaser and remit to DOR. It is estimated that this legislation may have a small positive impact on use tax collections due to increased compliance, however the amount is undetermined. (Effective December 31, 2002) 2001 TAX LAWS Laws 2001, Chapter 137 provided exemptions from the retail sales and use taxes for food and drinks purchased by hotels and served to guests. This bill is estimated to have minimal fiscal impact. (Effective June 8, 1994) Laws 2001, Chapter 287 provided a number of technical and clarifying changes to statutes, and combined fuel tax statutes for motor vehicle fuel and use fuel into one article. The act also included several substantive provisions, such as an increase in the bonding levels for fuel suppliers and criminal penalty for fuel tax evasion. (Effective August 9, 2001.) 1999 TAX LAWS Laws 1999, Chapter 144 extended a use tax exemption to any diesel fuel imported in the regular fuel tanks of a locomotive and consumed in this state. However, any excess diesel fuel brought into the state by a locomotive and consumed here is still subject to the use tax. This act is estimated to have no fiscal impact. (Effective January 1, 1993) Use Tax - 18 - 1997 TAX LAWS Laws 1997, Chapter 75 applied a four-year statute of limitations to assessments of use taxes levied against vendors who sell to a purchaser licensed or registered by the Department of Revenue to remit use tax. The Department of Revenue is required to provide a credit or offset for interest and penalties paid by the purchaser if and when the department issues a use tax deficiency assessment against a seller. This act is estimated to have no fiscal impact. (Effective June 2, 1996) Pre 1996 History - 19 - SEVERANCE TAX ON METALLIFEROUS MINERALS DESCRIPTION The severance tax on metalliferous minerals (copper or other metals) is levied on the production or extraction from the earth of minerals. The tax rate is 2.5%, and it is applied to 50% of the difference between the gross value of production and the production costs. DISTRIBUTION Revenues from the severance tax on metalliferous minerals are distributed between the state, the counties, and the cities. · 80% of the tax revenues collected are designated as Distribution Base and are distributed as described in the Transaction Privilege Tax section of this book. · 20% of the tax revenues are deposited in the General Fund [A.R.S. § 42-5205]. Table 1 TAX COLLECTIONS AND DISTRIBUTION Fiscal Year General Fund Cities Counties Total FY 2001 1/ $ 56 $1,609,331 $ 2,607,994 $ 4,217,380 FY 2000 $ 3,554,565 $3,237,959 $ 5,247,042 $12,039,566 FY 1999 $ 8,914,656 $3,746,283 $ 6,070,478 $18,731,417 FY 1998 $12,884,325 $5,414,492 $ 8,773,643 $27,072,460 FY 1997 $12,875,213 $5,410,663 $ 8,767,438 $27,053,314 FY 1996 $19,540,585 $8,211,710 $13,306,254 $41,058,549 FY 1995 $17,901,380 $7,522,853 $12,190,030 $37,614,263 FY 1994 $11,618,342 $4,690,868 $ 7,145,130 $23,454,340 FY 1993 $13,804,934 $5,573,698 $ 8,489,856 $27,868,488 FY 1992 $13,883,704 $5,585,313 $ 8,507,549 $27,926,566 FY 1991 $13,911,842 $6,020,608 $ 9,170,591 $30,103,041 FY 1990 2/ $29,552,883 FY 1989 $30,906,899 FY 1988 $19,268,473 FY 1987 $11,979,174 FY 1986 $13,990,093 FY 1985 $10,101,077 FY 1984 $ 9,814,062 FY 1983 $ 4,045,392 FY 1982 3/ NA 1/ Note Laws 1999, 1st Special Session, Chapter 5. 2/ Distribution amounts are not available for FY 1983 – FY 1990. 3/ The tax began in FY 1983, so there were no FY 1982 collections. SOURCE: Department of Revenue, Annual Reports WHO PAYS THE TAX The tax is paid by “severers”, persons engaged in the business of mining metalliferous minerals from the earth [A.R.S. § 42-5202 and § 42-5201]. Severance Tax on Metalliferous Minerals - 20 - TAX BASE AND RATE The severance tax on metalliferous minerals is levied at the rate of 2.5% on a tax base that is 50% of the difference between the gross value of production and the production costs [A.R.S. § 42-5202 and § 42-5204]. Metalliferous minerals are defined as copper, gold, silver, or other metals or ores that are mined in this state [A.R.S. § 42-5201]. The tax does not apply to metalliferous products sold at retail [A.R.S. § 42-5203]. These items are taxed by the transaction privilege tax. PAYMENT SCHEDULE Tax payments for this tax are due on the same schedule as the transaction privilege tax [A.R.S. § 42-5205]. IMPACT OF TAX LAW CHANGES The following section is a summary by year of tax law changes that have been enacted by the Legislature since 1996. A listing of tax law changes prior to the 1996 legislative session is available on the JLBC web site located at www.azleg.state.az.us/jlbc.htm. The estimated dollar impact of the tax law changes is summarized by fiscal year in the following table: Table 2 ESTIMATED DOLLAR VALUE OF TAX LAW CHANGES Fiscal Year Impact 2003 $ 0 2002 $ 0 2001 $ (3,333,000) 2000 $ (4,667,000) 1999 $ 0 1998 $ 0 1997 $ 0 Estimates made by JLBC Staff There were no changes enacted to this tax in 1996 through 1998, 2001, and 2002. 2000 TAX LAWS Laws 2000, Chapter 337 required payers of the mining severance tax to submit a monthly report to the Department of Revenue showing the amount of severance tax that would have been due if their tax liability had been calculated according to the tax law in place before the passage of Laws 1999, 1st Special Session, Chapter 5. In determining the distribution of mining severance tax revenues to the counties, the Department of Revenue is required to calculate point of sale tax collections based on the previous mining severance tax law (not Laws 1999, 1st Special Session, Chapter 5). This legislation only changes the distribution of tax revenues among the counties and has no state revenue impact. (Effective November 1, 1999) 1999 TAX LAWS Laws 1999, 1st Special Session, Chapter 5 made a series of tax cuts that are to be triggered only if sufficient excess revenue is collected in FY 1999. Since sufficient revenue was collected, this bill reduced the mining severance tax base to the difference between the gross value of production and the production costs multiplied by 1.337. Taxpayers are allowed to use either the new tax base or the current base, if the new base would result in a tax increase. On July 1, 2001 the new tax base will expire and only the current base will remain. This act was estimated to reduce General Fund revenues by $(4,667,000) in FY 2000 and by another $(3,333,000) in FY 2001. (Effective November 1, 1999) Pre 1996 History - 21 - JET FUEL EXCISE AND USE TAX DESCRIPTION The jet fuel excise tax is a tax levied on the retail sale of jet fuel. The jet fuel use tax is a tax levied on the storage, use or consumption in the state of jet fuel purchased from a retailer [A.R.S. § 42-5352]. DISTRIBUTION Forty percent of the excise tax revenue collected is designated as distribution base and is distributed pursuant to A.R.S. § 42-5029(D). Sixty percent of the excise tax revenue and 100% of the use tax is credited to the state General Fund [A.R.S. § 42-5353]. Table 1 DISTRIBUTION OF JET FUEL EXCISE TAX Fiscal Year General Fund Counties Cities FY 2001 $4,333,585 $951,561 $587,239 FY 2000 $3,838,375 $842,165 $519,727 FY 1999 $3,645,555 $800,485 $494,004 FY 1998 $3,767,232 $827,203 $510,493 FY 1997 $3,411,961 $749,193 $462,351 FY 1996 $3,135,681 $688,527 $424,912 FY 1995 $3,462,468 $760,282 $469,194 FY 1994 $3,889,868 $792,457 $520,258 FY 1993 $5,194,309 $1,058,203 $694,724 FY 1992 $3,869,796 $788,368 $517,574 DISTRIBUTION OF JET FUEL USE TAX Fiscal Year General Fund Counties Cities FY 2001 $740,281 $0 $0 FY 2000 $835,615 $0 $0 FY 1999 $458,118 $0 $0 FY 1998 $394,789 $0 $0 FY 1997 $532,451 $0 $0 FY 1996 $613,252 $0 $0 FY 1995 $421,116 $0 $0 FY 1994 $490,721 $0 $0 FY 1993 $725,335 $0 $0 FY 1992 $550,908 $0 $0 Note: The Jet Fuel Excise and Use Tax became effective October 1, 1991. SOURCE: Department of Revenue, Annual Reports WHO PAYS THE TAX The excise tax is paid by every person engaging or continuing in the retail sale of jet fuel. The use tax is levied on the storage, use, or consumption in Arizona of jet fuel purchased from a retailer in any case in which the excise tax has not been paid to the state [A.R.S. § 42-5352]. Jet Fuel Excise and Use Tax - 22 - TAX BASE AND RATE The tax rate is 3.05¢ per gallon on the first 10 million gallons of jet fuel. The tax on amounts over 10 million gallons was reduced from 3.05¢ per gallon to 2.05¢ per gallon in FY 1993, to 1.05¢ per gallon in FY 1994, and is not subject to tax in FY 1995 and thereafter [A.R.S. § 42-5352]. The jet fuel excise tax does not apply to jet fuel that is sold in Arizona to commercial airlines and used on flights that originate in the state and whose first outbound destination is outside of the United States [A.R.S. § 42-5354]. PAYMENT SCHEDULE Taxes are collected and due in the same manner as for Transaction Privilege Taxes. IMPACT OF TAX LAW CHANGES The following section is a summary by year of tax law changes that have been enacted by the Legislature since 1996. A listing of tax law changes prior to the 1996 legislative session is available on the JLBC web-site located at www.azleg.state.az.us/jlbc.htm. There were no changes enacted to this tax in the period from 1996 to 2002. Pre 1996 History - 23 - RENTAL OCCUPANCY TAX DESCRIPTION The rental occupancy tax is imposed on tenants of real property whose lease was entered into prior to December 1, 1967. It is intended to be a substitute for the transaction privilege tax on rentals of real property where the landlord cannot pass the tax on to tenants in the form of a rent increase because of the long-standing fixed nature of the lease price. The tax rate is 3% of the tenant’s rent. DISTRIBUTION Revenues from the rental occupancy tax are distributed between the state, the counties, and the cities. · Two-thirds of the tax revenues collected are designated as Distribution Base and will be distributed as described in the Transaction Privilege Tax section of this book. The Department of Revenue shall determine each county’s share of the Distribution Base on the basis of occupancy in each county. · One-third of the tax revenues are deposited in the General Fund. [A.R.S. § 42-5409] Table 1 TAX COLLECTIONS AND DISTRIBUTION Fiscal Year General Fund Cities Counties Total FY 2001 $82,743 $24,485 $39,675 $146,903 FY 2000 $63,092 $18,670 $30,252 $112,014 FY 1999 $66,455 $19,665 $31,865 $117,985 FY 1998 $71,158 $21,056 $34,120 $126,334 FY 1997 $55,632 $16,462 $26,675 $ 98,769 FY 1996 $59,739 $17,677 $28,644 $106,060 FY 1995 $55,917 $16,547 $26,812 $ 99,276 FY 1994 $56,919 $16,372 $24,938 $ 98,229 FY 1993 $49,874 $14,346 $21,851 $ 86,071 FY 1992 $54,161 $15,579 $23,730 $ 93,470 FY 1991 $62,738 $18,061 $27,510 $108,359 FY 1990 $ 91,832 FY 1989 $ 92,239 FY 1988 $ 88,163 FY 1987 $127,493 FY 1986 $150,130 FY 1985 $112,958 FY 1984 $ 74,595 FY 1983 $ 76,651 FY 1982 $113,272 Note: Distribution amounts are not available for FY 1982 – FY 1990. SOURCE: Department of Revenue, Annual Reports. WHO PAYS THE TAX The tax is paid by landlords who collect the tax from the tenant together with the rental payment or by any tenant from whom no tax has been collected by the landlord [A.R.S. § 42-5406]. Rental Occupancy Tax - 24 - TAX BASE AND RATE The rental occupancy tax is levied at a rate of 3% on tenants of preexisting leases for the privilege of occupancy [A.R.S. § 42-5404]. A preexisting lease is defined as any written lease or rental agreement entered into prior to December 1, 1967 [A.R.S. § 42-5401]. Exceptions to Preexisting Lease. The following are exempt from the rental occupancy tax: · Any bilateral amendment to a lease or rental agreement entered into after December 1, 1967 that lengthens the term of the lease or changes the size of the premises leased. · A lease or rental agreement for the following businesses: hotels, guest houses, dude ranches, resorts, rooming houses, apartment houses, office buildings, automobile storage garages, parking lots, and tourist camps [A.R.S. § 42-5401]. Other Exemptions from this tax: · Occupancy by any tenant who is exempt under the Constitution or laws of the United States or Arizona. · Occupancy under a lease entered into prior to December 1, 1967 which the Constitution or laws of the United States or Arizona would prohibit from taxing if the landlord were the tenant. · Leasing or renting of property when such property is used by the lessee as a principal or permanent place of residence [A.R.S. § 42-5405]. PAYMENT SCHEDULE On or before the last day of each month, the landlord shall pay taxes on rents received during the previous calendar month. An extension may be granted for good cause, but not beyond the last day of the second month following the regular due date [A.R.S. § 42-5407]. IMPACT OF TAX LAW CHANGES The following section is a summary by year of tax law changes that have been enacted by the Legislature since 1996. A listing of tax law changes prior to the 1996 legislative session is available on the JLBC web-site located at www.azleg.state.az.us/jlbc.htm. There were no changes enacted to this tax in the period from 1996 to 2002. Pre 1996 History - 25 - SEVERANCE TAX ON TIMBER DESCRIPTION The severance tax on timber is levied on the production of timber products. Timber products include poles, saw logs, pulpwood, and firewood. DISTRIBUTION Revenues from this tax are shared between the General Fund and the local governments. Eighty percent of timber severance tax revenues is deposited in the distribution base, and the remaining 20% is designated for the General Fund. Of the distribution base monies, 34.49% is allocated to the General Fund, 40.51% is designated to the counties, and 25% goes to the cities [A.R.S. § 42-5205]. Table 1 TAX COLLECTIONS AND DISTRIBUTION Fiscal Year General Fund Cities Counties Total FY 2001 $521 $219 $355 $1,095 FY 2000 $6,150 $2,584 $4,188 $12,922 FY 1999 $19,160 $8,053 $13,047 $40,260 FY 1998 $24,812 $10,426 $16,894 $52,132 FY 1997 $19,781 $8,312 $13,470 $41,563 FY 1996 $21,720 $9,127 $14,791 $45,638 FY 1995 $124,045 $52,129 $84,469 $260,643 FY 1994 $131,612 $53,138 $80,939 $265,689 FY 1993 $209,243 $84,481 $128,681 $422,405 FY 1992 $232,679 $93,943 $143,094 $469,716 FY 1991 $175,944 $71,037 $108,204 $355,185 FY 1990 1/ $543,461 FY 1989 $563,534 FY 1988 $557,476 FY 1987 $480,535 FY 1986 $376,947 FY 1985 $197,920 FY 1984 $102,305 FY 1983 $33,425 FY 1982 NA 1/ Distribution by jurisdiction not available prior to FY 1991. SOURCE: Department of Revenue. WHO PAYS THE TAX The tax is paid by individuals engaged in the business of producing timber products [A.R.S. § 42-5202]. TAX BASE AND RATE This tax is imposed on timbering activities that result in timber products, such as poles, saw logs, pulpwood, or firewood. An exemption is provided for timber products sold at retail [A.R.S. § 42-5202]. The tax rate is: · $2.13 per 1,000 board feet for timber products derived from ponderosa pine. · $1.51 per 1,000 board feet for timber products derived from all species except ponderosa pine. Severance Tax on Timber - 26 - TAX REFUNDS AND/OR TAX CREDITS None. PAYMENT SCHEDULE The due dates for the severance tax on timber are the same as for the transaction privilege tax [A.R.S. § 42-5014]. IMPACT OF TAX LAW CHANGES The following section is a summary by year of tax law changes that have been enacted by the Legislature since 1996. A listing of tax law changes prior to the 1996 legislative session is available on the JLBC web-site located at www.azleg.state.az.us/jlbc.htm. There were no changes enacted to this tax in the period from 1996 to 2002. Pre 1996 History GENERAL FUND INCOME TAXES - 27 - INDIVIDUAL INCOME TAX DESCRIPTION The individual income tax is levied on the personal income of full-time residents and pro-rated for part-time residents of Arizona. Taxation of income by local entities is preempted by the state as long as the Urban Revenue Sharing Fund is maintained. The starting point for Arizona individual income tax is the federal adjusted gross income. The tax, which uses a graduated rate structure, currently ranges between 2.87% and 5.04% of Arizona taxable income depending on the taxpayer’s income level. The individual income tax is an important revenue source for the state, representing over 36% of forecasted General Fund revenues. A portion of individual income tax collections (along with corporate income tax collections) is shared with incorporated cities and towns within the state. The individual income tax is comprised of four components: (1) withholdings, (2) estimated tax payments, (3) final payments, and (4) refunds. Generally, withholding payments are from tax on wage and salary based income, and estimated payments from non-wage earnings. Final payments and refunds are the underpayment and overpayment of tax, respectively, settled between taxpayers and the state after tax returns have been filed. DISTRIBUTION Table 1 below provides historical individual income tax collections for the last 20 years. Individual income tax receipts are deposited into the General Fund, after sufficient amounts have been deposited into the tax refund account to meet the requirements for tax refunds [A.R.S. § 42-1116]. Table 1 INDIVIDUAL INCOME TAX COLLECTIONS Fiscal Year General Fund Fiscal Year General Fund FY 2001 $2,300,751,988 FY 1991 $1,243,656,300 FY 2000 $2,289,328,921 FY 1990 $996,405,685 FY 1999 $2,097,629,461 FY 1989 $912,164,223 FY 1998 $1,862,514,798 FY 1988 $853,980,226 FY 1997 $1,668,414,355 FY 1987 $761,421,688 FY 1996 $1,494,282,274 FY 1986 $702,956,800 FY 1995 $1,479,588,252 FY 1985 $626,244,306 FY 1994 $1,405,482,556 FY 1984 $526,707,527 FY 1993 $1,367,641,116 FY 1983 $480,715,757 FY 1992 $1,237,540,251 FY 1982 $438,984,699 SOURCE: Department of Revenue annual reports – amounts are net of refunds and charge-offs. A portion of individual income tax collections is shared with incorporated cities and towns - see Table 2 below. Based on initiative measure approved by the voters in 1972, an urban revenue sharing fund was established. The initiative provided that a percentage of income tax revenues (including both individual and corporate income tax) be shared with incorporated cities and towns within the state. Currently, 15% of net income tax revenues from two years prior is distributed to cities and towns. This distribution is based on the jurisdiction’s relative population of the state from the last decennial or special census. Table 2 below provides historical urban revenue sharing distributions [A.R.S. § 42-206]. Individual Income Tax - 28 - Table 2 DISTRIBUTION OF INDIVIDUAL AND CORPORATE INCOME TAX Fiscal Year Total Collections 1/ State General Fund Urban Revenue Sharing Voluntary Contribution Funds FY 2001 $2,845,000,474 $2,445,472,944 $396,452,640 $3,074,890 FY 2000 $2,815,006,109 $2,434,799,494 $377,710,989 $2,495,626 FY 1999 $2,643,737,477 $2,302,706,943 $340,310,656 $ 719,878 FY 1998 $2,390,575,871 $2,098,733,397 $291,243,578 $ 598,896 FY 1997 $2,269,304,787 $2,010,937,159 $257,800,548 $ 567,080 FY 1996 $1,942,321,758 $1,723,080,577 $218,543,272 $ 697,909 FY 1995 $1,896,299,526 $1,689,985,202 $205,607,690 $ 707,264 FY 1994 $1,708,098,853 $1,521,964,032 $185,405,279 $ 729,542 FY 1993 $1,606,910,521 $1,422,638,002 $183,667,152 $ 605,368 FY 1992 $1,448,985,875 $1,272,391,599 $176,087,148 $ 507,128 FY 1991 $1,435,328,781 $1,268,036,363 $166,863,264 $ 429,154 FY 1990 $1,174,472,787 $1,023,291,736 $150,622,581 $ 558,470 FY 1989 $1,113,033,948 $ 968,464,778 $143,956,984 $ 612,187 FY 1988 $1,004,728,980 $ 873,497,071 $130,653,468 $ 578,441 FY 1987 $ 960,370,312 $ 835,501,060 $124,212,169 $ 657,084 FY 1986 $ 871,639,451 $ 771,448,590 $108,637,795 $ 616,270 FY 1985 $ 828,521,461 $ 730,874,978 $ 96,166,908 $ 440,334 FY 1984 $ 724,593,724 $ 633,247,539 $ 83,061,596 $ 260,685 FY 1983 $ 641,112,719 $ 573,649,629 $ 73,596,099 $ -0- FY 1982 $ 553,743,940 $ 487,950,969 $ 65,083,596 $ -0- ____________ 1/ Note that this column also includes corporate income tax. WHO PAYS THE TAX Residents or part-year residents of the state and non-residents who derived income from sources within the state must pay individual income tax [A.R.S. ' 43-102(A)]. Fiduciaries of estates and trusts, and individuals comprising a partnership or S-corporations also are subject to the tax. Any individual whose permanent home is in the state is considered a resident. Every person who spends more than nine months of the taxable year in Arizona is presumed a resident unless competent evidence can show the individual is in the state for a temporary or transitory purpose. Any resident who moved into or out of Arizona with intent to establish or relinquish residency is considered to be a part-year resident. The United States, the state, counties, cities, towns, school districts or other political subdivisions of the state or federal government are excluded from the definition of a taxpayer. TAX BASE The tax is levied, paid, and collected each taxable year based on taxable income [A.R.S. ' 43-1011]. The tax base starts with Arizona gross income, which is equivalent to the taxpayer's federal adjusted gross income, and is then modified by a list of additions and subtractions to income as listed under A.R.S. ' 43-1021 and A.R.S. § 43-1022, respectively. This is further reduced by exemptions and standard or itemized deductions to arrive at Arizona taxable income. Individual Income Tax - 29 - Exempt Organizations [A.R.S. ' 43-1201]: (1) Labor, agricultural, and horticultural organizations except for cooperative organizations. (2) Fraternal beneficiary societies, orders, or organizations operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system and providing for the payment of life, sick, accident, or other benefits to the members of such society, order or organization or their dependents. (3) Cemetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit. (4) Nonprofit business leagues, chambers of commerce, real estate boards, or boards of trade, of which no part of the net earnings inures to the benefit of any private shareholder or individual. (5) Civic leagues or organizations not organized for profit, operated exclusively for the promotion of social welfare, or local organizations of employees, with the membership limited to the employees of a designated person(s) in a particular municipality and the net earnings devoted exclusively to charitable, educational or recreational purposes. (6) Clubs organized and operated exclusively for pleasure, recreation, and other nonprofit making purposes, of which no part of the net earnings inures to the benefit of any private shareholder. (7) Voluntary employees' beneficiary organizations providing for the payment of life, sick, accident or other benefits to the members of such organizations or their dependents, if no part of their net earnings inures (other than through such payment) to the benefit of any private shareholder or individual, and 85% or more of the income consists of amounts collected from members and contributions by the employees of the member for the sole purpose of making such payments and meeting expenses. (8) Teachers' or public employees' retirement fund organizations of a purely local character, if no part of their net earnings inures (other than through payment of retirement benefits) to the benefit of any shareholder or indivi-dual, and the income consists entirely of amounts received from public taxa tion, assessments upon the salaries of members, and income from investments. (9) Religious or apostolic organizations or corporations, if such organizations or corporations have a common or community treasury. (10) Voluntary employees' beneficiary organizations providing for the payment of life, sick, accident, or other benefits to members of such organizations or their dependents or designated beneficiaries, if admission to membership in such organizations is limited to individuals who are officers or employees of the United States government and, if no part of the organization's net earnings inure (other than through such payments) to the benefit of any private shareholder or individual. (11) Insurance companies subject to payment of the insurance premium tax. (12) Mutual ditch, irrigation or water companies or similar nonprofit organizations if 85% or more of the income consists of amounts collected from members for the sole purpose of meeting losses and expenses. (13) Workers’ compensation pools established pursuant to A.R.S. § 23-961.01. TAX RATE Rates and Brackets. The current rate structure, based on Arizona taxable income, is as follows [A.R.S. ' 43-1011]: 2001 TAX RATE SCHEDULE Single 1/ Married 3/ Arizona Taxable Income Rate 2/ Arizona Taxable Income Rate $ 0 - $10,000 2.87% $ 0 - $20,000 2.87% $ 10,001 - 25,000 $ 287 plus 3.20% $ 20,001 - 50,000 $ 574 plus 3.20% $ 25,001 - 50,000 $ 767 plus 3.74% $ 50,001 - 100,000 $ 1,534 plus 3.74% $ 50,001 - 150,000 $1,702 plus 4.72% $100,001 - 300,000 $ 3,404 plus 4.72% $150,001 and over $6,422 plus 5.04% $300,001 and over $12,844 plus 5.04% ___________ 1/ Or married filing separately. 