State of Arizona tax handbook

              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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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