State & Local Tax Alert

Transcription

1 State & Local Tax Alert Breaking state and local tax developments from Grant Thornton LLP Arizona Issues Transaction Privilege Tax Rulings and Guidance The Arizona Department of Revenue recently has issued several transaction privilege tax (TPT) rulings and procedural guidance. Specifically, the rulings address the factors used to determine if an out-of-state business has substantial nexus with Arizona, the application of TPT to businesses that operate an online marketplace, and the application of the jet fuel excise and use tax on the sale and purchase of jet fuel. 1 The procedural guidance addresses the use of various exemption certificates. 2 Arizona Transaction Privilege Tax Arizona s TPT differs from the sales tax imposed by most states, in that the TPT is levied on the privilege of doing business in Arizona. As such, the TPT is levied on income derived by the seller, who is legally allowed to pass the economic expense of the tax on to the purchaser. Ultimately, however, the seller is responsible for the tax. The TPT is imposed under the retail classification, which includes the sale of tangible personal property at retail. 3 Selling at retail is defined to include a sale for any purpose other than for resale in the regular course of business. 4 The tax base for the retail classification is the gross proceeds of sales or gross income derived from the business. All sales of tangible personal property are subject to the TPT under the retail classification unless specifically exempted or excluded by statute. Arizona Transaction Privilege Tax Ruling No (TPR 16-1) Substantial Nexus Transaction Privilege Tax Ruling (TPR) 16-1, which rescinds and supersedes TPR 08-1, addresses the factors that determine if an out-of-state business has substantial nexus with Arizona for purposes of imposing TPT or use taxes and municipal privilege taxes. 5 Release date November 4, 2016 States Arizona Issue/Topic Transaction Privilege Tax Contact details Saylor Sims Phoenix T E saylor.sims@us.gt.com Metisse Lutz Denver T E metisse.lutz@us.gt.com Jamie C. Yesnowitz Washington, DC T E jamie.yesnowitz@us.gt.com Chuck Jones Chicago T E chuck.jones@us.gt.com Lori Stolly Cincinnati T E lori.stolly@us.gt.com Priya D. Nair Washington, DC T E priya.nair@us.gt.com 1 TPR 16-1, Arizona Department of Revenue, Sept. 20, 2016; TPR 16-2, Arizona Department of Revenue, Sept. 20, 2016; TPR 16-3, Arizona Department of Revenue, Sept. 20, TPP 16-1, Arizona Department of Revenue, Sept. 20, ARIZ. REV. STAT ARIZ. REV. STAT (V)(4). 5 Note that in order for Arizona to impose either TPT or the duty to collect use tax on an out-ofstate business, substantial nexus with Arizona must be present..

2 Grant Thornton LLP - 2 Further, the guidance speaks to the appropriate tax rate through application of the sourcing rules applicable to an out-of-state business for calculating the TPT. Specifically, TPR 16-1 prescribes an analysis for determining substantial nexus and notes that this requirement is generally met if any person or business resides in Arizona, maintains an inventory warehouse or place of business in Arizona, or maintains an employee, independent contractor or other business representative or agent in Arizona. In all other cases, a case-by-case determination must be made. While the primary focus for the determination of substantial nexus in superseded ruling TPR 08-1 focused on the application of related statutes to brick-and-mortar businesses which had established related entities to perform online sales activity, the new ruling focuses on whether the activities performed in Arizona for (or on behalf of) a business are significantly associated with the business s ability to establish and maintain a business market in Arizona. 6 Specifically, a substantial nexus determination relies upon a number of factors presented by the state considering the type of activity or activities performed by a taxpayer in the state for and by a business, and the degree of activity (including duration of activity hours and effect of the activity on the business s market in the state). 7 Sourcing Rules TPR 16-1 also discusses the sourcing rules that a taxpayer may rely on for determining the appropriate tax rate. Generally, there are five categories of sourcing rules: (i) general retail sales; 8 (ii) sales of construction materials to be incorporated or fabricated into a prime contracting project; 9 (iii) sales of construction materials to be incorporated or fabricated into a nonprime contracting project; 10 (iv) sales of manufactured buildings; 11 and (v) leasing or rental activities. 12 Generally, Arizona utilizes an origin sourcing method to apply the appropriate tax rate for these transactions taking place within the state of Arizona. For 6 This test was applied by the Arizona Court of Appeals in two cases: Arizona Department of Revenue v. Care Computer Systems, Inc., 4 P.3d 469 (Ariz. Ct. App. 2000) and Arizona Department of Revenue v. O Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A., 963 P.2d 279 (Ariz. Ct. App. 1997). 7 The guidance includes the following list of general activities or factors that may, by themselves or in conjunction with others, establish substantial nexus: (i) the business has an employee present in Arizona for more than two days per year; (ii) the business maintains an office or other place of business, Internet kiosk or a locally listed telephone number in Arizona; (iii) the business owns or leases real or personal property in Arizona; (iv) the business maintains an inventory of products in Arizona; (v) the business s merchandise or goods is/are delivered into Arizona on vehicles owned or leased by the business; (vi) an independent contractor or other non-employee representative/agent is present in Arizona for more than two days a year, and acts on the business s behalf to promote the business s commercial interests; and (vii) other activities are performed in Arizona for or on behalf of the business that enable the business to establish or maintain a market in Arizona. 8 ARIZ. REV. STAT (A), (B). 9 ARIZ. REV. STAT (A)(1). 10 Id. 11 ARIZ. REV. STAT (M). 12 ARIZ. REV. STAT (C), (D).