2/ The marginal rates apply to income within the taxable income bracket. 3/ Or unmarried head of household. Individual Income Tax - 30 - NOTE: Inflation indexing has been repealed from the income tax statutes. Optional Tax Table. The Department of Revenue developed an optional tax table prescribing tax liability amounts, based on filing status, in $50 increments of Arizona taxable income. The table can be used if (1) an individual has been a resident for the entire taxable year, and (2) the Arizona taxable income for the year is less than $50,000 regardless of filing status [A.R.S. ' 43-1012]. RECENT HISTORICAL PERSONAL INCOME TAX RATES 1/ Taxable Income 2/ 1990 Tax Rate 1994 Tax Rate 1995 Tax Rate 1997 Tax Rate 1998 Tax Rate 1999 Tax Rate $ 0 -$ 10,000 3.80% 3.25% 3.00% 2.90% 2.88% 2.87% $ 10,001 - 25,000 4.40% 4.00% 3.50% 3.30% 3.24% 3.20% $ 25,001 - 50,000 5.25% 5.05% 4.20% 3.90% 3.82% 3.74% $ 50,001 - 150,000 6.50% 6.40% 5.20% 4.90% 4.74% 4.72% $150,001 & over 7.00% 6.90% 5.60% 5.17% 5.10% 5.04% ___________ 1/ For marginal rates prior to 1990, see page 90 of the 1990 Tax Handbook. 2/ These brackets applied to single or married filing separately filers. For married joint filers or head of households, the bracket amounts are doubled. In 1990, the brackets were altered into the present form (see Laws 1990, 3rd Special Session, Chapter 3). NOTE: There were no changes in 2000 and 2001. TAX REFUNDS AND/OR TAX CREDITS Taxes Paid to Other States. Subject to certain conditions, residents are allowed a credit for income taxes paid to another state or country [A.R.S. ' 43-1071]. Property Taxes. A full-year resident can claim a refundable credit for property taxes or rent paid on property if all the following apply [A.R.S. ' 43-1072]: · 65 years or over or receiving SSI Title 16 monies from the Social Security Administration. · Paid property tax on your Arizona homestead or paid rent on taxable property for the entire year (or combination of both). · If lived alone, your income from all sources was below $3,751 or if lived with others, the combined household income was below $5,501. The amount of the credit is the lesser of property taxes actually paid or the amount listed in the table under A.R.S. ' 43-1072, Section B, Paragraphs 1 and 2. The inflation indexing of this table has been repealed. The credit amount will remain at 1989 levels. Refunds are subject to setoffs of debt owed to the state or a court as listed in A.R.S. ' 42-133. Agricultural Pollution Control Equipment. A taxpayer involved in the commercial production of livestock or agricultural crops may claim a tax credit for expenses incurred to purchase tangible personal property used in the business in order to control or prevent pollution. The credit is 25% of the cost of the property up to a maximum of $25,000 [A.R.S. § 43-1081.01]. Agricultural Preservation District. A refundable credit for individuals and corporations that donate land or development rights to land to an agricultural preservation district. The amount of the credit is equal to the appraised value of the property if ownership is conveyed to the district or the difference between the appraised value of the undeveloped land and the land for development purposes if development rights are conveyed instead. The maximum credit is $33,000. The credit is available from 2001 through 2005 [A.R.S. § 43-1081.02]. Agricultural Water Conservation System. A tax credit can be claimed for 75% of the qualifying expenses in purchasing and installing an agricultural water conservation system. This credit is in lieu of itemized deductions for Individual Income Tax - 31 - such expenses, in which case, the taxpayer must add the credit back into Arizona gross income in computing taxable income [A.R.S. ' 43-1084]. Alternative Fuel Delivery Systems. A taxpayer may claim a credit for the costs to construct or operate an alternative fuel delivery system (AFDS) in Arizona that is capable of dispensing alternative fuel to an alternative fuel vehicle. Laws 2000, 7th Special Session, Chapter 1 limited the credit for AFDS to those individuals who had a purchase order or contract for the system before October 20, 2000 and for which actual construction began before November 9, 2000. Taxpayers may take their credit as a lump sum refund or over a period not to exceed five years [A.R.S. § 43- 1086.02]. Alternative Fuel Vehicles. A taxpayer may claim a tax credit for alternative fuel vehicles (AFV) used in Arizona. Laws 2000, 7th Special Session, Chapter 1 modified the amount of the credit and imposed ownership, alternative fuel use, and emission testing requirements on persons qualifying for it. (For more details, see section Impact of Tax Law Changes.) Taxpayers may take their credit as a lump sum refund or over a period not to exceed three years. Interest is not paid on unpaid annual installments [A.R.S. ' 43-1086]. Charitable Organizations and Contributions. A taxpayer may take a tax credit up to $200 for donations to qualifying charitable organizations that exceed the level of contributions in 1996 or the first year that the taxpayer deducted charitable contributions pursuant to Section 170 of the Internal Revenue Code. This became effective January 1, 1998 [A.R.S. § 43-1088]. Construction Materials. A tax credit can be claimed for 5% of the purchase price of new construction materials used to build a new facility or expand an existing one. The facility must be predominantly used for manufacturing, refining, mining, metallurgical operations, or research and development and the total cost of construction must exceed $5 million. Also, construction must have begun on or after January 1, 1994 and be completed by December 31, 1999 [A.R.S. ' 43-1082]. Defense Contractor. A defense contractor certified by the state Department of Commerce may qualify for a tax credit due to (1) net employment increases under defense related contracts, or (2) net employment increases from transferring employment from exclusively defense related activities to exclusively private commercial activities, or (3) taxes paid on class 3 property if there was new defense related employment during the taxable year [A.R.S. ' 43- 1077 and 43-1078]. Enterprise Zones. Businesses located in an enterprise zone can claim a credit for net increases in employment of persons who qualify as economically disadvantaged under the Job Training Partnership Act. (See Laws 1989, Chapter 194 for changes in the amount of credit allowed.) In addition to extending the repeal of the credit from July 1, 2001 to July 1, 2006, Laws 2001, Chapter 370 also made several modifications to the program [A.R.S. ' 43- 1074]. Environmental Technology Facility. A taxpayer may claim a credit for expenses incurred in constructing a qualified environmental technology facility as described in A.R.S. ' 42-1514.02. The credit is equal to 10% of construction costs including land acquisition, improvements, building improvements, machinery and equipment. Credit may not exceed 75% of the tax liability for the taxable year. This credit is in lieu of the credit given for the same recycling equipment. Certain recapture provisions apply to this credit [A.R.S. ' 43-1080]. Family Income Credit. Residents are allowed a $40 nonrefundable tax credit for each personal or dependent exemption claimed, subject to certain income limitations [A.R.S. ' 43-1073]. Low-Income Credit for Excise Taxes Paid. For taxpayers filing as married couple or as head of household and whose federal adjusted gross income is $25,000 or less, a credit of $25 is granted per person or $100 per household. For taxpayers filing as single or as married person filing separately, the income requirement is $12,500 or less. This credit is considered a mitigation of the 0.6% sales tax increase resulting from Proposition 301 passed in November 2000. This law became effective January 1, 2001 [A.R.S. § 43-1072.01]. Military Reuse Zones. Businesses that are primarily engaged in manufacturing, assembling or fabricating aviation or aerospace products, and are located in a military reuse zone can claim a tax credit for net employment increases Individual Income Tax - 32 - within the military reuse zone. This credit is in lieu of any other tax credit obtained by a qualified defense contractor for the same employees [A.R.S. ' 43-1079]. Pollution Control Equipment. A taxpayer may claim a tax credit for 10% of the cost to purchase real or personal property used to control or prevent pollution. Amounts that qualify for this credit must be includible in the taxpayer=s adjusted basis for the property. This credit is in lieu of the recycling equipment credit. The maximum credit is $500,000 [A.R.S. ' 43-1081]. Public School Extra Curricular Activity Fees. A taxpayer may take a credit up to $250 per year for contributions for the support of extracurricular activities and character education programs at public schools. This credit is in lieu of any federal or state deduction for such contributions. A five-year carry forward of the credit is allowed [A.R.S. § 43-1089.01]. Recycling Equipment. Taxpayers may claim a credit for placing recycling equipment in service after December 31, 1992. This credit is in lieu of any deductions taken for depreciation. The credit is equal to 10% of the installation cost, but not to exceed the lesser of 25% of the tax liability for that year or $5,000. Certain recapture provisions apply when the recycling equipment ceases operation or is transferred [A.R.S. ' 43-1076]. Refueling Stations. A taxpayer may claim a credit for a vehicle refueling apparatus, including storage tanks, installed on one or more properties located in Arizona for his use. Laws 2000, 7th Special Session, Chapter 1 limited the credit to those individuals who had a purchase order or contract for the apparatus before October 20, 2000 and had the refueling station either installed by December 31, 2000 or paid in full by November 9, 2000. Taxpayers may take their credit as a lump sum refund or over a period not to exceed three years [A.R.S. § 43-1086.01]. School Site Donation Credit. A credit is allowed in the amount of 30% of the value of real property and improvements donated by a taxpayer to a school district or a charter school. This credit became available January 1, 2001 [A.R.S. § 43-1089.02]. School Tuition Organizations. A taxpayer may take a credit up to $625 per year for donations to a non-governmental primary or secondary school tuition organization that allocates at least 90% of its annual revenue to educational scholarships or tuition grants. A five-year carry forward of the credit is allowed [A.R.S. § 43-1089]. Solar Energy Devices. A taxpayer may claim 25% of the purchase price for a qualified solar energy device installed in the taxpayer=s residence located in Arizona. The maximum credit is $1,000 per year and $1,000 in aggregate for the same residence [A.R.S. ' 43-1083]. Solar Hot Water Heater Stub-Outs and Electric Vehicle Recharge Outlets. A taxpayer may take a credit up to $75 for installing solar hot water plumbing stub-outs or electric vehicle recharge outlets in home dwellings built by the taxpayer. This law became effective January 1, 1998 [A.R.S. § 43-1090]. TANF Employment. A credit that is allowed for net increases in qualified employment of recipients of temporary assistance for needy families (TANF) residing in Arizona. The credit is in lieu of any wage expense deduction taken for tax purposes [A.R.S. § 43-1087]. Technology Training. A taxpayer may claim a credit for expenses incurred in providing qualified technology skills training for up to 20 of his employees. The credit is 50% of the expenses for the training but cannot exceed $1,500 per employee. The credit is available between 2001 and 2005 [A.R.S. § 43-1088.01]. Underground Storage Tanks. Taxpayers can claim 10% of the expenses in tax year 1994 and thereafter for corrective actions related to underground storage tank compliance if the taxpayer is not responsible or liable for the corrective action. The corrective action must be certified by the Department of Environmental Quality and is in lieu of reimbursements by said agency [A.R.S. ' 43-1085]. Wheels to Work Vehicle Donation. A credit for the fair market value, up to $1,500 per vehicle, may be taken for donations of vehicles to qualified wheels to work programs [A.R.S. § 43-1090.01]. Individual Income Tax - 33 - TAX COMPUTATION Individuals: Arizona Gross Income Equivalent to taxpayer's federal adjusted gross income. Plus Additions to Income See A.R.S. § 43-1021 for amounts not taxed under federal income tax laws, Minus but subject to Arizona income tax. Subtractions from Income See A.R.S. § 43-1022 for amounts taxed under federal income tax laws, but Minus not subject to Arizona income tax. Exemptions See A.R.S. § 43-1023 for exemptions: (1) $1,500 for blind taxpayer and/or Equals spouse (2) $2,300 for taxpayer and/or spouse who is age 65 or over, (3) $2,300 for each dependent, and (4) $10,000 for qualifying parents and ancestors of parents. Arizona Adjusted Gross Income Minus Standard or Itemized Deductions Standard deduction is $4,050 for single or married filing separately and Minus $8,100 for married filing jointly or unmarried head of household. Itemized deductions are the same as on the federal income tax return. Personal Exemptions See A.R.S. § 43-1043: (1) single or married filing separately - $2,100 (2) Equals married filing jointly - $4,200 (3) unmarried head of household - $4,200 (4) a married couple filing a joint return and claiming at least one dependent - $6,300. Taxable Income Multiply By Tax Rates See Tax Rate Section Equals Tax Liability Minus Tax Credits See Tax Refund and/or Tax Credits Section Minus Tax Payments Withholding, estimated, and extension payments made to the Department of Equals Revenue. Tax Due This can also be an overpayment; in which case, taxpayer will be entitled to tax refund. Partnerships: Arizona Gross Income Equivalent to federal ordinary business and rental income for the year, Add excluding (1) items requiring a separate computation under A.R.S. § 43- 1412, paragraph 1 through 17 and (2) the federal provisions relating to interest on investment indebtedness. Individual Income Tax - 34 - Addition to Income See A.R.S. § 43-1021 for amounts not taxed under federal income tax laws, Minus but subject to Arizona income tax. Subtractions from Income See A.R.S. § 43-1022 for amounts taxed under federal income tax laws, but Equals not subject to Arizona income tax. Arizona Taxable Income This is mainly for filing and reporting purposes. The taxable income of a Calculate partnership is passed through to individuals in the partnership who are then taxed through the individual income tax on their distributed portion of the income. Apportionment Ratio Only for multi-state partnerships to determine Arizona's share of income and deductions. Uses a three-part apportionment formula of property, payroll and sales. See A.R.S. § 43-1131 through A.R.S. § 43-1150. Fiduciaries: Arizona Gross Income Equivalent to federal taxable income of estates or trusts (A.R.S. § 43-1301). Add income is taxable based on the residence of the decedent for an estate and the residence of the fiduciary or the beneficiary for a trust. See A.R.S. § 43-1312. Additions to Income See A.R.S. § 43-1331 for a list of additions which also include those items Minus listed for individuals under A.R.S. § 43-1021. Subtractions from Income See A.R.S. § 43-1332 for a list of subtractions which also include those items Equals listed for individuals under A.R.S. § 43-1022. Arizona Taxable Income Multiply By Individual Tax Rates See Tax Rate Section Equals Tax Liability Minus Individual Tax Credits See Tax Refund and/or Tax Credits Section Minus Tax Payments Equals Tax Due PAYMENT SCHEDULE Withholding. To simplify payment of the individual income tax, a portion of the tax is paid through a system of withholding. Under the withholding system, a percentage of each employee's gross salary is withheld by the employer at the time wages are paid [A.R.S. ' 43-401]. Percentages. An employee must elect which percentage of the federal income tax withholding shall be withheld for state income taxes: $ If the employee's annual wage is less than $15,000, the percentages are: 0%, 10%, 18%, 21%, 23%, 29%, or 34%. Individual Income Tax - 35 - $ If the employee's annual wage is $15,000 or more, the percentages are: 0%, 18%, 21%, 23%, 29%, or 34%. The 0% option is available only for those who had no state tax liability in the prior taxable year and expect to have no state tax liability for the current taxable year. Exclusions. Certain types of employment are exempt from the withholding requirements (see A.R.S. ' 43-403 for a complete list). Disposition. Employers who deduct withholding from their employees' wages are required to transfer the withholding collections to the Department of Revenue (DOR). If an employer's withholding collections exceeded an average of $1,500 per quarter over the four preceding calendar quarters, the employer must forward withholding collections to the state in accordance with the federal payment schedule. For employers whose withholding collections did not exceed an average of $1,500 per quarter over the four preceding calendar quarters, the withholding collections for the previous calendar quarter must be transferred to DOR on or before April 30, July 31, October 31, and January 31. Estimated Tax Payments. A taxpayer whose Arizona gross income was greater than $75,000 in the preceding taxable year or can reasonably expect to exceed $75,000 in the current year, must make estimated payments, if estimated withholding for the tax year does not equal 90% of the tax liability for the current year or 100% of the liability for the preceding year [A.R.S. ' 43-581]. The estimated amount shall be paid in four installments on or before the due dates established for federal filing and reasonably reflect the taxpayer's Arizona income tax liability. The total of annual estimated tax payments and withholding tax must be at least 90% of the tax liability for the current year or 100% of tax liability for the preceding year. If a taxpayer does not pay the required estimated tax payments, DOR will assess a penalty not exceeding 10% of the unpaid tax plus interest on the unpaid balance. Voluntary Payments. All other taxpayers may voluntarily make estimated tax payments during the tax year. Payment of Balance. The taxpayer is required to pay the balance of the tax due on April 15 after the close of the calendar year or, if return is based on a fiscal year, on the 15th day of the fourth month following the close of the fiscal year. An Income Tax Return is required to be filed with DOR along with the tax payment [A.R.S. ' 43-501]. Extensions. If requested, an automatic 4-month extension is granted by the department. An additional two-month extension may also be granted if good cause exists. No extension may be granted beyond six months from the original due date [A.R.S. ' 42-116]. Penalties and Interest. When applying for an extension, at least 90% of the tax liability must be paid by the original due date or the taxpayer is subject to a penalty of 0.5% of the unpaid balance for each 30 days or fraction thereof. This penalty is in addition to the 10% late payment or the 5% late filing penalties found under A.R.S. ' 42-136. Total penalties cannot exceed 25%. DOR will assess interest on the unpaid balance until it is paid. IMPACT OF TAX LAW CHANGES The following section is a summary by year of tax law changes that have been enacted by the Legislature since 1996. A listing of tax law changes prior to the 1996 legislative session is available on the JLBC web-site located at www.azleg.state.az.us/jlbc.htm. The estimated dollar impact of the tax law changes is summarized by fiscal year in the following table: Individual Income Tax - 36 - Table 3 ESTIMATED DOLLAR VALUE OF TAX LAW CHANGES ($ in Thousands) Fiscal Year Impact 2003 $ 4,434.5 2002 $ 19,825.3 2001 $ (82,895.0) 2000 $ (27,177.9) 1999 $ (51,091.5) 1998 $(114,969.0) 1997 $ (950.0) Estimates made by JLBC Staff 2002 TAX LAWS Laws 2002, Chapter 130 conformed Arizona’s estate and trust taxation statutes to changes in the Internal Revenue Code. The Department of Revenue did not anticipate that individual income tax collections from estates and trusts would be affected by this legislation. (Effective January 1, 2003.) Laws 2002, Chapter 237 provided modifications to the state’s enterprise zone program both with respect to income tax credits and property reclassification. For example, the act clarified and narrowed the definition for the enterprise zone program with respect to retail activity. The act also limited the number of qualified employment positions that are eligible for the premium or income tax credits under this program. The fiscal impact of this act is unknown. (Effective retroactively from January 1, 2002.) Laws 2002, Chapter 344 conformed Arizona tax statutes to the current Internal Revenue Code. The act includes provisions relating to the Economic Growth and Tax Relief Reconciliation Act of 2001, the Fallen Hero Survivor Benefit Fairness Act of 2001 and the Job Creation and Worker Assistance Act of 2002, except for the bonus depreciation provision (which impacts the corporate income tax). The act also adjusted the Urban Revenue Sharing (URS) program from 15% to 14.8% for two years. The JLBC Staff estimated that the conformity provisions will reduce individual income tax revenues by $(14.5) million in FY 2003. The URS adjustments, however, are expected to increase the General Fund by $5.7 million. The URS changes are not included in Table 3. (Contained various effective dates.) 