Actually, there are really only two issues, but they are big issues.
Arizona’s Transaction Privilege Tax has always been an anomaly in the traditional state sales tax system. Contrary to some commentators, however, the recent amendments do not, and could not, impose an origin tax on Arizona retailers for remote sales delivered out-of-state. That is not to say that these amendments are benign. Oddly, the amendments provide incentives for Arizona residents shipping items out-of-state to purchase these items over the internet rather than visit Arizona retailers in person. Furthermore, these amendments create complexities for Arizona vendors shipping to foreign jurisdictions. Finally, these amendments create additional administrative problems for retailers that are difficult to address with existing software and invite double taxation problems that should not exist in a transaction tax world.
Background: Arizona Transaction Privilege and Use Tax
For retail sales, Arizona, like most states, has two complementary transaction-based taxes, but each tax is imposed on a different entity. The first tax, the Transaction Privilege Tax (TPT), is imposed directly on the retailer. Ariz. Rev. Stat. § 42-5001.13. A retailer will be subject to the TPT on the gross proceeds from a sale if “the location where the sale is made” is Arizona. Ariz. Rev. Stat. § 42-5034.A.9. A retailer subject to the TPT is allowed but not required to collect the amount of TPT it owes from its customers. Ariz. Admin. Code §§ 15-5-2002, 15-5-2210.
The second tax, the Arizona Use Tax, complements and backstops the TPT. The Use Tax is imposed on the use, storage or consumption in the State of tangible personal property purchased from an out-of-state retailer. Ariz. Rev. Stat. § 42-5155. Generally, the purchaser is liable for payment of Use Tax to the State, but a retailer is required to collect Use Tax from a purchaser if the retailer meets the constitutional nexus provisions. Ariz. Rev. Stat. §§ 42-5155, 42-5160. Use Tax is imposed only on transactions where TPT has not been imposed, i.e., a transaction is subject to either TPT or Use Tax, but not both. Ariz. Rev. Stat. § 42-5159.A.1.
The State and its courts have been clear that, while the location of the transfer of title or possession is relevant to the inquiry as to where the sale is made, it is the totality of the retailer’s business activities that identifies the location that may tax the proceeds. Exactly where that line is drawn, however, is not as clear. The Arizona Department of Revenue (DOR) has taken the position that, unless an exemption applies, a seller is subject to the tax if a purchaser buys a product at a store, even if the purchaser does not take possession in the state, and the product is shipped to a location outside of the state. The DOR is apparently taking the position either that the title transfers in the store, which cannot always be the case (a retailer could easily specify that title transfers to the customer outside the store, particularly if the retailer [...]