Amidst the usual bustle of the legislative session is a sales tax bill garnering little attention, even though Arizona taxpayers will pay between $190 million to $293 million more in sales taxes with the passage of HB2702. The Wayfair decision from the U.S. Supreme Court last summer was arguably the biggest tax decision in a generation and after months of hearing nothing about Arizona’s plan to respond, a bill dropped late which mandates remote sellers and marketplaces collect Arizona sales taxes.
The Government Accountability Office estimates these tax revenue increases because of two reasons: first, most consumers do not pay the use tax owed on internet purchases and so forcing remote sellers to remit the tax amounts to higher taxes collected. Second, retail taxes are higher in Arizona than use tax because counties and about one-third of cities don’t charge a use tax. This is key for the business community who pays use tax on its out-of-state purchases— their taxes will rise.
Before this bill goes flying through the Legislature, the question should be asked: what are Arizona taxpayers going to get in exchange for this massive increase to state and local coffers? This change could be a vehicle for tax reform or, at minimum, an opportunity to address system challenges.
The first thing that needs to be addressed before the state passes HB2702, which will create an economic nexus standard that forces remote sellers to comply with Arizona’s notoriously complex transaction privilege tax, is to meet the Supreme Court’s guidance.
In Wayfair, the Supreme Court didn’t just eliminate the old Quill physical presence standard. The majority opinion noted some states are not simplified like the defendant South Dakota and would likely place an undue burden on remote sellers in violation of the Commerce Clause. They left that issue for lower courts to decide.
There are few states with more challenging sales tax systems than Arizona’s, with our independent municipal bases, myriad classifications, and complex rate structures. Not only is Arizona’s sales tax far different than most states, our cities base of definitions can all be different from the state in a variety of ways. It’s so cumbersome, Arizona businesses who already are physically here struggle with compliance.
The underlying bill, which the sponsor has graciously offered to fix, is riddled with problems such as only asking for base conformity (related to definitions), and only in the retail classification.
Worse, it appears the Department of Revenue hasn’t been involved in figuring out this difficult task. DOR told a room full of stakeholders that some nine total classifications are affected by remote sales, not just the retail class. It was clear to the business community DOR is not ready to implement this law.
One outcome is certain: Arizona is bound to face litigation which could tie this law change up in court for years if not done properly. Though Wayfair provides an opportunity to apply sales tax laws beyond our borders, we cannot squander it with a failed effort landing us in court. Moreover, simple fairness demands we not treat small businesses in a manner we would not want foisted on our own.
The good news is it appears all parties want to see this happen because everyone has something to gain: revenue for government; fairness and simplification for taxpayers. That said, massive reform should be done methodically to avoid litigation and avoidable mistakes.
Tim Lawless is Executive Director BOMA of Greater Phoenix