2001 TAX LAWS Laws 2001, 2nd Special Session, Chapter 2 adjusted state withholding rates to compensate for changes at the federal level. The withholding rates were changed, as of January 1, 2002, as shown in the table below: Old Withholding Rates New Withholding Rates 17% 18% 20% 21% 22% 23% 28% 29% 32% 34% The adjustments of the state withholding rates were estimated to result in a one-time revenue increase of $60 million in FY 2003. The act also established a tax amnesty program within the Department of Revenue for any taxpayer with an outstanding individual income tax liability prior to November 1, 2001. Taxpayers that were eligible for the tax amnesty program had to apply to the department between January 1 and February 28, 2002. This program was estimated to generate $10 million in income tax revenues in FY 2003. (The act contained various effective dates.) Individual Income Tax - 37 - Laws 2001, Chapter 30 changed the income threshold required for filing estimated tax payments from “reasonably expected to exceed” to “exceed.” Provided an exception for estimated payments if the taxpayer’s Arizona income tax liability is less than $1,000. (Effective January 1, 2002) Laws 2001, Chapter 115 was the annual tax correction bill that made technical, conforming, and clarification changes to the Arizona tax statutes. (Contained various effective dates) Laws 2001, Chapter 191 established new provisions pertaining to the Department of Revenue’s (DOR) electronic tax return filing program. Most notably, this law provided administrative provisions for DOR related to alternative signatures. (Effective August 9, 2001) Laws 2001, Chapter 235 increased the standard deduction for taxpayers filing as single and as married filing separately from $3,600 to $4,050, and for head of household and married filing jointly from $7,200 to $8,100. These provisions became effective retroactively from January 1, 2001 and were estimated to reduce individual income tax revenues by $(15,000,000) in both FY 2002 and FY 2003. In addition, this bill contained provisions that would become enacted conditional upon actual revenues exceeding forecasted revenues by specified amounts in FY 2001 and FY 2002. However, actual revenues in FY 2001 were insufficient to “trigger” this legislation. Laws 2001, Chapter 261 established a Refund Offset Program Fund. This fund enables the Department of Revenue (DOR) to offset federal tax refunds against state debts and other debts. Monies from the fund are then utilized for administrative costs for the fund and any remaining monies go to the General Fund. This law also expands to whom DOR may disclose confidential information apart from the corporate principal officers. The act is estimated to result in additional individual income tax revenues of $1.4 million in FY 2002 and $1.3 million in FY 2003. (Effective August 9, 2001) Laws 2001, Chapter 296 was the annual bill that conformed the Arizona statutory definition of the Internal Revenue Code (IRC) to the 2001 United States IRC. This law is estimated to reduce individual income tax revenues by $(123,000) in FY 2001, $(157,000) in FY 2002, and $(262,000) in FY 2003. (Contained various effective dates) Laws 2001, Chapter 370 extended the repeal of the enterprise zone program from July 1, 2001 to July 1, 2006 and, in addition, made several modifications to the program. For example, the law now permits businesses with no more than 10% of their retail activity at the location of the enterprise zone, measured by the number of employees, to be eligible for the program. The fiscal impact could not be determined. (Contained various effective dates) Laws 2001, Chapter 382 repealed the state’s archaic laws against cohabitation, sodomy, and lewd and lascivious acts. The law also modified the definition of “dependent” for state income tax purposes. Arizona uses the same definition of dependent as the Internal Revenue Code (IRC). However, becaus
Object Description
TITLE | State of Arizona tax handbook |
CREATOR | Arizona. Legislature. Joint Legislative Budget Committee. |
SUBJECT | Taxation--Law and legislation--Arizona; |
Browse Topic |
Government and politics |
DESCRIPTION | This title contains one or more publications. |
Language | English |
Publisher | Arizona. Legislature. Joint Legislative Budget Committee. |
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Text |
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State Documents |
ORIGINAL FORMAT | Born Digital |
Source Identifier | LG 4.8:T 19 |
Location | ocm26153148 |
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REPOSITORY | Arizona State Library, Archives and Public Records. |
Description
TITLE | Tax handbook 2002 |
DESCRIPTION | 164 pages (PDF version). File size: 1344803 Bytes. |
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Text |
Acquisition Note | Publication or link to publication sent to reports@lib.az.us |
RIGHTS MANAGEMENT | Copyright to this resource is held by the creating agency and is provided here for educational purposes only. It may not be downloaded, reproduced or distributed in any format without written permission of the creating agency. Any attempt to circumvent the access controls placed on this file is a violation of United States and international copyright laws, and is subject to criminal prosecution. |
DATE ORIGINAL | 2002 |
Time Period |
2000s (2000-2009) |
ORIGINAL FORMAT | Born Digital |
Source Identifier | LG 4.8:T 19/ 2002 |
DIGITAL IDENTIFIER | 02taxbk.pdf |
DIGITAL FORMAT | PDF (Portable Document Format) |
REPOSITORY | Arizona State Library, Archives and Public Records. |
File Size | 1344803 Bytes |
Full Text | STATE OF ARIZONA 2002 Tax Handbook Prepared by the Staff of the Joint Legislative Budget Committee JLBC CONTENTS Page No. Foreword ..................................................................................................................................................................................... i Overview of Arizona Taxes ..................................................................................................................................................... iii GENERAL FUND SALES AND USE TAXES A. Transaction Privilege Tax................................................................................................................................................. 1 B. Use Tax................................................................................................................................................................................ 16 C. Severance Tax on Metalliferous Minerals ....................................................................................................................... 19 D. Jet Fuel Excise and Use Tax.............................................................................................................................................. 21 E. Rental Occupancy Tax...................................................................................................................................................... 23 D. Severance Tax on Timber.................................................................................................................................................. 25 INCOME TAXES A. Individual Income Tax....................................................................................................................................................... 27 B. Corporate Income Tax....................................................................................................................................................... 44 PROPERTY TAXES ................................................................................................................................................................... 53 LUXURY TAXES AND LICENSES A. Luxury Tax on Cigarettes and Tobacco.......................................................................................................................... 67 B. Luxury Tax on Liquor ........................................................................................................................................................ 71 C. Alcoholic Beverage License Fees ................................................................................................................................... 74 INSURANCE PREMIUM TAX................................................................................................................................................ 79 ESTATE TAX............................................................................................................................................................................. 83 OTHER REVENUE SOURCES A. Bingo License and Lieu Tax............................................................................................................................................. 85 B. Boulder Canyon Projects - In Lieu Payments ................................................................................................................. 87 C. Commercial Nuclear Generating Station Assessment ................................................................................................... 88 D. Lieu Tax on Private Railroad Car Companies .................................................................................................................. 91 E. Pari-Mutuel Tax.................................................................................................................................................................. 93 F. Voluntary Contributions by Municipalities .................................................................................................................... 96 Contents OTHER FUNDS PAYMENTS IN LIEU OF PROPERTY TAXES A. Aircraft License Tax........................................................................................................................................................... 99 B. Flight Property Tax............................................................................................................................................................ 101 C. Vehicle License Tax........................................................................................................................................................... 105 D. Voluntary Contributions by Districts .............................................................................................................................. 110 E. Voluntary Contributions by the Game and Fish Commission ...................................................................................... 113 F. Watercraft License Tax..................................................................................................................................................... 115 G. Government Property Lease Excise Tax........................................................................................................................... 117 HIGHWAY USER TAXES A. Aviation Fuel Tax............................................................................................................................................................... 121 B. Motor Carrier Fee ............................................................................................................................................................... 123 C. Motor Vehicle Fuel Tax..................................................................................................................................................... 126 D. Use Fuel Tax....................................................................................................................................................................... 129 MISCELLANEOUS REVENUE SOURCES A. Intrastate Utility Corporation Assessments ................................................................................................................... 131 B. Lieu Tax on Workers' Compensation Insurance Premiums .......................................................................................... 134 C. Telecommunication Services Excise Tax......................................................................................................................... 137 D. Underground Storage Tank Tax...................................................................................................................................... 141 E. Unemployment Insurance Tax......................................................................................................................................... 144 F. Water Use Tax.................................................................................................................................................................... 151 Joint Legislative Budget Committee 1716 West Adams Phoenix, Arizona 85007 Phone: (602) 542-5491 Email: jlbcwebmaster@azleg.state.az.us JLBC Website: http://www.azleg.state.az.us/jlbc.htm i FORWARD The 2002 Tax Handbook provides Legislators and the interested public with collection and distribution numbers for the taxes levied by the state, as well as summaries of all tax law revisions enacted in the 1996 through 2002 legislative sessions. A listing of tax law changes prior to the 1996 legislative session is available on the Joint Legislative Budget Committee (JLBC) web-site located at www.azleg.state.az.us/jlbc.htm. The 2002 version of the Tax Handbook makes some changes to the format used in previous editions. Foremost among these is an emphasis on describing and displaying the dollar impact of tax law changes. In the 2002 Tax Handbook, we attempt to describe in the narrative the impacts, if quantifiable, of tax law changes passed in recent sessions. In addition, an itemized list of incremental tax law changes has been included for every tax category that experienced a tax law change with an incremental impact in FY 1996 through FY 2002. By including this information we hope the handbook will be more useful to readers. The organization of the 2002 Tax Handbook has been revised from earlier handbooks. The chapters are organized by revenue category under General Funds and Other Funds. The sections within each chapter are generally organized from the largest revenue category to the smallest. Each entry in the handbook has been organized into a consistent format which includes the following sections (where applicable): · Description – a comprehensive narrative description of the tax or revenue source. · Distribution – a 20-year history of collections and a description of how the tax is distributed by fund, or shared with other jurisdictions such as cities and towns. · Who Pays the Tax – a description of who is legally responsible for the payment of the tax or fee. · Tax Base and Rate – a definition of the tax base, a discussion of exemptions if any, and a description of the tax rate(s). · Tax Refunds and/or Credits – a description of circumstances under which tax refunds are made, and/or credits are allowed. · Payment Schedule – due dates, delinquency dates, and payment schedules, as well as an explanation of how the tax or fee is remitted to the state. · Impact of Tax Law Changes – includes tax law changes from 1996 through 2002. As noted above, tax law changes prior to 1996 are available on the JLBC web-site. Finally, because fiscal year 2002 only recently ended, actual revenue collections for FY 2002 are unavailable, and are not included. iii OVERVIEW OF ARIZONA TAXES Taxes represent the most visible and important revenue source for Arizona. Other forms of revenue such as fees, assessments, and federal grants do exist, but taxes are the primary method by which the state provides goods and services to its citizenry. There are many different types of taxes. Some are obvious and well known, such as the sales tax and the income tax. Others are more obscure, such as the telecommunication services excise tax and the intrastate utility corporation assessment. Taxes also vary widely in terms of their revenue generating capacity. The state sales tax produces $3 billion per year, while at the other end of the spectrum, voluntary contributions by the Game and Fish Department produce just $12,000 a year. The revenues from Arizona’s different taxes are deposited in a number of funds. The largest fund is the General Fund. In FY 2002, total General Fund revenue was $6.7 billion. The state budget is paid for from this fund. While revenues from numerous taxes are deposited in the General Fund, there are 3 taxes that constitute the bulk of General Fund collections: the sales tax, the individual income tax, and the corporate income tax. In FY 2002, the Big Three, as they are called, represented approximately 87% of General Fund revenues, which is lower than in the past few years. In FY 2002, the Legislature enacted approximately $500 million in non-tax revenue enhancements in order to overcome revenue shortfalls for the fiscal year, and to provide a balanced budget. These actions resulted in a higher relative percentage in the “other “ category, and lower percentages in the individual and corporate income tax categories, where the primary shortfalls occurred. It also should be noted that the chart below does not include Proposition 301 sales tax revenues. A discussion of Arizona’s taxes usually begins with the Big Three, but it should not end there, for the state levies many other taxes. Some of the other taxes generate sizable amounts of revenue, but because their collections are not deposited in the General Fund there is a tendency for these taxes to get overlooked. For example, the motor vehicle fuel tax generated $436 million in FY 2001 and the unemployment insurance tax over $200 million. However, their collections were deposited in the Highway User Revenue Fund and the Unemployment Compensation Fund, respectively. Sources of FY 2002 General Fund Revenue Other 13% Individual Income Tax 33% Sales Tax 48% Corporate Income Tax 6% iv This handbook provides a listing and description of the taxes levied by the State of Arizona. It shows revenue collection amounts and tax distributions by fund. In addition, this year’s book makes an effort to estimate the dollar impact of tax law changes that have incremental impacts in FY 2002 and FY 2003. The table below summarizes the impacts of these tax law changes. ESTIMATED IMPACT OF TAX LAW CHANGES Revenue Category FY 2002 FY 2003 Sales and Use Tax $ (1,764.6) $ (40.0) Individual Income Tax $ 19,825.3 $ 4,434.5 Corporate Income Tax $ (37,459.6 $ 22,267.0 Property Tax $ (2,234.9) $ (1,738.3) Estate Tax $ 0.0 $ (18,830.0) GENERAL FUND SALES AND USE TAXES - 1 - TRANSACTION PRIVILEGE TAX DESCRIPTION The transaction privilege tax is Arizona’s version of a sales tax. Across the United States, there are 13 states that levy a transaction privilege tax, 17 states that employ a sales tax, and another 15 states that impose a hybrid tax. All three types of taxes are levied upon consumer spending, but they differ with regard to the legal burden of the tax. Under Arizona’s transaction privilege tax, the seller is responsible for remitting to the state the entire amount of tax due based on the gross proceeds or gross income of the business. The seller may include the tax in the purchase price or absorb the tax. Because of its similarity to the sales tax, the transaction privilege tax is often referred to as a sales tax. The sales tax consists of many different tax categories. The largest of these, the retail sales tax, comprises half of total sales tax revenues. Other large sales tax categories include contracting, utilities, and restaurants and bars. Chart 1 illustrates the relative importance of the major categories. A full listing of all sales tax classifications is provided in Table 2. The sales tax is the state’s single largest revenue source, representing approximately 53% of total General Fund revenues in FY 2002 (including the sales taxes collected under Proposition 301). A significant portion of state sales tax revenues is shared with the counties and cities. This revenue sharing occurs through the distribution base, described in further detail in Distribution Section below. Beginning in June, 2001, the sales tax rate for most categories rose from 5.0% to 5.6%, with the extra 0.6% being dedicated to education. This tax increase was approved by voters, and is commonly known as Proposition 301. DISTRIBUTION Transaction privilege tax revenues are shared with Arizona’s counties and cities through a complex system of formulas established in statute. See Table 1 for amounts distributed. Legislative changes to the state sales tax usually have local government impacts, unless otherwise specified through hold harmless provisions (provisions designed not to harm local governments). Distribution. The Department of Revenue transmits all sales tax revenues to the State Treasurer, separately accounting for payments of estimated taxes, the transient lodging tax, transaction privilege and severance taxes on mining and timber collected from businesses located on Indian reservations, and education sales taxes. The aforementioned tax collections have dedicated uses. All other transaction privilege tax revenues are credited to a clearing account. Revenues designated by statute for the distribution base (see Tables 1 and 2) are divided among the state, the counties and the cities. The remaining monies (non-shared) are directly credited to the General Fund, except as needed for school capital finance pursuant to A.R.S. § 42-5030.01, part of the Students FIRST legislation [A.R.S. § 42-5029]. Components of Sales Tax Revenues Other 19% Restaurants & Bars 8% Utilities Retail 8% 50% Contracting 15% Chart 1 Transaction Privilege Tax - 2 - Table 1 TAX COLLECTIONS AND DISTRIBUTION (20 year history)* Fiscal Year General Fund Cities Counties Total FY 2001 $2,984,082,031 $312,676,402 $506,661,075 $3,803,419,508 FY 2000 $2,829,307,415 $299,386,513 $485,126,158 $3,613,820,086 FY 1999 $2,577,768,324 $272,402,244 $441,400,596 $3,291,571,164 FY 1998 $2,367,883,017 $253,826,710 $411,300,801 $3,033,010,528 FY 1997 $2,211,158,987 $240,264,373 $389,324,389 $2,840,747,749 FY 1996 $2,103,275,229 $233,196,324 $377,871,323 $2,714,342,876 FY 1995 $1,968,613,472 $219,908,226 $356,339,289 $2,544,860,987 FY 1994 $1,787,609,451 $200,069,251 $304,745,483 $2,292,424,185 FY 1993 $1,626,535,290 $184,318,955 $280,754,631 $2,091,608,876 FY 1992 $1,503,124,515 $170,654,277 $259,940,595 $1,933,719,387 FY 1991 $1,447,942,088 $163,823,044 $249,535,260 $1,861,300,392 FY 1990 $1,442,587,551 $159,021,328 $242,221,287 $1,843,830,166 FY 1989 $1,340,809,656 $151,056,680 $230,089,535 $1,721,955,871 FY 1988 $1,249,832,747 $136,876,722 $208,490,623 $1,595,200,092 FY 1987 $1,199,589,750 $129,753,925 $197,641,179 $1,526,984,854 FY 1986 $1,150,175,481 $122,598,867 $186,674,822 $1,459,449,170 FY 1985 $1,070,654,725 $114,972,699 $174,179,683 $1,359,807,107 FY 1984 $ 854,824,687 $105,144,271 $181,255,017 $1,141,223,975 FY 1983 $ 616,291,719 $ 93,527,936 $135,951,094 $ 845,770,749 FY 1982 $ 580,882,821 $ 91,596,747 $129,829,407 $ 802,308,975 * The figures displayed in this table include revenues collected from the sales tax and its affiliated taxes – the use tax, mining and timber severance taxes, jet fuel taxes, and the rental occupancy tax. Revenues collected from the 0.6% education tax go directly toward education programs. For a more extensive discussion of the specific uses of education tax revenues, please refer to pages 180-181 of the FY 2002 and FY 2003 Appropriations Report. Monies in the distribution base are allocated on a monthly basis in the following way: – 25% is paid to the cities in proportion to their population based on the last U.S. decennial or special census. – 40.51% is paid to the counties according to the formula described below. – The remaining 34.49% is retained by the state and used to make various allocations and appropriations specified by statute. In total, the counties receive 40.51% of distribution base revenues. This amount is divided among the 15 counties in the following way: 1) 38.08% is paid by averaging: (a) The proportion that the population of each county bears to the total state population based on the most recent census, and; (b) The proportion that the distribution base monies collected during the month in each county bear to the total of distribution base monies collected statewide for the month. 2) 2.43% is distributed to counties receiving less under the population formula than under the old property valuation formula, to hold the counties harmless from the change in distribution methods that occurred with the passage of Laws 1994, 8th Special Session, Chapter 8. Any amount left after this distribution is distributed based on the new population formula. The remaining 34.49% of distribution base revenues is allocated for various purposes, including school capital finance, multipurpose facilities, counties that enter into an intergovernmental agreement with the Department of Transaction Privilege Tax - 3 - Transportation for construction of a bridge, and the Tourism and Sports Authority (TSA). The TSA’s share of distribution base monies is equal to the amount of sales taxes collected at Arizona Cardinals football games. In addition, some monies are transferred to the Water Quality Assurance Revolving Fund, as required by A.R.S. § 49- 282. After these distributions have been made, the remainder is credited to the General Fund. From this amount, the following distributions are subject to appropriation: 1) The Department of Revenue receives monies sufficient to cover administrative expenses. 2) The Department of Economic Security receives monies for the purposes stated in Title 46, Chapter 1 (public welfare, out-of-wedlock pregnancy prevention, and aging). 3) The Tourism Fund receives 3.5% of last year’s gross transient lodging tax revenues, 3.0% of last year’s gross amusement tax revenues, and 2.0% of last year’s gross restaurant and bar tax revenues. 4) The Arts Endowment Fund receives the amount by which amusement tax revenues for the current fiscal year exceed the revenues that were derived from the amusement tax in FY 1994, up to a maximum of $2,000,000. This distribution will expire at the end of FY 2007. 5) The Shooting Range Relocation and Assistance Fund receives $50,000 derived from retail sales taxes collected during the current fiscal year. WHO PAYS THE TAX Persons or companies engaging in business in the state are legally responsible for payment of the tax. However, in practice transaction privilege taxes are passed on to consumers [A.R.S. § 42-5001]. TAX BASE AND RATE In general, the tax base is the gross proceeds of sales or gross income derived by a person from a taxable business. However, there are variations between the tax bases of the different classifications of the transaction privilege tax, as specified in A.R.S. § 42-5061 – A.R.S. § 42-5077. Notably, the contracting tax has a unique tax base. The tax base for contractors is 65% of the value of a contract, based on the assumption that labor costs represent 35% of the value of a contract [A.R.S. § 42-5023]. Exemptions. There are numerous (over 100) sales tax exemptions provided in statute, such as exemptions for food and medicine. The effect of these exemptions is to reduce the size of the tax base. See Table 2 for specific tax exemption statutes for each sales tax classification. For a complete list of all sales tax exemptions, see the Department of Revenue’s publication, The Revenue Impact of Arizona’s Tax Expenditures [A.R.S. § 42-5002 and A.R.S. § 42-5061 – A.R.S. § 42-5077]. Tax Rates. Once the net tax base is computed, it is multiplied by the applicable tax rate to derive the total tax due. The tax rates vary according to the business classification of the taxable activity. Most categories, however, are taxed at the rate of 5.6%. Table 2 on the following page lists the tax rates for each classification. In addition, a complete list of sales tax rates by all Arizona cities, including the tax rates levied by state, county, and city governments, is provided in Attachment A at the end of this section [A.R.S. § 42-5010]. TAX REFUNDS AND/OR TAX CREDITS Motion Picture Production Tax Refund. Sales tax refunds are rare. However, statute does permit refunds for motion picture companies and commercial advertising production companies that satisfy certain criteria [A.R.S. § 42-5015]. Telecommunications Service Assistance Program. Local exchange telephone companies may claim a tax credit for rate reductions given to elderly low-income persons [A.R.S. § 42-5016]. Accounting Allowance. A taxpayer may claim a tax credit of 1% of the amount of tax due, not to exceed $10,000 in any calendar year. This credit is designed to reimburse taxpayers for expenses incurred in accounting for and reporting sales tax payments [A.R.S. § 42-5017]. Transaction Privilege Tax - 4 - PAYMENT SCHEDULE Due Dates. Transaction privilege taxes are due to the Department of Revenue every month on or before the 20th day of the month after the month in which the tax accrues. For example, for taxable sales made in January, a tax payment is due to the Department of Revenue by February 20 [A.R.S. § 42-5014]. Table 2 TRANSACTION PRIVILEGE TAX CLASSIFICATIONS Classification A.R.S. Exemption Statute Tax Rate Distribution Base 1/ Non-Shared Base 2/ Education 3/ Retail 42-5061 5.6% 40% of first 5.0% 60% of first 5.0% 0.6% Increment Transporting 42-5062 5.6% 20% of first 5.0% 80% of first 5.0% 0.6% Increment Utilities 42-5063 5.6% 20% of first 5.0% 80% of first 5.0% 0.6% Increment Telecommunications 42-5064 5.6% 20% of first 5.0% 80% of first 5.0% 0.6% Increment Publication 42-5065 5.6% 20% of first 5.0% 80% of first 5.0% 0.6% Increment Job Printing 42-5066 5.6% 20% of first 5.0% 80% of first 5.0% 0.6% Increment Pipeline 42-5067 5.6% 20% of first 5.0% 80% of first 5.0% 0.6% Increment Private Car Line 42-5068 5.6% 20% of first 5.0% 80% of first 5.0% 0.6% Increment Transient Lodging 42-5070 5.5% 50% 50% None Personal Property Rental 42-5071 5.6% 40% of first 5.0% 60% of first 5.0% 0.6% Increment Mining 42-5072 3.125% 100% 0% None Amusement 42-5073 5.6% 40% of first 5.0% 60% of first 5.0% 0.6% Increment Restaurant and Bar 42-5074 5.6% 40% of first 5.0% 60% of first 5.0% 0.6% Increment Prime Contracting 42-5075 5.6% 20% of first 5.0% 80% of first 5.0% 0.6% Increment Owner Builder 42-5076 5.6% 20% of first 5.0% 80% of first 5.0% 0.6% Increment Membership Camping 42-5077 5.6% 40% of first 5.0% 60% of first 5.0% 0.6% Increment 1/ Represents the portion of revenues that is designated for the distribution base. 2/ Represents the portion of revenues that is designated for the non-shared base. 3/ Represents the portion of revenues that is designated for education. Delinquency Dates. Tax payments are delinquent if not postmarked on or before the 25th day of the month or received by the Department of Revenue on or before the next-to-last business day of the month. Alternative Payment Schedules. The department may authorize different payment schedules depending on the taxpayer’s estimated tax liability or transient nature of the business. Taxpayers with an estimated annual tax liability of $500 or less may pay on an annual basis. Taxpayers with an estimated annual tax liability of between $500 and $1,250 may pay on a quarterly basis. Taxpayers whose business is of a “transient character” may be required to pay on a daily, weekly, or transaction-by-transaction basis. Estimated Tax Payments. Taxpayers who pay income taxes and whose business had an annual sales tax liability in the preceding calendar year of $100,000 or more must make a single estimated advance payment in June of each year. Normally, the full June tax bill would be due on July 20. This estimated payment is in addition to the regular June sales tax liability (which represents May sales). The amount of the estimated payment is equal to either 1) one-half of what was owed in May of the current year, or 2) the actual tax liability for the first 15 days of June. Estimated payments are due by June 20. In July of each year, those taxpayers who made estimated payments in the preceding month may subtract the amount of June’s estimated payment from their July tax bill. Transaction Privilege Tax - 5 - When the estimated payments program was first enacted in 1989, the estimated payments provided a one-time boost to state revenues by advancing a portion of the next fiscal year’s revenues into the current fiscal year. If the program is ever eliminated (as is periodically proposed), it would entail a one-time cost to state revenues. This is because every July taxpayers make a “claim” for the preceding month’s estimated payment, and every June taxpayers make a counterbalancing estimated payment. Eliminating the June payment leaves the July claim without a counterbalance – and the state with a one-time cost. Collection. The Department of Revenue may enter into agreements with cities and towns that levy transaction privilege taxes to provide a uniform method of administration, collection, and auditing of sales taxes. In FY 2000, the department collected transaction privilege and use taxes for some 75 Arizona cities and towns (see the department’s 2001 Annual Report) [A.R.S. § 42-6001]. IMPACT OF TAX LAW CHANGES The following section is a summary by year of tax law changes that have been enacted by the Legislature since 1996. A listing of tax law changes prior to the 1996 legislative session is available on the JLBC web-site located at www.azleg.state.az.us/jlbc.htm. The estimated dollar impact of the tax law changes is summarized by fiscal year in the following table: Table 3 ESTIMATED MARGINAL DOLLAR VALUE OF TAX LAW CHANGES 1/ Fiscal Year Impact 2003 $ (40,000) 2002 $ (1,764,600) 2001 $ (4,892,000) 2000 $ (8,402,300) 1999 $ (3,684,200) 1998 $(59,907,900) 1997 $(23,449,300) 1/ Excluding Proposition 301 revenue. Estimates made by JLBC Staff 2002 TAX LAWS Laws 2002, Chapter 288 requires the Tourism and Sports Authority (TSA) to select a site host for the multipurpose facility by September 12, 2002, or seek voter approval for the continuation of the TSA. If the voters terminate the TSA, the requirements that the Department of Revenue separately account for revenue collected in connection with a multipurpose facility, and that the tax revenues collected on professional athlete income be distributed to the TSA, would be repealed. Laws 2002, Chapter 307 clarifies the definitions of lawn maintenance service and landscaping activities, and that income received from landscaping activities are subject to the contracting classification of the sales tax. The fiscal impact of this legislation can not be determined. (Effective September 1, 2002) 2001 TAX LAWS Laws 2001, Chapter 137 provided exemptions from the retail sales and use taxes for food and drinks purchased by hotels and served to guests. This bill is estimated to have minimal fiscal impact. (Effective June 8, 1994) Transaction Privilege Tax - 6 - 2000 TAX LAWS Laws 2000, Chapter 33 clarified that the post-construction treatment of real property for termite and other wood-destroying pests is exempt from the prime contracting tax, but pretreatment remains taxable. This act is estimated to have no fiscal impact. (Effective January 1, 1994) Laws 2000, Chapter 214 allowed contractors to deduct the cost of solar energy devices that they install from their prime contracting tax base, up to a maximum allowable deduction of $5,000. This provision is estimated to have a General Fund cost of $(40,700) in FY 2001. The deduction is set to expire at the end of 2010. (Effective January 1, 1997) Laws 2000, Chapter 297 continued the Municipal Tax Code Commission for another five years, until 2005. The Commission exists to promote uniformity and consistency among the sales taxes levied by the different Arizona cities. (Effective July 1, 2000) Laws 2000, Chapter 359 provided contracting tax exemptions for the construction of a spaceport launch site and for domestic violence shelters. The launch site exemption is estimated to have no fiscal impact to the existing revenue base, since there are currently no launch sites in the state. This provision becomes effective July 18, 2000. The domestic violence shelter exemption is projected to cost the General Fund $(18,400) in FY 2000 and another $(18,300) in future years. This provision becomes effective retroactive to July 1, 1999. Laws 2000, Chapter 372 established a Tourism and Sports Authority in Maricopa County, subject to voter approval in November 2000, for the purpose of financing a new football stadium for the Arizona Cardinals, promoting tourism in Maricopa County, making additional Cactus League stadium improvements, and constructing new recreational facilities. The Authority would receive funds resulting from a countywide 1% increase in the transient lodging tax and a 3.25% increase in the car rental tax (less $2.50 on each car rental dedicated to Cactus League stadium improvements). The tax increase would become effective upon the Governor’s signature within 30 days after the election. In addition, the Authority would receive the transaction privilege taxes collected at Cardinals football games. This is estimated to reduce General Fund sales tax collections by $(1,512,500) beginning in FY 2002. The Authority would also receive the income taxes paid by Arizona Cardinals football players. This provision has an estimated cost of $(2,718,600) beginning in FY 2002. Conditional upon voter approval, this legislation would also provide the Office of Tourism with an alternative funding source. The funding formula would annually provide the Office of Tourism with 3.5% of transient lodging tax revenues collected in the previous year, 3.0% of amusement tax revenues collected in the previous year, and 2.0% of restaurant and bar tax revenues collected in the previous year. This new funding formula would generate about $1,695,800 more in FY 2002 for the Office of Tourism than it is otherwise expected to receive. This provision would become effective July 1, 2001. The voters approved this measure in the November 2000 election. Laws 2000, Chapter 375 changed the method for funding the Office of Tourism by directing 52.66% of the state’s share of the distribution base monies collected from the transient lodging tax to the Tourism Fund. However, the act stipulates that this change is repealed if Maricopa County voters approve Laws 2000, Chapter 372 in the November 2000 elections, as Chapter 372 provides an alternative funding formula for the Office of Tourism. The revised funding method in Chapter 375 has no fiscal impact, since it is intended to merely replace – not augment – the General Fund appropriations that the Office of Tourism currently receives. This provision becomes effective July 1, 2001. As Maricopa County voters did approve Laws 2000, Chapter 372, this act (Chapter 375) was repealed. The act also authorized Pima County to hold an election on whether to raise the county’s transient lodging tax rate by 1% in order to promote tourism in that county. This provision has no state fiscal impact. If approved, the additional tax would become effective on the first day of the month beginning 90 days after the election and would be in effect for 30 years. This tax increase was subsequently rejected by the voters of Pima County. Laws 2000, Chapter 397 prohibited the imposition of transaction privilege taxes on interstate telecommunication services. The act also prohibited the state and cities from levying sales taxes on Internet access fees. The bill has no Transaction Privilege Tax - 7 - fiscal impact for the state since no state taxes are currently being levied on interstate telecommunications services or Internet access. (Effective July 18, 2000) Laws 2000, Chapter 401 provided sales and use tax exemptions for purchases of aircraft, navigational, and communication instruments and other accessories and related equipment made by persons holding supplemental air carrier certificates under federal aviation regulations. It authorized refunds for taxes paid since the bill’s retroactive date, but the total amount of refunds is capped at $10,000. This act is estimated to cost the state $10,000 in FY 2001. (Effective June 1, 1998) Laws 2000, 5th Special Session, Chapter 1 (referred to and approved by voters as Proposition 301 in the November 2000 general election) raised the transaction privilege tax from 5.0% to 5.6% in order to increase funding for K-12 and higher education. It also provided for the distribution of the increased tax rate to various education related areas including debt service on school improvement revenue bonds, increased teacher salaries, technology and research, school safety programs, and the classroom site fund. (Effective May 31, 2001) 1999 TAX LAWS Laws 1999, Chapter 87 expanded the transaction privilege and use tax exemptions for machinery and equipment used to meet or exceed the rules and regulations of the United States Nuclear Regulatory Commission. This provision is effective retroactive to May 19, 1977. Refunds are authorized for past taxes paid, but the total amount of refunds is capped at $10,000. The bill also clarified that electricity sold to out-of-state customers is exempt from the sales and use taxes, and provided sales and use tax exemptions for railroad equipment used to transport persons or property. The electricity provision is effective January 1, 1999. Laws 1999, Chapter 153 revised the definition of expendable materials. Current law specifies that expendable materials used in industry are not deductible from the transaction privilege and use tax base. This act defined expendable materials as those items that are ancillary to the operation or use of tangible personal property that is already deductible under current law. The cost or useful life of the property does not determine whether it can be included under the allowed deductions. The bill is effective retroactive to May 19, 1977, and refunds are authorized for taxes paid since that date. The total amount of refunds is capped at $100,000. Laws 1999, Chapter 162 made various changes to the statutes governing multipurpose stadium districts. Payments of transaction privilege tax revenues to stadium districts were increased by allowing a diversion of taxes paid by businesses adjacent to a multipurpose facility. It authorized payments to a county stadium district of one-half of all sales tax revenues received two months prior from persons doing business at a multipurpose facility site or in the construction of a multipurpose facility. The payments are limited to the net new revenues and are continued for a length of 10 years. The diverted transaction privilege taxes may be used for operation and maintenance expenses, as well as to retire bonds. (Effective July 1, 1998) Laws 1999, Chapter 165 repealed or limited the use of tax increment financing to pay for large municipal projects. Retroactive to January 1, 1999, it repeals the ability of cities to use tax increment financing for redevelopment zones. Effective September 1, 1999, it also repeals the ability of counties to use tax increment financing for construction of theme parks. In addition, it conditionally repeals the ability of multipurpose facility districts to levy a transaction privilege tax to finance projects. This conditional repeal is effective November 3, 1999, unless by this date, in at least one district, voters have voted to fund a project. Laws 1999, Chapter 167 allowed a sales and use tax deduction for machinery or equipment used in connection with natural gas pipelines to meet or exceed federal and state pollution standards. (Effective August 6, 1999) Laws 1999, Chapter 180 provided an exemption under the retail sales classification of the transaction privilege tax for sales of spirituous, vinous, or malt liquor by licensed liquor wholesalers. Refunds are authorized for taxes paid by liquor wholesalers since December 31, 1990, but only if the taxpayer furnishes evidence that the refund amount will be paid to the person actually bearing the incidence of the tax. (Effective January 1, 1991) Laws 1999, Chapter 183 returned to qualifying Indian tribes the amount of transaction privilege tax revenue received from all sources located on the Indian reservation in order to provide support for community colleges owned and operated by the tribes on their reservation. The amount of sales tax revenue transferred to a qualifying Transaction Privilege Tax - 8 - tribe is limited to a maximum of $1,500,000 in FY 2001 and $1,750,000 each fiscal year thereafter. (Effective July 1, 2000) Laws 1999, Chapter 225 established the Uniform Transaction Privilege Tax Study Committee to study the impact of eliminating the Model City Tax Code and replacing it with a uniform state and local transaction privilege tax base. The Committee is required to submit its findings by December 15, 1999. (Effective August 6, 1999) Laws 1999, Chapter 246 extended transaction privilege and use tax exemptions to sales of tangible personal property used in environmental remediation. It also expanded the existing prime contracting tax exemption to contracts for specified activities related to environmental remediation. (Effective January 1, 1997) Laws 1999, Chapter 264 established the Study Committee on Internet Privacy, Jurisdiction, Regulation, and Taxation to analyze Internet taxation, privacy, and regulation issues. The Committee is required to report its findings by December 1, 1999. (Effective August 6, 1999) Laws 1999, Chapter 267 provided sales and use tax exemptions for tangible personal property sold to a nonprofit charitable organization that provides apartment housing to low income persons over the age of 62 in a facility that qualifies for a federal housing subsidy. It also allowed a prime contracting tax deduction for income derived from a contract entered into for the construction of such housing facilities for low income persons. (Effective July 1, 2001) Laws 1999, Chapter 288 allowed all counties except Maricopa County to establish a capital projects tax to pay for the purchase or construction of buildings, roads, or other facilities. The tax base is the same as the transaction privilege tax base. The tax rate may not, in combination with the county excise tax for roads, exceed 10% of the transaction privilege tax rate. The capital projects tax is not permitted to last for more than 20 years. (Effective August 6, 1999) Laws 1999, Chapter 290 made a number of procedural and administrative changes relating to the Department of Revenue and the enforcement of tax statutes. It required a person operating a business under two or more names to obtain a transaction privilege license for each name. It also stipulated that if a purchaser provides incomplete or inaccurate information to a seller in order for a transaction to be deducted from the sales tax, that purchaser becomes liable for the tax and any penalties and interest that the seller would have been required to pay if the purchaser had provided accurate information. In addition, it clarified that an organization that qualifies under the Internal Revenue Code as a charitable organization is exempt from the transaction privilege and use taxes. (Effective August 6, 1999) Laws 1999, Chapter 304 exempted from the transient lodging classification of the transaction privilege tax any activities that are already taxed under a different classification. This bill was needed to prevent double taxation in cases in which businesses engaged in transient lodging charge fees for amusement activities that they provide. Under current law, these fees were subject to both the transient lodging and amusement taxes. The bill is intended to rectify this problem. Also, the act granted amusement tax exemptions for the income received from sales to persons or entities engaged in the transient lodging classification under certain circumstances. Because of a drafting error in the way this bill was written, it would have resulted in far-reaching unintended consequences. Instead of applying to only the transient lodging, transportation, and amusement classifications, it actually applied to all classifications within the transaction privilege tax. To correct this error, the bill was repealed and replaced by Laws 1999, 2nd Special Session, Chapter 2. Laws 1999, Chapter 322 earmarked $50,000 of retail sales tax collections to the Shooting Range Relocation and Assistance Fund in each fiscal year. (Effective August 6, 1999) Laws 1999, 2nd Special Session, Chapter 2 fixed a drafting error in Laws 1999, Chapter 304. It corrected the inadvertent granting of a transaction privilege tax exemption to businesses that have proceeds subject to taxation under more than one sales tax classification. Instead, this bill provides exemptions from only the transient lodging, transportation, and amusement tax classifications to businesses that receive proceeds from bundled activities that are subject to taxation from more than one classification. The effect of the bill is to prevent double taxation. (Effective June 30, 1993) 1998 TAX LAWS Transaction Privilege Tax - 9 - Laws 1998, Chapter 88 provided an exemption under the transporting classification of the transaction privilege tax for the proceeds of sales resulting from the shipment of freight or property, by a railroad operating exclusively in Arizona, as part of a single shipment that involves more than one railroad and that originates or terminates across the state line. (Effective January 1, 1988) Laws 1998, Chapter 90 exempted from the prime contracting tax the gross proceeds of sales or gross income attributable to the purchase of machinery, equipment, or other personal property. The act provided contracting tax exemptions for purchases used in a wide range of activities, including qualifying health care organizations, manufacturing, telecommunications, and oil and gas extraction, among others. (Effective January 1, 1999) Laws 1998, Chapter 105 codified the historical tax treatment of pipelines, the machinery and equipment used to operate pipelines, and the use of pipelines by hospitals. Specifically, it extended retail and use tax exemptions to include the parts used to operate pipes and valves that are at least four inches in diameter and used to transport oil, natural gas, artificial gas, water, or coal slurry. In addition, an exemption from the pipeline classification of the transaction privilege tax is provided for the income derived from pipeline services to qualifying hospitals and qualifying health care organizations if the oil and gas being transported is used to provide health and medical related educational and charitable services. (The provision regarding parts used to operate pipes and valves is effective December 3, 1981. The health care provision is effective July 2, 1989.) Laws 1998, Chapter 132 exempted from the retail and use tax the chemicals used directly in the production process of a printing operation. A printing operation is defined as a commercial printing operation and includes job printing, engraving, embossing, copying, and book binding. (Effective January 1, 1999) Laws 1998, Chapter 165 increased the threshold limits for quarterly and annual payments of the sales tax. Previously, taxpayers were allowed to make quarterly payments if their annual sales tax liability was between $200 and $500, and annual payments were permitted if their annual liability was less than $200. Under this act, quarterly payments are allowed for taxpayers with a sales tax liability between $500 and $1,250, and annual payments are permitted for those with a liability of less than $500. (Effective January 1, 1999) Laws 1998, Chapter 177 authorized transaction privilege tax exemptions for leases or rentals of aircraft, flight simulators, or similar training equipment to students or staff by nonprofit educational institutions that offer degrees in aviation or aerospace related fields. (Effective July 1, 1988) Laws 1998, Chapter 206 exempted prepaid calling cards that are taxable under the retail classification of the sales tax from the telecommunications classification of the sales tax. (Effective January 1, 1999) Laws 1998, Chapter 221 allowed sales and use tax exemptions for the lease or purchase of new alternative fuel vehicles and for the lease or purchase of equipment used to convert a conventional vehicle to an alternative fuel vehicle. (Effective January 1, 1999) Laws 1998, Chapter 225 authorized Maricopa County to levy a jail facilities excise tax, subject to voter approval in the 1998 general election, that would raise the transaction privilege tax rate in the county by one-fifth of one percent for nine years or until $900 million is collected, whichever comes first. The County Board of Supervisors is permitted to modify the tax rate. Monies collected are to be used to finance and construct new jail facilities, to maintain and operate jail facilities, and to fund specified programs to reduce the expense of jail facilities. This measure was approved by voters. (Effective August 21, 1998) Laws 1998, Chapter 272 prohibited cities, towns, and other taxing jurisdictions from levying any taxes or fees on the gross proceeds of sales or gross income derived from incarcerating or detaining prisoners in a privately operated prison. (Effective April 1, 1987) Transaction Privilege Tax - 10 - Laws 1998, Chapter 286 provided a broad range of sales tax exemptions and income tax credits designed to promote the use of pollution control devices. Exemptions from retail, contracting, and use taxes are given for the purchase of machinery or equipment used to control agriculture pollution and for the construction or improvement of property used to control agriculture pollution. This provision is effective January 1, 1999. In addition, the act provided retail and use tax exemptions for the purchase of machinery or equipment used for poultry farming, and a contracting tax exemption for the construction of an environmentally controlled poultry facility. This provision is effective January 1, 1998. Sales and use tax exemptions are also extended to include the purchase of machinery or equipment used in a number of industries to meet or exceed government pollution standards. This provision’s retroactive date of May 19, 1977 allows taxpayers to file for refunds of taxes paid subsequent to this date for purchases of environmental protection equipment. Refund claims must be made by December 31, 1998, and the total amount of the refunds is capped at $100,000. The act also specified that the diversion of gas from a pipeline by a person in the business of operating a pipeline, for the sole purpose of fueling compressor equipment to pressurize the pipeline, does not constitute a sale of the gas to the operator of the pipeline and is therefore not subject to the transaction privilege tax. This provision is effective January 1, 1992. Retail and use tax exemptions are extended to machinery or equipment that enables a television station to comply with the Telecommunications Act of 1996 and the Federal Communications Commission Order that mandates television stations to originate and broadcast digital television signals. However, the exemption may not be claimed for the repair or replacement of machinery and equipment for which an exemption has already been claimed. This provision is effective August 21, 1998 and is discontinued after November 1, 2009, or after a station has ceased analog broadcasting, whichever comes first. Finally, the act provided a contracting tax exemption for the income derived from the installation or maintenance of clean rooms that have received a retail tax exemption. This provision is effective retroactive to January 1, 1990, and refunds are authorized for tax payments made subsequent to this date. Laws 1998, 5th Special Session, Chapter 1 changed the distribution of the transaction privilege tax beginning in FY 2000. The newly created School Facilities Board is authorized to allocate monies from the state’s share of the distribution base and from the non-shared base to various school capital funds in order to finance school facilities. This provision is part of the Students FIRST legislation enacted in response to a court decision that required Arizona to alter the way schools are financed in this state. (Effective July 9, 1998) 1997 TAX LAWS Laws 1997, Chapter 3 provided an exemption from the commercial lease classification of the transaction privilege tax for the lease of another person s land to mine minerals (known as profit a prendre rights). The practice of taxing royalties within commercial lease agreements is also prohibited. However, the exclusion does not apply to any commercial uses that the leaseholder has to the property that are separate from the profit a prendre rights. The bill also applied the standard four year statute of limitations for Department of Revenue assessments if a taxpayer fails to report income derived from granting a right of profit a prendre. (Effective March 23, 1968) Laws 1997, Chapter 4 allocated an amount of sales tax revenue to low-wealth school districts based on a distribution formula. This bill was in response to the Roosevelt v. Bishop court case regarding school capital finance, but it was ruled unconstitutional by the court and repealed. (Effective July 1, 1997) Laws 1997, Chapter 61 clarified that cleanrooms and related machinery and equipment are exempted from sales and use taxes. The bill codified the historical administrative practice of valuing and assessing cleanrooms. (Effective July 21, 1997) Laws 1997, Chapter 109 allocated $5 million of state transaction privilege taxes over a 12-year period to Maricopa County to aid in building the Gila River Bridge. The bridge is to provide direct access to commercial, residential, and recreational facilities. (Effective October 1, 1997) Transaction Privilege Tax - 11 - Laws 1997, Chapter 110 exempted for hire commercial vehicles that are less than 12,000 pounds from the transporting classification of the transaction privilege tax, provided that an annual light motor vehicle fee of $64 has been paid for the vehicle. Payment of the fee does not, however, exempt a person from paying sales tax on transactions involving the retail sale of property or freight transported in a light motor vehicle. (Effective October 1, 1997) Laws 1997, Chapter 116 provided transaction privilege tax and use tax exemptions for wireless telecommunication equipment sold to consumers as an inducement to enter into or continue contracts for telecommunication services. The bill excludes from the transaction privilege tax the compensation received by a retailer for selling or transferring wireless telecommunication equipment to a customer as an inducement to contract for service. It also specifies that sale of such equipment to a person who holds the equipment for sale or transfer to a customer as an inducement to enter into or continue a contract for telecommunication services is a sale for resale, and consequently exempt from taxation. (Effective January 1, 1990) Laws 1997, Chapter 150 recodified Title 42 of the Arizona Tax Code, which regards property, transaction privilege, use, and luxury taxation. The bill made numerous technical changes, removed references to gender, and restructured and renumbered several statutes. It provided that the interpretation of the tax code is not to be changed solely due to changes made by the recodification. Immunities, exemptions, claims, proceedings, etc. that existed before the recodification are to remain in effect. (Effective January 1, 1999) Laws 1997, Chapter 165 allowed municipalities to each designate a commercial enhancement reuse district. These districts are required to be 25 acres or less, have recreational, commercial, and retail facilities, and have developed a lake facility by December 31, 2004. The bill provides exemptions from the prime contracting tax and the use tax for lake facility construction costs of up to $125 million. Lake facility developments must contribute to the long-term vitality of the commercial enhancement reuse district and entail an investment of at least $40 million. (Effective July 21, 1997) Laws 1997, Chapter 178 provided transaction privilege and use tax exemptions for sales of alternative fuel to a used oil fuel burner who has received a permit from the Department of Environmental Quality to burn used oil or used oil fuel. (Effective July 21, 1997) Laws 1997, Chapter 227 exempted sales of printed, photographic, electronic, or digital media materials purchased by publicly-funded libraries for public use from the transaction privilege and use tax. (Exemptions for printed or photographic materials are effective beginning August 7, 1985. Exemptions for electronic or digital media materials are effective beginning July 17, 1994.) Laws 1997, Chapter 245 authorized refunds for prime contracting taxes paid by a contractor for tangible personal property incorporated or installed in an unlicensed residential care facility operated in conjunction with a licensed nursing care institution. The refunds are given for contracting taxes paid between January 1, 1982 and July 17, 1993. Claims for refunds must be submitted by October 31, 1997, and contractors that request refunds are required to remit the refunds to the residential care facility. The residential care facility must, in turn, return the refund monies to past, current, or future residents who have paid or are paying the taxes. Finally, the interest rate paid for refunds is set at 1% per year compounded annually until June 30, 1998, and the maximum amount of refunds issued in FY 1999 is capped at $2 million. (Effective July 21, 1997) Laws 1997, Chapter 274 provided a transaction privilege and use tax exemption for food and beverage items sold to a commercial airline to be consumed by passengers on flights. The act also authorized sales and use tax exemptions for the purchase of tangible personal property by contractors for use in environmental remediation. (Exemptions for airline food and beverages are effective beginning January 1, 1982. Exemptions for property used for environmental remediation are effective on July 1, 1997.) Laws 1997, Chapter 287 assured $18 million annually in funding for the Water Quality Assurance Revolving Fund (WQARF) beginning July 1, 1999. This funding level is achieved by combining a transfer of $15 million from the corporate income tax with monies collected from various fees and appropriations. At the end of the fiscal year, if the corporate income tax transfer together with the total of the fees and appropriations is not sufficient to reach the $18 million level, the State Treasurer shall adjust the $15 million transfer of corporate income tax revenues upward Transaction Privilege Tax - 12 - in the necessary amount. If corporate income tax revenues are insufficient to supplement collected fees and appropriations, transaction privilege tax revenues are to be used. (Effective April 29, 1997) Laws 1997, Chapter 297 allowed two or more municipalities located in the same county to create a multipurpose facility district for the purpose of financing and constructing a multipurpose facility. A multipurpose facility is defined as a facility designed to accommodate sporting and entertainment, cultural, civic, meeting, or convention events. The bill authorized the use of transaction privilege tax collections and excise taxes to finance the acquisition of land, construction, maintenance, operation, and marketing of the facility. Upon voter approval, a multipurpose facility district is authorized to levy a transaction privilege tax of up to 5% of the state tax rate that was in effect on January 1, 1990 on businesses conducting sales in the district. In addition, districts with a facility that costs at least $200 million to construct and that have issued bonds are to receive from the State Treasurer half of the state transaction privilege taxes paid each year by businesses at the facility. These payments from the state continue for 10 years after the bonds are issued or until the bonds are paid in full, whichever comes first. Other funding mechanisms for generating revenue during national championship sporting events or international games hosted in the multipurpose facility are also authorized to secure the bonds, subject to voter approval. These include receiving the incremental increases in municipal transaction privilege tax revenues associated with such sporting events or international games hosted in the facility; surcharges on car rentals or recreational vehicle spaces during these events; and the imposition of an additional 1% sales tax on businesses in the transient lodging and restaurant and bar classifications during these events. (Effective July 21, 1997) Laws 1997, 1st Special Session, Chapter 3 modified the distribution of the transient lodging classification so that in FY 1998 and FY 1999 a total of 3% of the state share of the revenue collected from this classification in the prior fiscal year is deposited in the Tourism Fund. (Effective June 26, 1997) 1996 TAX LAWS Laws 1996, Chapter 93 expanded military reuse zone sales tax incentives by allowing a deduction from the prime contracting classification of the transaction privilege tax for the gross income received from a contract entered into for the construction or alteration of any building or road that provides aviation or aerospace services and that is located in a military reuse zone. (Effective April 5, 1996) Laws 1996, Chapter 99 exempted the following from the transaction privilege, use, or other similar tax: 1. Sales of warranty or service contracts. 2. Sales of motor vehicles to nonresidents if the vehicle will be used outside the state and the vendor delivers the vehicle to a destination outside the state. 3. Interest on finance contracts. 4. Dealer documentation fees on the sales of motor vehicles. (Effective July 20, 1996) Laws 1996, Chapter 141 increased the bed tax in Pima County for the benefit of spring training facilities for major league baseball teams. The act raised the bed tax rate from an allowable maximum of 1% to an allowable maximum of 2% from January 1, 1997 through December 31, 2012. During this time, up to one-half of the revenue collected from the tax will be used to enhance spring training facilities, and the remaining money will continue to go to Pima County for tourism. On January 1, 2013, the bed tax will revert to the original 1% for tourism and the additional tax for spring training baseball facilities shall be eliminated. (Effective July 20, 1996) Laws 1996, Chapter 186 established the Arizona Arts Endowment Fund to create a public-private partnership for the support of the arts in Arizona. The Arts Endowment Fund is funded by an annual appropriation from the state General Fund in an amount equal to the difference between the FY 1994 collection of amusement taxes and the current fiscal year s collection of amusement taxes, up to $2 million. Any money above $2 million more than FY 1994 amusement tax collections is to be deposited into the General Fund. This funding provision expires after FY 2007. (Effective July 1, 1997) Transaction Privilege Tax - 13 - Laws 1996, Chapter 317 reduced the tax reporting burden on small business taxpayers and the cost of tax administration on state government by allowing an alternative method for payment of transaction privilege taxes. Taxpayers may elect to pay by electronic funds transfer provided that payment is made by the twenty-fifth day of the month after the month that the tax was accrued. This payment due date is consistent with the due date of the mailed transaction privilege payments. The act further stipulated that taxpayers subject to the annual estimated transaction privilege taxes must make any electronic funds transfer by June 25. For tax reporting periods after December 31, 1996, the Department of Revenue may authorize quarterly and annual payments for taxpayers that have established sufficient payment history to indicate that they are current and in good standing. (Effective July 20, 1996) Laws 1996, Chapter 319 allowed a prime contracting tax deduction for the installation, assembly, repair, or maintenance of machinery, equipment, or other tangible personal property, provided that the property is deducted from the tax base of the retail classification, and not permanently attached to a building, highway, road, railroad, excavation, or manufactured building or other structure. The term permanently attached is defined to mean at least one of the following: Incorporated into real property. Being so affixed to real property that it becomes part of the real property. Being attached to the real property in a manner which would damage the property if it was removed. If a deduction for machinery, equipment, or other tangible personal property has been utilized under the retail classification in order to facilitate the installation, assembly, repair, or removal of this machinery or equipment, then a deduction for the same machinery or equipment is not permitted under prime contracting activity. The act also expanded the deduction from prime contracting activities for military reuse zones (see Chapter 93) to include the construction, addition, alteration, repair, or removal of any manufactured buildings. (Effective July 1, 1997) Laws 1996, Chapter 322 exempted machinery and equipment used for motion picture, multimedia, or interactive video production in a sound stage complex from the transaction privilege and use taxes, provided that the sound stage complex is constructed after June 30, 1996 and before January 1, 2002. The exemption applies only to machinery and equipment purchased within five years after construction of the complex begins. The act also eliminated a provision that would have repealed the tax exemption for solar energy devices. This exemption will continue to provide a retail sales tax deduction for the sale of a solar energy device whose value is $5,000 or less and which results in a tax benefit of no more than $250 per device. (Effective July 20, 1996) Laws 1996, Chapter 326 exempted from the transaction privilege tax the activities and events, or fees and assessments, received by homeowners' organizations, unless they are taxable under other statutes. Homeowners' organizations are defined as mandatory membership organizations whose primary purpose is to provide for the acquisition, maintenance, or management of their property. Moreover, no part of the organization s net earnings may inure to the benefit of any private shareholder or individual. (Effective January 1, 1994) Laws 1996, 6th Special Session, Chapter 1 excluded from the transaction privilege and use tax bases any tangible personal property used to receive, produce, generate, transmit, etc., telecommunications information by either a direct broadcast satellite television or data transmission service, or any satellite television or data transmission facility if the following conditions are met: 1. Over two-thirds of the information transmitted by the facility during the test period is to or on behalf of one or more direct broadcast satellite television or data transmission services. 2. Over two-thirds of the transmissions by or on behalf of the direct broadcast television or data transmission services must be transmitted by the facility to or on behalf of those services. Transaction Privilege Tax - 14 - The act defined the test period as the 365-day period beginning on the later of the date on which the tangible personal property is purchased or the date on which the direct broadcast satellite television or data transmission service first transmits information. If a seller is entitled to the transaction privilege and use tax deduction for tangible personal property sold to a satellite television or data transmission facility, the purchaser must establish that the above requirements have been satisfied. If the purchaser cannot establish this, the purchaser becomes liable for any tax, penalty, and interest. (Effective January 1, 1996) Transaction Privilege Tax - 15 - Attachment A STATE AND LOCAL RETAIL SALES TAX RATES BY CITY, JULY 2001 County County Cities by County State Gen. Fund Road Jail City 2001 Rate Cities by County State General Fund Road Jail City 2001 Rate Apache County 3.00 9.10 Queen Creek 5.60 - 0.50 0.20 1.00 7.30 Eagar 5.60 0.50 - - 2.00 8.10 Scottsdale 5.60 - 0.50 0.20 1.40 7.70 St. Johns 5.60 0.50 - - 3.00 9.10 Surprise 5.60 - 0.50 0.20 2.00 8.30 Springerville 5.60 0.50 - - Tempe 5.60 - 0.50 0.20 1.80 8.10 Cochise County Tolleson 5.60 - 0.50 0.20 2.00 8.30 Benson 5.60 0.50 - - 2.50 8.60 Wickenburg 5.60 - 0.50 0.20 1.00 7.30 Bisbee 5.60 0.50 - - 2.50 8.60 Youngtown 5.60 - 0.50 0.20 2.00 8.30 Douglas 5.60 0.50 - - 2.50 8.60 Mohave County Huachuca City 5.60 0.50 - - 1.00 7.10 Bullhead City 5.60 0.25 - - 2.00 7.85 Sierra Vista 5.60 0.50 - - 1.50 7.60 Colorado City 5.60 0.25 - - 2.00 7.85 Tombstone 5.60 0.50 - - 2.50 8.60 Kingman 5.60 0.25 - - 2.00 7.85 Willcox 5.60 0.50 - - 2.00 8.10 Lake Havasu City 5.60 0.25 - - 2.00 7.85 Coconino County Navajo County Flagstaff 5.60 0.50 - 0.30 1.51 7.91 Holbrook 5.60 0.50 - - 3.00 9.10 Fredonia 5.60 0.50 - 0.30 2.00 8.40 Pinetop-Lakeside 5.60 0.50 - - 2.50 8.60 Page 5.60 0.50 - 0.30 2.00 8.40 Show Low 5.60 0.50 - - 2.00 8.10 Sedona 5.60 0.50 - 0.30 3.00 9.40 Snowflake 5.60 0.50 - - 2.00 8.10 Williams 5.60 0.50 - 0.30 3.00 9.40 Taylor 5.60 0.50 - - 2.00 8.10 Gila County Winslow 5.60 0.50 - - 3.00 9.10 Globe 5.60 0.50 0.50 - 1.50 8.10 Pima County Hayden 5.60 0.50 0.50 - 1.00 7.60 Marana 5.60 - - - 2.00 7.60 Miami 5.60 0.50 0.50 - 1.50 8.10 Oro Valley 5.60 - - - 2.00 7.60 Payson 5.60 0.50 0.50 - 2.00 8.60 Sahuarita 5.60 - - - 2.00 7.60 Winkelman 5.60 0.50 0.50 - 2.50 9.10 South Tucson 5.60 - - - 2.50 8.10 Graham County Tucson 5.60 - - - 2.00 7.60 Pima 5.60 0.50 - - 1.00 7.10 Pinal County Safford 5.60 0.50 - - 2.00 8.10 Apache Junction 5.60 0.50 0.50 - 2.20 8.80 Thatcher 5.60 0.50 - - 2.00 8.10 Casa Grande 5.60 0.50 0.50 - 1.80 8.40 Greenlee County Coolidge 5.60 0.50 0.50 - 2.00 8.60 Clifton 5.60 0.50 - - 2.00 8.10 Elroy 5.60 0.50 0.50 - 2.00 8.60 Duncan 5.60 0.50 - - 2.00 8.10 Florence 5.60 0.50 0.50 - 2.00 8.60 La Paz County Kearny 5.60 0.50 0.50 - 2.00 8.60 Parker 5.60 0.50 - 0.50 2.00 8.60 Mammoth 5.60 0.50 0.50 - 2.00 8.60 Quartzsite 5.60 0.50 - 0.50 2.50 9.10 Superior 5.60 0.50 0.50 - 2.00 8.60 Maricopa County Winkelman 5.60 0.50 0.50 - 2.50 9.10 Avondale* 5.60 - 0.50 0.20 2.00 8.30 Santa Cruz County Buckeye 5.60 - 0.50 0.20 2.00 8.30 Nogales 5.60 0.50 - - 1.25 7.35 Carefree 5.60 - 0.50 0.20 2.00 8.30 Patagonia 5.60 0.50 - - 3.00 9.10 Cave Creek 5.60 - 0.50 0.20 2.50 8.80 Yavapai County Chandler 5.60 - 0.50 0.20 1.50 7.80 Camp Verde 5.60 0.50 - 0.20 2.00 8.30 El Mirage 5.60 - 0.50 0.20 3.00 9.30 Chino Valley 5.60 0.50 - 0.20 2.00 8.30 Fountain Hills 5.60 - 0.50 0.20 1.60 7.90 Clarkdale 5.60 0.50 - 0.20 2.25 8.55 Gila Bend 5.60 - 0.50 0.20 3.00 9.30 Cottonwood 5.60 0.50 - 0.20 2.20 8.50 Gilbert 5.60 - 0.50 0.20 1.50 7.80 Jerome 5.60 0.50 - 0.20 3.00 9.30 Glendale 5.60 - 0.50 0.20 1.30 7.60 Prescott 5.60 0.50 - 0.20 2.00 8.30 Goodyear 5.60 - 0.50 0.20 2.00 8.30 Prescott Valley 5.60 0.50 - 0.20 2.00 8.30 Guadalupe 5.60 - 0.50 0.20 2.00 8.30 Sedona 5.60 0.50 - 0.20 3.00 9.30 Litchfield Park 5.60 - 0.50 0.20 2.00 8.30 Yuma County* Mesa 5.60 - 0.50 0.20 1.50 7.80 San Luis 5.60 1.00 - 0.50 2.50 9.60 Paradise Valley 5.60 - 0.50 0.20 1.40 7.70 Somerton 5.60 1.00 - 0.50 2.50 9.60 Peoria 5.60 - 0.50 0.20 1.50 7.80 Wellton 5.60 1.00 - 0.50 2.50 9.60 Phoenix 5.60 - 0.50 0.20 1.80 8.10 Yuma 5.60 1.00 - 0.50 1.70 8.80 SOURCE: Arizona Tax Research Association *Note: The Yuma County rate includes a half-cent sales tax for general operations and a half-cent sales tax for capital projects. Pre 1996 History - 16 - USE TAX DESCRIPTION The use tax is assessed on items purchased in other states and brought into Arizona for storage, use, or consumption, and for which no tax (or tax at a lesser rate) has been paid in another state. The use tax serves to protect Arizona retailers from out-of-state competition by attempting to ensure that in-state and out-of-state purchases are taxed at an equal rate. Beginning in June, 2001, the use tax rate rose from 5.0% to 5.6%, with the extra 0.6% being dedicated to education. This tax increase was approved by voters, and is commonly known as Proposition 301. DISTRIBUTION Use tax revenues are virtually all deposited in the General Fund, except that 20% of use tax revenues collected from the sale of electricity are deposited in the distribution base. Table 1 USE TAX COLLECTIONS Fiscal Year State General Fund Fiscal Year State General Fund FY 2001 $196,147,647 FY 1991 $82,625,028 FY 2000 $175,730,649 FY 1990 $61,708,485 FY 1999 $147,642,017 FY 1989 $64,805,718 FY 1998 $136,473,801 FY 1988 $61,797,123 FY 1997 $119,600,758 FY 1987 $52,549,878 FY 1996 $113,964,912 FY 1986 $59,415,099 FY 1995 $104,480,933 FY 1985 $27,423,193 FY 1994 $97,492,637 FY 1984 $20,807,747 FY 1993 $84,424,541 FY 1983 $15,702,202 FY 1992 $83,023,743 FY 1982 $13,795,054 SOURCE: Department of Revenue, Annual Reports WHO PAYS THE TAX The tax is paid by persons who make retail purchases of tangible personal property outside this state and store, use, or consume the item in Arizona. If a sales tax has already been paid on the item in another state, the Arizona use tax does not apply. The use tax is due, for example, when an Arizona resident purchases a good over the Internet from an out-of-state retailer and has the item delivered to this state. In practice, the use tax is primarily paid by businesses. Individuals are also liable for the use tax but rarely pay it, because individuals are often unaware of the tax or are unwilling to “voluntarily” report a taxable transaction [A.R.S. § 42-5155]. TAX BASE AND RATE The tax base is the sales price of tangible personal property purchased at retail in another state and brought to Arizona for storage, use, or consumption. Statute mentions a few special cases in which the use tax is also applicable, including tangible personal property provided under the conditions of a warranty or service contract, motor vehicles removed from inventory, and motor vehicles used by motor vehicle manufacturers [A.R.S. § 42-5155 – 5158]. As with the retail sales tax, the law provides a number of exemptions from the use tax. The effect of these exemptions is to reduce the size of the use tax base [A.R.S. § 42-5155]. Use Tax - 17 - The use tax rate is 5.6%, the same as the Transaction Privilege Tax rate for retail sales. However, if the item has already been taxed in another state at a rate less than 5.6%, the use tax rate is reduced by the amount of the tax already imposed by the other state [A.R.S. § 42-5155 and § 42-5159]. PAYMENT SCHEDULE Use taxes are due to the Department of Revenue on the 20th day of the month after the month in which the tax accrues. For example, for taxable sales made in January, the tax payment is due to the department by February 20 [A.R.S. § 42-5162]. Tax payments are delinquent if not postmarked on or before the 25th day of the month or received by the Department of Revenue on or before the next-to-last business day of the month [A.R.S. § 42-5162]. The department may allow taxpayers whose estimated annual use tax liability is between $500 and $1,250 to make quarterly tax payments. Also, the department may permit taxpayers with an estimated annual tax liability of less than $500 to make an annual payment. If good cause is shown, the department can allow a two-month extension for filing the tax return [A.R.S. § 42-5162]. IMPACT OF TAX LAW CHANGES The following section is a summary by year of tax law changes that have been enacted by the Legislature since 1996. A listing of tax law changes prior to the 1996 legislative session is available on the JLBC web-site located at www.azleg.state.az.us/jlbc.htm. The following tax law changes apply only to the use tax. Tax law changes that apply to both the use tax and the transaction privilege tax are included in the Transaction Privilege Tax section of the Tax Handbook. There were no changes enacted to this tax in 1996, 1998 and 2000. 2002 TAX LAWS Laws 2002, Chapter 338 provides that businesses that purchase at least $500,000 worth of tangible personal property annually may obtain a use tax permit and pay use taxes directly to the Department of Revenue (DOR). Previously, out-of-state vendors were required to register with DOR, and collect the use tax from the purchaser and remit to DOR. It is estimated that this legislation may have a small positive impact on use tax collections due to increased compliance, however the amount is undetermined. (Effective December 31, 2002) 2001 TAX LAWS Laws 2001, Chapter 137 provided exemptions from the retail sales and use taxes for food and drinks purchased by hotels and served to guests. This bill is estimated to have minimal fiscal impact. (Effective June 8, 1994) Laws 2001, Chapter 287 provided a number of technical and clarifying changes to statutes, and combined fuel tax statutes for motor vehicle fuel and use fuel into one article. The act also included several substantive provisions, such as an increase in the bonding levels for fuel suppliers and criminal penalty for fuel tax evasion. (Effective August 9, 2001.) 1999 TAX LAWS Laws 1999, Chapter 144 extended a use tax exemption to any diesel fuel imported in the regular fuel tanks of a locomotive and consumed in this state. However, any excess diesel fuel brought into the state by a locomotive and consumed here is still subject to the use tax. This act is estimated to have no fiscal impact. (Effective January 1, 1993) Use Tax - 18 - 1997 TAX LAWS Laws 1997, Chapter 75 applied a four-year statute of limitations to assessments of use taxes levied against vendors who sell to a purchaser licensed or registered by the Department of Revenue to remit use tax. The Department of Revenue is required to provide a credit or offset for interest and penalties paid by the purchaser if and when the department issues a use tax deficiency assessment against a seller. This act is estimated to have no fiscal impact. (Effective June 2, 1996) Pre 1996 History - 19 - SEVERANCE TAX ON METALLIFEROUS MINERALS DESCRIPTION The severance tax on metalliferous minerals (copper or other metals) is levied on the production or extraction from the earth of minerals. The tax rate is 2.5%, and it is applied to 50% of the difference between the gross value of production and the production costs. DISTRIBUTION Revenues from the severance tax on metalliferous minerals are distributed between the state, the counties, and the cities. · 80% of the tax revenues collected are designated as Distribution Base and are distributed as described in the Transaction Privilege Tax section of this book. · 20% of the tax revenues are deposited in the General Fund [A.R.S. § 42-5205]. Table 1 TAX COLLECTIONS AND DISTRIBUTION Fiscal Year General Fund Cities Counties Total FY 2001 1/ $ 56 $1,609,331 $ 2,607,994 $ 4,217,380 FY 2000 $ 3,554,565 $3,237,959 $ 5,247,042 $12,039,566 FY 1999 $ 8,914,656 $3,746,283 $ 6,070,478 $18,731,417 FY 1998 $12,884,325 $5,414,492 $ 8,773,643 $27,072,460 FY 1997 $12,875,213 $5,410,663 $ 8,767,438 $27,053,314 FY 1996 $19,540,585 $8,211,710 $13,306,254 $41,058,549 FY 1995 $17,901,380 $7,522,853 $12,190,030 $37,614,263 FY 1994 $11,618,342 $4,690,868 $ 7,145,130 $23,454,340 FY 1993 $13,804,934 $5,573,698 $ 8,489,856 $27,868,488 FY 1992 $13,883,704 $5,585,313 $ 8,507,549 $27,926,566 FY 1991 $13,911,842 $6,020,608 $ 9,170,591 $30,103,041 FY 1990 2/ $29,552,883 FY 1989 $30,906,899 FY 1988 $19,268,473 FY 1987 $11,979,174 FY 1986 $13,990,093 FY 1985 $10,101,077 FY 1984 $ 9,814,062 FY 1983 $ 4,045,392 FY 1982 3/ NA 1/ Note Laws 1999, 1st Special Session, Chapter 5. 2/ Distribution amounts are not available for FY 1983 – FY 1990. 3/ The tax began in FY 1983, so there were no FY 1982 collections. SOURCE: Department of Revenue, Annual Reports WHO PAYS THE TAX The tax is paid by “severers”, persons engaged in the business of mining metalliferous minerals from the earth [A.R.S. § 42-5202 and § 42-5201]. Severance Tax on Metalliferous Minerals - 20 - TAX BASE AND RATE The severance tax on metalliferous minerals is levied at the rate of 2.5% on a tax base that is 50% of the difference between the gross value of production and the production costs [A.R.S. § 42-5202 and § 42-5204]. Metalliferous minerals are defined as copper, gold, silver, or other metals or ores that are mined in this state [A.R.S. § 42-5201]. The tax does not apply to metalliferous products sold at retail [A.R.S. § 42-5203]. These items are taxed by the transaction privilege tax. PAYMENT SCHEDULE Tax payments for this tax are due on the same schedule as the transaction privilege tax [A.R.S. § 42-5205]. IMPACT OF TAX LAW CHANGES The following section is a summary by year of tax law changes that have been enacted by the Legislature since 1996. A listing of tax law changes prior to the 1996 legislative session is available on the JLBC web site located at www.azleg.state.az.us/jlbc.htm. The estimated dollar impact of the tax law changes is summarized by fiscal year in the following table: Table 2 ESTIMATED DOLLAR VALUE OF TAX LAW CHANGES Fiscal Year Impact 2003 $ 0 2002 $ 0 2001 $ (3,333,000) 2000 $ (4,667,000) 1999 $ 0 1998 $ 0 1997 $ 0 Estimates made by JLBC Staff There were no changes enacted to this tax in 1996 through 1998, 2001, and 2002. 2000 TAX LAWS Laws 2000, Chapter 337 required payers of the mining severance tax to submit a monthly report to the Department of Revenue showing the amount of severance tax that would have been due if their tax liability had been calculated according to the tax law in place before the passage of Laws 1999, 1st Special Session, Chapter 5. In determining the distribution of mining severance tax revenues to the counties, the Department of Revenue is required to calculate point of sale tax collections based on the previous mining severance tax law (not Laws 1999, 1st Special Session, Chapter 5). This legislation only changes the distribution of tax revenues among the counties and has no state revenue impact. (Effective November 1, 1999) 1999 TAX LAWS Laws 1999, 1st Special Session, Chapter 5 made a series of tax cuts that are to be triggered only if sufficient excess revenue is collected in FY 1999. Since sufficient revenue was collected, this bill reduced the mining severance tax base to the difference between the gross value of production and the production costs multiplied by 1.337. Taxpayers are allowed to use either the new tax base or the current base, if the new base would result in a tax increase. On July 1, 2001 the new tax base will expire and only the current base will remain. This act was estimated to reduce General Fund revenues by $(4,667,000) in FY 2000 and by another $(3,333,000) in FY 2001. (Effective November 1, 1999) Pre 1996 History - 21 - JET FUEL EXCISE AND USE TAX DESCRIPTION The jet fuel excise tax is a tax levied on the retail sale of jet fuel. The jet fuel use tax is a tax levied on the storage, use or consumption in the state of jet fuel purchased from a retailer [A.R.S. § 42-5352]. DISTRIBUTION Forty percent of the excise tax revenue collected is designated as distribution base and is distributed pursuant to A.R.S. § 42-5029(D). Sixty percent of the excise tax revenue and 100% of the use tax is credited to the state General Fund [A.R.S. § 42-5353]. Table 1 DISTRIBUTION OF JET FUEL EXCISE TAX Fiscal Year General Fund Counties Cities FY 2001 $4,333,585 $951,561 $587,239 FY 2000 $3,838,375 $842,165 $519,727 FY 1999 $3,645,555 $800,485 $494,004 FY 1998 $3,767,232 $827,203 $510,493 FY 1997 $3,411,961 $749,193 $462,351 FY 1996 $3,135,681 $688,527 $424,912 FY 1995 $3,462,468 $760,282 $469,194 FY 1994 $3,889,868 $792,457 $520,258 FY 1993 $5,194,309 $1,058,203 $694,724 FY 1992 $3,869,796 $788,368 $517,574 DISTRIBUTION OF JET FUEL USE TAX Fiscal Year General Fund Counties Cities FY 2001 $740,281 $0 $0 FY 2000 $835,615 $0 $0 FY 1999 $458,118 $0 $0 FY 1998 $394,789 $0 $0 FY 1997 $532,451 $0 $0 FY 1996 $613,252 $0 $0 FY 1995 $421,116 $0 $0 FY 1994 $490,721 $0 $0 FY 1993 $725,335 $0 $0 FY 1992 $550,908 $0 $0 Note: The Jet Fuel Excise and Use Tax became effective October 1, 1991. SOURCE: Department of Revenue, Annual Reports WHO PAYS THE TAX The excise tax is paid by every person engaging or continuing in the retail sale of jet fuel. The use tax is levied on the storage, use, or consumption in Arizona of jet fuel purchased from a retailer in any case in which the excise tax has not been paid to the state [A.R.S. § 42-5352]. Jet Fuel Excise and Use Tax - 22 - TAX BASE AND RATE The tax rate is 3.05¢ per gallon on the first 10 million gallons of jet fuel. The tax on amounts over 10 million gallons was reduced from 3.05¢ per gallon to 2.05¢ per gallon in FY 1993, to 1.05¢ per gallon in FY 1994, and is not subject to tax in FY 1995 and thereafter [A.R.S. § 42-5352]. The jet fuel excise tax does not apply to jet fuel that is sold in Arizona to commercial airlines and used on flights that originate in the state and whose first outbound destination is outside of the United States [A.R.S. § 42-5354]. PAYMENT SCHEDULE Taxes are collected and due in the same manner as for Transaction Privilege Taxes. IMPACT OF TAX LAW CHANGES The following section is a summary by year of tax law changes that have been enacted by the Legislature since 1996. A listing of tax law changes prior to the 1996 legislative session is available on the JLBC web-site located at www.azleg.state.az.us/jlbc.htm. There were no changes enacted to this tax in the period from 1996 to 2002. Pre 1996 History - 23 - RENTAL OCCUPANCY TAX DESCRIPTION The rental occupancy tax is imposed on tenants of real property whose lease was entered into prior to December 1, 1967. It is intended to be a substitute for the transaction privilege tax on rentals of real property where the landlord cannot pass the tax on to tenants in the form of a rent increase because of the long-standing fixed nature of the lease price. The tax rate is 3% of the tenant’s rent. DISTRIBUTION Revenues from the rental occupancy tax are distributed between the state, the counties, and the cities. · Two-thirds of the tax revenues collected are designated as Distribution Base and will be distributed as described in the Transaction Privilege Tax section of this book. The Department of Revenue shall determine each county’s share of the Distribution Base on the basis of occupancy in each county. · One-third of the tax revenues are deposited in the General Fund. [A.R.S. § 42-5409] Table 1 TAX COLLECTIONS AND DISTRIBUTION Fiscal Year General Fund Cities Counties Total FY 2001 $82,743 $24,485 $39,675 $146,903 FY 2000 $63,092 $18,670 $30,252 $112,014 FY 1999 $66,455 $19,665 $31,865 $117,985 FY 1998 $71,158 $21,056 $34,120 $126,334 FY 1997 $55,632 $16,462 $26,675 $ 98,769 FY 1996 $59,739 $17,677 $28,644 $106,060 FY 1995 $55,917 $16,547 $26,812 $ 99,276 FY 1994 $56,919 $16,372 $24,938 $ 98,229 FY 1993 $49,874 $14,346 $21,851 $ 86,071 FY 1992 $54,161 $15,579 $23,730 $ 93,470 FY 1991 $62,738 $18,061 $27,510 $108,359 FY 1990 $ 91,832 FY 1989 $ 92,239 FY 1988 $ 88,163 FY 1987 $127,493 FY 1986 $150,130 FY 1985 $112,958 FY 1984 $ 74,595 FY 1983 $ 76,651 FY 1982 $113,272 Note: Distribution amounts are not available for FY 1982 – FY 1990. SOURCE: Department of Revenue, Annual Reports. WHO PAYS THE TAX The tax is paid by landlords who collect the tax from the tenant together with the rental payment or by any tenant from whom no tax has been collected by the landlord [A.R.S. § 42-5406]. Rental Occupancy Tax - 24 - TAX BASE AND RATE The rental occupancy tax is levied at a rate of 3% on tenants of preexisting leases for the privilege of occupancy [A.R.S. § 42-5404]. A preexisting lease is defined as any written lease or rental agreement entered into prior to December 1, 1967 [A.R.S. § 42-5401]. Exceptions to Preexisting Lease. The following are exempt from the rental occupancy tax: · Any bilateral amendment to a lease or rental agreement entered into after December 1, 1967 that lengthens the term of the lease or changes the size of the premises leased. · A lease or rental agreement for the following businesses: hotels, guest houses, dude ranches, resorts, rooming houses, apartment houses, office buildings, automobile storage garages, parking lots, and tourist camps [A.R.S. § 42-5401]. Other Exemptions from this tax: · Occupancy by any tenant who is exempt under the Constitution or laws of the United States or Arizona. · Occupancy under a lease entered into prior to December 1, 1967 which the Constitution or laws of the United States or Arizona would prohibit from taxing if the landlord were the tenant. · Leasing or renting of property when such property is used by the lessee as a principal or permanent place of residence [A.R.S. § 42-5405]. PAYMENT SCHEDULE On or before the last day of each month, the landlord shall pay taxes on rents received during the previous calendar month. An extension may be granted for good cause, but not beyond the last day of the second month following the regular due date [A.R.S. § 42-5407]. IMPACT OF TAX LAW CHANGES The following section is a summary by year of tax law changes that have been enacted by the Legislature since 1996. A listing of tax law changes prior to the 1996 legislative session is available on the JLBC web-site located at www.azleg.state.az.us/jlbc.htm. There were no changes enacted to this tax in the period from 1996 to 2002. Pre 1996 History - 25 - SEVERANCE TAX ON TIMBER DESCRIPTION The severance tax on timber is levied on the production of timber products. Timber products include poles, saw logs, pulpwood, and firewood. DISTRIBUTION Revenues from this tax are shared between the General Fund and the local governments. Eighty percent of timber severance tax revenues is deposited in the distribution base, and the remaining 20% is designated for the General Fund. Of the distribution base monies, 34.49% is allocated to the General Fund, 40.51% is designated to the counties, and 25% goes to the cities [A.R.S. § 42-5205]. Table 1 TAX COLLECTIONS AND DISTRIBUTION Fiscal Year General Fund Cities Counties Total FY 2001 $521 $219 $355 $1,095 FY 2000 $6,150 $2,584 $4,188 $12,922 FY 1999 $19,160 $8,053 $13,047 $40,260 FY 1998 $24,812 $10,426 $16,894 $52,132 FY 1997 $19,781 $8,312 $13,470 $41,563 FY 1996 $21,720 $9,127 $14,791 $45,638 FY 1995 $124,045 $52,129 $84,469 $260,643 FY 1994 $131,612 $53,138 $80,939 $265,689 FY 1993 $209,243 $84,481 $128,681 $422,405 FY 1992 $232,679 $93,943 $143,094 $469,716 FY 1991 $175,944 $71,037 $108,204 $355,185 FY 1990 1/ $543,461 FY 1989 $563,534 FY 1988 $557,476 FY 1987 $480,535 FY 1986 $376,947 FY 1985 $197,920 FY 1984 $102,305 FY 1983 $33,425 FY 1982 NA 1/ Distribution by jurisdiction not available prior to FY 1991. SOURCE: Department of Revenue. WHO PAYS THE TAX The tax is paid by individuals engaged in the business of producing timber products [A.R.S. § 42-5202]. TAX BASE AND RATE This tax is imposed on timbering activities that result in timber products, such as poles, saw logs, pulpwood, or firewood. An exemption is provided for timber products sold at retail [A.R.S. § 42-5202]. The tax rate is: · $2.13 per 1,000 board feet for timber products derived from ponderosa pine. · $1.51 per 1,000 board feet for timber products derived from all species except ponderosa pine. Severance Tax on Timber - 26 - TAX REFUNDS AND/OR TAX CREDITS None. PAYMENT SCHEDULE The due dates for the severance tax on timber are the same as for the transaction privilege tax [A.R.S. § 42-5014]. IMPACT OF TAX LAW CHANGES The following section is a summary by year of tax law changes that have been enacted by the Legislature since 1996. A listing of tax law changes prior to the 1996 legislative session is available on the JLBC web-site located at www.azleg.state.az.us/jlbc.htm. There were no changes enacted to this tax in the period from 1996 to 2002. Pre 1996 History GENERAL FUND INCOME TAXES - 27 - INDIVIDUAL INCOME TAX DESCRIPTION The individual income tax is levied on the personal income of full-time residents and pro-rated for part-time residents of Arizona. Taxation of income by local entities is preempted by the state as long as the Urban Revenue Sharing Fund is maintained. The starting point for Arizona individual income tax is the federal adjusted gross income. The tax, which uses a graduated rate structure, currently ranges between 2.87% and 5.04% of Arizona taxable income depending on the taxpayer’s income level. The individual income tax is an important revenue source for the state, representing over 36% of forecasted General Fund revenues. A portion of individual income tax collections (along with corporate income tax collections) is shared with incorporated cities and towns within the state. The individual income tax is comprised of four components: (1) withholdings, (2) estimated tax payments, (3) final payments, and (4) refunds. Generally, withholding payments are from tax on wage and salary based income, and estimated payments from non-wage earnings. Final payments and refunds are the underpayment and overpayment of tax, respectively, settled between taxpayers and the state after tax returns have been filed. DISTRIBUTION Table 1 below provides historical individual income tax collections for the last 20 years. Individual income tax receipts are deposited into the General Fund, after sufficient amounts have been deposited into the tax refund account to meet the requirements for tax refunds [A.R.S. § 42-1116]. Table 1 INDIVIDUAL INCOME TAX COLLECTIONS Fiscal Year General Fund Fiscal Year General Fund FY 2001 $2,300,751,988 FY 1991 $1,243,656,300 FY 2000 $2,289,328,921 FY 1990 $996,405,685 FY 1999 $2,097,629,461 FY 1989 $912,164,223 FY 1998 $1,862,514,798 FY 1988 $853,980,226 FY 1997 $1,668,414,355 FY 1987 $761,421,688 FY 1996 $1,494,282,274 FY 1986 $702,956,800 FY 1995 $1,479,588,252 FY 1985 $626,244,306 FY 1994 $1,405,482,556 FY 1984 $526,707,527 FY 1993 $1,367,641,116 FY 1983 $480,715,757 FY 1992 $1,237,540,251 FY 1982 $438,984,699 SOURCE: Department of Revenue annual reports – amounts are net of refunds and charge-offs. A portion of individual income tax collections is shared with incorporated cities and towns - see Table 2 below. Based on initiative measure approved by the voters in 1972, an urban revenue sharing fund was established. The initiative provided that a percentage of income tax revenues (including both individual and corporate income tax) be shared with incorporated cities and towns within the state. Currently, 15% of net income tax revenues from two years prior is distributed to cities and towns. This distribution is based on the jurisdiction’s relative population of the state from the last decennial or special census. Table 2 below provides historical urban revenue sharing distributions [A.R.S. § 42-206]. Individual Income Tax - 28 - Table 2 DISTRIBUTION OF INDIVIDUAL AND CORPORATE INCOME TAX Fiscal Year Total Collections 1/ State General Fund Urban Revenue Sharing Voluntary Contribution Funds FY 2001 $2,845,000,474 $2,445,472,944 $396,452,640 $3,074,890 FY 2000 $2,815,006,109 $2,434,799,494 $377,710,989 $2,495,626 FY 1999 $2,643,737,477 $2,302,706,943 $340,310,656 $ 719,878 FY 1998 $2,390,575,871 $2,098,733,397 $291,243,578 $ 598,896 FY 1997 $2,269,304,787 $2,010,937,159 $257,800,548 $ 567,080 FY 1996 $1,942,321,758 $1,723,080,577 $218,543,272 $ 697,909 FY 1995 $1,896,299,526 $1,689,985,202 $205,607,690 $ 707,264 FY 1994 $1,708,098,853 $1,521,964,032 $185,405,279 $ 729,542 FY 1993 $1,606,910,521 $1,422,638,002 $183,667,152 $ 605,368 FY 1992 $1,448,985,875 $1,272,391,599 $176,087,148 $ 507,128 FY 1991 $1,435,328,781 $1,268,036,363 $166,863,264 $ 429,154 FY 1990 $1,174,472,787 $1,023,291,736 $150,622,581 $ 558,470 FY 1989 $1,113,033,948 $ 968,464,778 $143,956,984 $ 612,187 FY 1988 $1,004,728,980 $ 873,497,071 $130,653,468 $ 578,441 FY 1987 $ 960,370,312 $ 835,501,060 $124,212,169 $ 657,084 FY 1986 $ 871,639,451 $ 771,448,590 $108,637,795 $ 616,270 FY 1985 $ 828,521,461 $ 730,874,978 $ 96,166,908 $ 440,334 FY 1984 $ 724,593,724 $ 633,247,539 $ 83,061,596 $ 260,685 FY 1983 $ 641,112,719 $ 573,649,629 $ 73,596,099 $ -0- FY 1982 $ 553,743,940 $ 487,950,969 $ 65,083,596 $ -0- ____________ 1/ Note that this column also includes corporate income tax. WHO PAYS THE TAX Residents or part-year residents of the state and non-residents who derived income from sources within the state must pay individual income tax [A.R.S. ' 43-102(A)]. Fiduciaries of estates and trusts, and individuals comprising a partnership or S-corporations also are subject to the tax. Any individual whose permanent home is in the state is considered a resident. Every person who spends more than nine months of the taxable year in Arizona is presumed a resident unless competent evidence can show the individual is in the state for a temporary or transitory purpose. Any resident who moved into or out of Arizona with intent to establish or relinquish residency is considered to be a part-year resident. The United States, the state, counties, cities, towns, school districts or other political subdivisions of the state or federal government are excluded from the definition of a taxpayer. TAX BASE The tax is levied, paid, and collected each taxable year based on taxable income [A.R.S. ' 43-1011]. The tax base starts with Arizona gross income, which is equivalent to the taxpayer's federal adjusted gross income, and is then modified by a list of additions and subtractions to income as listed under A.R.S. ' 43-1021 and A.R.S. § 43-1022, respectively. This is further reduced by exemptions and standard or itemized deductions to arrive at Arizona taxable income. Individual Income Tax - 29 - Exempt Organizations [A.R.S. ' 43-1201]: (1) Labor, agricultural, and horticultural organizations except for cooperative organizations. (2) Fraternal beneficiary societies, orders, or organizations operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system and providing for the payment of life, sick, accident, or other benefits to the members of such society, order or organization or their dependents. (3) Cemetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit. (4) Nonprofit business leagues, chambers of commerce, real estate boards, or boards of trade, of which no part of the net earnings inures to the benefit of any private shareholder or individual. (5) Civic leagues or organizations not organized for profit, operated exclusively for the promotion of social welfare, or local organizations of employees, with the membership limited to the employees of a designated person(s) in a particular municipality and the net earnings devoted exclusively to charitable, educational or recreational purposes. (6) Clubs organized and operated exclusively for pleasure, recreation, and other nonprofit making purposes, of which no part of the net earnings inures to the benefit of any private shareholder. (7) Voluntary employees' beneficiary organizations providing for the payment of life, sick, accident or other benefits to the members of such organizations or their dependents, if no part of their net earnings inures (other than through such payment) to the benefit of any private shareholder or individual, and 85% or more of the income consists of amounts collected from members and contributions by the employees of the member for the sole purpose of making such payments and meeting expenses. (8) Teachers' or public employees' retirement fund organizations of a purely local character, if no part of their net earnings inures (other than through payment of retirement benefits) to the benefit of any shareholder or indivi-dual, and the income consists entirely of amounts received from public taxa tion, assessments upon the salaries of members, and income from investments. (9) Religious or apostolic organizations or corporations, if such organizations or corporations have a common or community treasury. (10) Voluntary employees' beneficiary organizations providing for the payment of life, sick, accident, or other benefits to members of such organizations or their dependents or designated beneficiaries, if admission to membership in such organizations is limited to individuals who are officers or employees of the United States government and, if no part of the organization's net earnings inure (other than through such payments) to the benefit of any private shareholder or individual. (11) Insurance companies subject to payment of the insurance premium tax. (12) Mutual ditch, irrigation or water companies or similar nonprofit organizations if 85% or more of the income consists of amounts collected from members for the sole purpose of meeting losses and expenses. (13) Workers’ compensation pools established pursuant to A.R.S. § 23-961.01. TAX RATE Rates and Brackets. The current rate structure, based on Arizona taxable income, is as follows [A.R.S. ' 43-1011]: 2001 TAX RATE SCHEDULE Single 1/ Married 3/ Arizona Taxable Income Rate 2/ Arizona Taxable Income Rate $ 0 - $10,000 2.87% $ 0 - $20,000 2.87% $ 10,001 - 25,000 $ 287 plus 3.20% $ 20,001 - 50,000 $ 574 plus 3.20% $ 25,001 - 50,000 $ 767 plus 3.74% $ 50,001 - 100,000 $ 1,534 plus 3.74% $ 50,001 - 150,000 $1,702 plus 4.72% $100,001 - 300,000 $ 3,404 plus 4.72% $150,001 and over $6,422 plus 5.04% $300,001 and over $12,844 plus 5.04% ___________ 1/ Or married filing separately. 2/ The marginal rates apply to income within the taxable income bracket. 3/ Or unmarried head of household. Individual Income Tax - 30 - NOTE: Inflation indexing has been repealed from the income tax statutes. Optional Tax Table. The Department of Revenue developed an optional tax table prescribing tax liability amounts, based on filing status, in $50 increments of Arizona taxable income. The table can be used if (1) an individual has been a resident for the entire taxable year, and (2) the Arizona taxable income for the year is less than $50,000 regardless of filing status [A.R.S. ' 43-1012]. RECENT HISTORICAL PERSONAL INCOME TAX RATES 1/ Taxable Income 2/ 1990 Tax Rate 1994 Tax Rate 1995 Tax Rate 1997 Tax Rate 1998 Tax Rate 1999 Tax Rate $ 0 -$ 10,000 3.80% 3.25% 3.00% 2.90% 2.88% 2.87% $ 10,001 - 25,000 4.40% 4.00% 3.50% 3.30% 3.24% 3.20% $ 25,001 - 50,000 5.25% 5.05% 4.20% 3.90% 3.82% 3.74% $ 50,001 - 150,000 6.50% 6.40% 5.20% 4.90% 4.74% 4.72% $150,001 & over 7.00% 6.90% 5.60% 5.17% 5.10% 5.04% ___________ 1/ For marginal rates prior to 1990, see page 90 of the 1990 Tax Handbook. 2/ These brackets applied to single or married filing separately filers. For married joint filers or head of households, the bracket amounts are doubled. In 1990, the brackets were altered into the present form (see Laws 1990, 3rd Special Session, Chapter 3). NOTE: There were no changes in 2000 and 2001. TAX REFUNDS AND/OR TAX CREDITS Taxes Paid to Other States. Subject to certain conditions, residents are allowed a credit for income taxes paid to another state or country [A.R.S. ' 43-1071]. Property Taxes. A full-year resident can claim a refundable credit for property taxes or rent paid on property if all the following apply [A.R.S. ' 43-1072]: · 65 years or over or receiving SSI Title 16 monies from the Social Security Administration. · Paid property tax on your Arizona homestead or paid rent on taxable property for the entire year (or combination of both). · If lived alone, your income from all sources was below $3,751 or if lived with others, the combined household income was below $5,501. The amount of the credit is the lesser of property taxes actually paid or the amount listed in the table under A.R.S. ' 43-1072, Section B, Paragraphs 1 and 2. The inflation indexing of this table has been repealed. The credit amount will remain at 1989 levels. Refunds are subject to setoffs of debt owed to the state or a court as listed in A.R.S. ' 42-133. Agricultural Pollution Control Equipment. A taxpayer involved in the commercial production of livestock or agricultural crops may claim a tax credit for expenses incurred to purchase tangible personal property used in the business in order to control or prevent pollution. The credit is 25% of the cost of the property up to a maximum of $25,000 [A.R.S. § 43-1081.01]. Agricultural Preservation District. A refundable credit for individuals and corporations that donate land or development rights to land to an agricultural preservation district. The amount of the credit is equal to the appraised value of the property if ownership is conveyed to the district or the difference between the appraised value of the undeveloped land and the land for development purposes if development rights are conveyed instead. The maximum credit is $33,000. The credit is available from 2001 through 2005 [A.R.S. § 43-1081.02]. Agricultural Water Conservation System. A tax credit can be claimed for 75% of the qualifying expenses in purchasing and installing an agricultural water conservation system. This credit is in lieu of itemized deductions for Individual Income Tax - 31 - such expenses, in which case, the taxpayer must add the credit back into Arizona gross income in computing taxable income [A.R.S. ' 43-1084]. Alternative Fuel Delivery Systems. A taxpayer may claim a credit for the costs to construct or operate an alternative fuel delivery system (AFDS) in Arizona that is capable of dispensing alternative fuel to an alternative fuel vehicle. Laws 2000, 7th Special Session, Chapter 1 limited the credit for AFDS to those individuals who had a purchase order or contract for the system before October 20, 2000 and for which actual construction began before November 9, 2000. Taxpayers may take their credit as a lump sum refund or over a period not to exceed five years [A.R.S. § 43- 1086.02]. Alternative Fuel Vehicles. A taxpayer may claim a tax credit for alternative fuel vehicles (AFV) used in Arizona. Laws 2000, 7th Special Session, Chapter 1 modified the amount of the credit and imposed ownership, alternative fuel use, and emission testing requirements on persons qualifying for it. (For more details, see section Impact of Tax Law Changes.) Taxpayers may take their credit as a lump sum refund or over a period not to exceed three years. Interest is not paid on unpaid annual installments [A.R.S. ' 43-1086]. Charitable Organizations and Contributions. A taxpayer may take a tax credit up to $200 for donations to qualifying charitable organizations that exceed the level of contributions in 1996 or the first year that the taxpayer deducted charitable contributions pursuant to Section 170 of the Internal Revenue Code. This became effective January 1, 1998 [A.R.S. § 43-1088]. Construction Materials. A tax credit can be claimed for 5% of the purchase price of new construction materials used to build a new facility or expand an existing one. The facility must be predominantly used for manufacturing, refining, mining, metallurgical operations, or research and development and the total cost of construction must exceed $5 million. Also, construction must have begun on or after January 1, 1994 and be completed by December 31, 1999 [A.R.S. ' 43-1082]. Defense Contractor. A defense contractor certified by the state Department of Commerce may qualify for a tax credit due to (1) net employment increases under defense related contracts, or (2) net employment increases from transferring employment from exclusively defense related activities to exclusively private commercial activities, or (3) taxes paid on class 3 property if there was new defense related employment during the taxable year [A.R.S. ' 43- 1077 and 43-1078]. Enterprise Zones. Businesses located in an enterprise zone can claim a credit for net increases in employment of persons who qualify as economically disadvantaged under the Job Training Partnership Act. (See Laws 1989, Chapter 194 for changes in the amount of credit allowed.) In addition to extending the repeal of the credit from July 1, 2001 to July 1, 2006, Laws 2001, Chapter 370 also made several modifications to the program [A.R.S. ' 43- 1074]. Environmental Technology Facility. A taxpayer may claim a credit for expenses incurred in constructing a qualified environmental technology facility as described in A.R.S. ' 42-1514.02. The credit is equal to 10% of construction costs including land acquisition, improvements, building improvements, machinery and equipment. Credit may not exceed 75% of the tax liability for the taxable year. This credit is in lieu of the credit given for the same recycling equipment. Certain recapture provisions apply to this credit [A.R.S. ' 43-1080]. Family Income Credit. Residents are allowed a $40 nonrefundable tax credit for each personal or dependent exemption claimed, subject to certain income limitations [A.R.S. ' 43-1073]. Low-Income Credit for Excise Taxes Paid. For taxpayers filing as married couple or as head of household and whose federal adjusted gross income is $25,000 or less, a credit of $25 is granted per person or $100 per household. For taxpayers filing as single or as married person filing separately, the income requirement is $12,500 or less. This credit is considered a mitigation of the 0.6% sales tax increase resulting from Proposition 301 passed in November 2000. This law became effective January 1, 2001 [A.R.S. § 43-1072.01]. Military Reuse Zones. Businesses that are primarily engaged in manufacturing, assembling or fabricating aviation or aerospace products, and are located in a military reuse zone can claim a tax credit for net employment increases Individual Income Tax - 32 - within the military reuse zone. This credit is in lieu of any other tax credit obtained by a qualified defense contractor for the same employees [A.R.S. ' 43-1079]. Pollution Control Equipment. A taxpayer may claim a tax credit for 10% of the cost to purchase real or personal property used to control or prevent pollution. Amounts that qualify for this credit must be includible in the taxpayer=s adjusted basis for the property. This credit is in lieu of the recycling equipment credit. The maximum credit is $500,000 [A.R.S. ' 43-1081]. Public School Extra Curricular Activity Fees. A taxpayer may take a credit up to $250 per year for contributions for the support of extracurricular activities and character education programs at public schools. This credit is in lieu of any federal or state deduction for such contributions. A five-year carry forward of the credit is allowed [A.R.S. § 43-1089.01]. Recycling Equipment. Taxpayers may claim a credit for placing recycling equipment in service after December 31, 1992. This credit is in lieu of any deductions taken for depreciation. The credit is equal to 10% of the installation cost, but not to exceed the lesser of 25% of the tax liability for that year or $5,000. Certain recapture provisions apply when the recycling equipment ceases operation or is transferred [A.R.S. ' 43-1076]. Refueling Stations. A taxpayer may claim a credit for a vehicle refueling apparatus, including storage tanks, installed on one or more properties located in Arizona for his use. Laws 2000, 7th Special Session, Chapter 1 limited the credit to those individuals who had a purchase order or contract for the apparatus before October 20, 2000 and had the refueling station either installed by December 31, 2000 or paid in full by November 9, 2000. Taxpayers may take their credit as a lump sum refund or over a period not to exceed three years [A.R.S. § 43-1086.01]. School Site Donation Credit. A credit is allowed in the amount of 30% of the value of real property and improvements donated by a taxpayer to a school district or a charter school. This credit became available January 1, 2001 [A.R.S. § 43-1089.02]. School Tuition Organizations. A taxpayer may take a credit up to $625 per year for donations to a non-governmental primary or secondary school tuition organization that allocates at least 90% of its annual revenue to educational scholarships or tuition grants. A five-year carry forward of the credit is allowed [A.R.S. § 43-1089]. Solar Energy Devices. A taxpayer may claim 25% of the purchase price for a qualified solar energy device installed in the taxpayer=s residence located in Arizona. The maximum credit is $1,000 per year and $1,000 in aggregate for the same residence [A.R.S. ' 43-1083]. Solar Hot Water Heater Stub-Outs and Electric Vehicle Recharge Outlets. A taxpayer may take a credit up to $75 for installing solar hot water plumbing stub-outs or electric vehicle recharge outlets in home dwellings built by the taxpayer. This law became effective January 1, 1998 [A.R.S. § 43-1090]. TANF Employment. A credit that is allowed for net increases in qualified employment of recipients of temporary assistance for needy families (TANF) residing in Arizona. The credit is in lieu of any wage expense deduction taken for tax purposes [A.R.S. § 43-1087]. Technology Training. A taxpayer may claim a credit for expenses incurred in providing qualified technology skills training for up to 20 of his employees. The credit is 50% of the expenses for the training but cannot exceed $1,500 per employee. The credit is available between 2001 and 2005 [A.R.S. § 43-1088.01]. Underground Storage Tanks. Taxpayers can claim 10% of the expenses in tax year 1994 and thereafter for corrective actions related to underground storage tank compliance if the taxpayer is not responsible or liable for the corrective action. The corrective action must be certified by the Department of Environmental Quality and is in lieu of reimbursements by said agency [A.R.S. ' 43-1085]. Wheels to Work Vehicle Donation. A credit for the fair market value, up to $1,500 per vehicle, may be taken for donations of vehicles to qualified wheels to work programs [A.R.S. § 43-1090.01]. Individual Income Tax - 33 - TAX COMPUTATION Individuals: Arizona Gross Income Equivalent to taxpayer's federal adjusted gross income. Plus Additions to Income See A.R.S. § 43-1021 for amounts not taxed under federal income tax laws, Minus but subject to Arizona income tax. Subtractions from Income See A.R.S. § 43-1022 for amounts taxed under federal income tax laws, but Minus not subject to Arizona income tax. Exemptions See A.R.S. § 43-1023 for exemptions: (1) $1,500 for blind taxpayer and/or Equals spouse (2) $2,300 for taxpayer and/or spouse who is age 65 or over, (3) $2,300 for each dependent, and (4) $10,000 for qualifying parents and ancestors of parents. Arizona Adjusted Gross Income Minus Standard or Itemized Deductions Standard deduction is $4,050 for single or married filing separately and Minus $8,100 for married filing jointly or unmarried head of household. Itemized deductions are the same as on the federal income tax return. Personal Exemptions See A.R.S. § 43-1043: (1) single or married filing separately - $2,100 (2) Equals married filing jointly - $4,200 (3) unmarried head of household - $4,200 (4) a married couple filing a joint return and claiming at least one dependent - $6,300. Taxable Income Multiply By Tax Rates See Tax Rate Section Equals Tax Liability Minus Tax Credits See Tax Refund and/or Tax Credits Section Minus Tax Payments Withholding, estimated, and extension payments made to the Department of Equals Revenue. Tax Due This can also be an overpayment; in which case, taxpayer will be entitled to tax refund. Partnerships: Arizona Gross Income Equivalent to federal ordinary business and rental income for the year, Add excluding (1) items requiring a separate computation under A.R.S. § 43- 1412, paragraph 1 through 17 and (2) the federal provisions relating to interest on investment indebtedness. Individual Income Tax - 34 - Addition to Income See A.R.S. § 43-1021 for amounts not taxed under federal income tax laws, Minus but subject to Arizona income tax. Subtractions from Income See A.R.S. § 43-1022 for amounts taxed under federal income tax laws, but Equals not subject to Arizona income tax. Arizona Taxable Income This is mainly for filing and reporting purposes. The taxable income of a Calculate partnership is passed through to individuals in the partnership who are then taxed through the individual income tax on their distributed portion of the income. Apportionment Ratio Only for multi-state partnerships to determine Arizona's share of income and deductions. Uses a three-part apportionment formula of property, payroll and sales. See A.R.S. § 43-1131 through A.R.S. § 43-1150. Fiduciaries: Arizona Gross Income Equivalent to federal taxable income of estates or trusts (A.R.S. § 43-1301). Add income is taxable based on the residence of the decedent for an estate and the residence of the fiduciary or the beneficiary for a trust. See A.R.S. § 43-1312. Additions to Income See A.R.S. § 43-1331 for a list of additions which also include those items Minus listed for individuals under A.R.S. § 43-1021. Subtractions from Income See A.R.S. § 43-1332 for a list of subtractions which also include those items Equals listed for individuals under A.R.S. § 43-1022. Arizona Taxable Income Multiply By Individual Tax Rates See Tax Rate Section Equals Tax Liability Minus Individual Tax Credits See Tax Refund and/or Tax Credits Section Minus Tax Payments Equals Tax Due PAYMENT SCHEDULE Withholding. To simplify payment of the individual income tax, a portion of the tax is paid through a system of withholding. Under the withholding system, a percentage of each employee's gross salary is withheld by the employer at the time wages are paid [A.R.S. ' 43-401]. Percentages. An employee must elect which percentage of the federal income tax withholding shall be withheld for state income taxes: $ If the employee's annual wage is less than $15,000, the percentages are: 0%, 10%, 18%, 21%, 23%, 29%, or 34%. Individual Income Tax - 35 - $ If the employee's annual wage is $15,000 or more, the percentages are: 0%, 18%, 21%, 23%, 29%, or 34%. The 0% option is available only for those who had no state tax liability in the prior taxable year and expect to have no state tax liability for the current taxable year. Exclusions. Certain types of employment are exempt from the withholding requirements (see A.R.S. ' 43-403 for a complete list). Disposition. Employers who deduct withholding from their employees' wages are required to transfer the withholding collections to the Department of Revenue (DOR). If an employer's withholding collections exceeded an average of $1,500 per quarter over the four preceding calendar quarters, the employer must forward withholding collections to the state in accordance with the federal payment schedule. For employers whose withholding collections did not exceed an average of $1,500 per quarter over the four preceding calendar quarters, the withholding collections for the previous calendar quarter must be transferred to DOR on or before April 30, July 31, October 31, and January 31. Estimated Tax Payments. A taxpayer whose Arizona gross income was greater than $75,000 in the preceding taxable year or can reasonably expect to exceed $75,000 in the current year, must make estimated payments, if estimated withholding for the tax year does not equal 90% of the tax liability for the current year or 100% of the liability for the preceding year [A.R.S. ' 43-581]. The estimated amount shall be paid in four installments on or before the due dates established for federal filing and reasonably reflect the taxpayer's Arizona income tax liability. The total of annual estimated tax payments and withholding tax must be at least 90% of the tax liability for the current year or 100% of tax liability for the preceding year. If a taxpayer does not pay the required estimated tax payments, DOR will assess a penalty not exceeding 10% of the unpaid tax plus interest on the unpaid balance. Voluntary Payments. All other taxpayers may voluntarily make estimated tax payments during the tax year. Payment of Balance. The taxpayer is required to pay the balance of the tax due on April 15 after the close of the calendar year or, if return is based on a fiscal year, on the 15th day of the fourth month following the close of the fiscal year. An Income Tax Return is required to be filed with DOR along with the tax payment [A.R.S. ' 43-501]. Extensions. If requested, an automatic 4-month extension is granted by the department. An additional two-month extension may also be granted if good cause exists. No extension may be granted beyond six months from the original due date [A.R.S. ' 42-116]. Penalties and Interest. When applying for an extension, at least 90% of the tax liability must be paid by the original due date or the taxpayer is subject to a penalty of 0.5% of the unpaid balance for each 30 days or fraction thereof. This penalty is in addition to the 10% late payment or the 5% late filing penalties found under A.R.S. ' 42-136. Total penalties cannot exceed 25%. DOR will assess interest on the unpaid balance until it is paid. IMPACT OF TAX LAW CHANGES The following section is a summary by year of tax law changes that have been enacted by the Legislature since 1996. A listing of tax law changes prior to the 1996 legislative session is available on the JLBC web-site located at www.azleg.state.az.us/jlbc.htm. The estimated dollar impact of the tax law changes is summarized by fiscal year in the following table: Individual Income Tax - 36 - Table 3 ESTIMATED DOLLAR VALUE OF TAX LAW CHANGES ($ in Thousands) Fiscal Year Impact 2003 $ 4,434.5 2002 $ 19,825.3 2001 $ (82,895.0) 2000 $ (27,177.9) 1999 $ (51,091.5) 1998 $(114,969.0) 1997 $ (950.0) Estimates made by JLBC Staff 2002 TAX LAWS Laws 2002, Chapter 130 conformed Arizona’s estate and trust taxation statutes to changes in the Internal Revenue Code. The Department of Revenue did not anticipate that individual income tax collections from estates and trusts would be affected by this legislation. (Effective January 1, 2003.) Laws 2002, Chapter 237 provided modifications to the state’s enterprise zone program both with respect to income tax credits and property reclassification. For example, the act clarified and narrowed the definition for the enterprise zone program with respect to retail activity. The act also limited the number of qualified employment positions that are eligible for the premium or income tax credits under this program. The fiscal impact of this act is unknown. (Effective retroactively from January 1, 2002.) Laws 2002, Chapter 344 conformed Arizona tax statutes to the current Internal Revenue Code. The act includes provisions relating to the Economic Growth and Tax Relief Reconciliation Act of 2001, the Fallen Hero Survivor Benefit Fairness Act of 2001 and the Job Creation and Worker Assistance Act of 2002, except for the bonus depreciation provision (which impacts the corporate income tax). The act also adjusted the Urban Revenue Sharing (URS) program from 15% to 14.8% for two years. The JLBC Staff estimated that the conformity provisions will reduce individual income tax revenues by $(14.5) million in FY 2003. The URS adjustments, however, are expected to increase the General Fund by $5.7 million. The URS changes are not included in Table 3. (Contained various effective dates.) 2001 TAX LAWS Laws 2001, 2nd Special Session, Chapter 2 adjusted state withholding rates to compensate for changes at the federal level. The withholding rates were changed, as of January 1, 2002, as shown in the table below: Old Withholding Rates New Withholding Rates 17% 18% 20% 21% 22% 23% 28% 29% 32% 34% The adjustments of the state withholding rates were estimated to result in a one-time revenue increase of $60 million in FY 2003. The act also established a tax amnesty program within the Department of Revenue for any taxpayer with an outstanding individual income tax liability prior to November 1, 2001. Taxpayers that were eligible for the tax amnesty program had to apply to the department between January 1 and February 28, 2002. This program was estimated to generate $10 million in income tax revenues in FY 2003. (The act contained various effective dates.) Individual Income Tax - 37 - Laws 2001, Chapter 30 changed the income threshold required for filing estimated tax payments from “reasonably expected to exceed” to “exceed.” Provided an exception for estimated payments if the taxpayer’s Arizona income tax liability is less than $1,000. (Effective January 1, 2002) Laws 2001, Chapter 115 was the annual tax correction bill that made technical, conforming, and clarification changes to the Arizona tax statutes. (Contained various effective dates) Laws 2001, Chapter 191 established new provisions pertaining to the Department of Revenue’s (DOR) electronic tax return filing program. Most notably, this law provided administrative provisions for DOR related to alternative signatures. (Effective August 9, 2001) Laws 2001, Chapter 235 increased the standard deduction for taxpayers filing as single and as married filing separately from $3,600 to $4,050, and for head of household and married filing jointly from $7,200 to $8,100. These provisions became effective retroactively from January 1, 2001 and were estimated to reduce individual income tax revenues by $(15,000,000) in both FY 2002 and FY 2003. In addition, this bill contained provisions that would become enacted conditional upon actual revenues exceeding forecasted revenues by specified amounts in FY 2001 and FY 2002. However, actual revenues in FY 2001 were insufficient to “trigger” this legislation. Laws 2001, Chapter 261 established a Refund Offset Program Fund. This fund enables the Department of Revenue (DOR) to offset federal tax refunds against state debts and other debts. Monies from the fund are then utilized for administrative costs for the fund and any remaining monies go to the General Fund. This law also expands to whom DOR may disclose confidential information apart from the corporate principal officers. The act is estimated to result in additional individual income tax revenues of $1.4 million in FY 2002 and $1.3 million in FY 2003. (Effective August 9, 2001) Laws 2001, Chapter 296 was the annual bill that conformed the Arizona statutory definition of the Internal Revenue Code (IRC) to the 2001 United States IRC. This law is estimated to reduce individual income tax revenues by $(123,000) in FY 2001, $(157,000) in FY 2002, and $(262,000) in FY 2003. (Contained various effective dates) Laws 2001, Chapter 370 extended the repeal of the enterprise zone program from July 1, 2001 to July 1, 2006 and, in addition, made several modifications to the program. For example, the law now permits businesses with no more than 10% of their retail activity at the location of the enterprise zone, measured by the number of employees, to be eligible for the program. The fiscal impact could not be determined. (Contained various effective dates) Laws 2001, Chapter 382 repealed the state’s archaic laws against cohabitation, sodomy, and lewd and lascivious acts. The law also modified the definition of “dependent” for state income tax purposes. Arizona uses the same definition of dependent as the Internal Revenue Code (IRC). However, becaus |