3 Grant Thornton LLP - 3 example, for general retail sales, the tax rate is determined by where the sales order is received by the seller, instead of where the purchaser is located. 13 Other Issues The ruling invites taxpayers to request nexus determinations from the Department in cases where there is uncertainty regarding whether substantial nexus for TPT purposes has been achieved. Further, the ruling presents several examples highlighting application of the substantial nexus rules, with conclusions based on U.S. Supreme Court and Arizona case law precedents. Arizona Transaction Privilege Tax Ruling No (TPR 16-2) TPR 16-2 addresses the application of the jet fuel excise and use tax on the sale and purchase of jet fuel for periods beginning from and after January 1, Superseding TPR 94-9, TPR 16-2 reviews the application of the jet fuel excise and use tax to the retail sale and the storage, use or consumption of jet fuel in Arizona. 14 The tax is based upon the actual per gallon fuel at a rate of 3.05 cents per gallon and is limited to the first 10 million gallons purchased in the calendar year. 15 The jet fuel excise and use tax has a number of exemptions, including: (i) the resale of jet fuel in the regular course of business; (ii) the sale of jet fuel that is subject to tax in another state; and (iii) the sale of jet fuel for use on qualified international flights. 16 In addition, a county transportation excise tax which piggybacks the imposition of the TPT is imposed, under which a tax rate of up to 10 percent of the state jet fuel excise and use tax rate is allowed. 17 Arizona Transaction Privilege Tax Ruling No (TPR 16-3) Online Businesses as Retailers Subject to TPT TPR 16-3 addresses when a business, with Arizona nexus, that operates an online marketplace through which third-party merchants sell tangible personal property at retail, is considered to be a retailer for purposes of TPT. 18 Specifically, an online business making online sales of tangible personal property is considered to be a retailer, the gross receipts of which are subject to the TPT, when providing and performing the following activities: (i) providing a primary contact point for customer service; (ii) processing payments on behalf of the merchant; and (iii) providing or controlling the fulfillment process. Notably, these activities create a TPT liability only for businesses with existing TPT nexus, presumably determined with respect to the guidelines stated in TPR More detailed instructions are provided in the document for each type of sales, along with examples of application. 14 ARIZ. REV. STAT (A), (B). 15 ARIZ. REV. STAT (A). 16 ARIZ. REV. STAT This exemption is only applicable if the flight departs a location in Arizona after loading passengers or cargo, and the flight s next destination is outside the United States for the discharge of cargo or passengers. 17 ARIZ. REV. STAT , , ARIZ. REV. STAT (citing the retail classification of sales subject to TPT).

4 Grant Thornton LLP - 4 Additionally, an online business with Arizona nexus, deriving gross receipts from acting as an agent of a third-party merchant, is considered to be a retailer subject to Arizona s retail TPT. TPR 16-3 considers Arizona s definitions of retailer, sale, and selling at retail, noting that they are broad enough to encompass transactions that do not fit traditional retailers with physical storefronts. As the terms agent and representative are undefined by TPT statutes, online businesses that conduct these sales may be subject to Arizona s retail TPT regardless of whether they hold title to the merchandise sold. 19 Specific examples of application are provided. Arizona Transaction Privilege Tax Procedure No (TPP 16-1) Exemption Certificate Procedures TPP 16-1 provides general guidance on the use of Department certificates to establish entitlement to an Arizona TPT exclusion, deduction, or exemption, superseding TPP Pursuant to statute, any vendor who falls within a business classification may establish entitlement to an allowable statutory exemption by both: (i) marking the invoice for the transaction to indicate that the gross proceeds of sales or gross income derived from the transaction was deducted (or excluded or exempt) from the tax base; and (ii) obtaining a certificate executed by the purchaser. 20 This new guidance outlines the various exemption certificate forms published by the Department, including the intended purpose and valid use of each certificate. Also, it outlines the requirements for completing valid exemption certificates, which must include: (i) the purchaser s name and address; (ii) the precise nature of the purchaser s business; (iii) the purpose for which the purchase was made (or the purpose for which the business activity was conducted); (iv) the necessary facts to establish the appropriate exemption (e.g., a description of the property purchased and its use); (v) the purchaser s TPT license number (if applicable); and (vi) certification that the person executing the certificate is authorized to do so on behalf of the purchaser, including that person s signature. 21 Further, the Department provides specific requirements to prove that a sale of tangible personal property was not a sale at retail. Specifically, this burden of proof remains with the vendor unless the vendor accepts an exemption certificate, in good faith, containing the following information from the purchaser: (i) name and address of the purchaser; (ii) statement that the property was purchased for resale in the ordinary course of business; (iii) indication that the purchaser has a valid TPT license (with the number) to sell the kind of property purchased; and (iv) signature of a person authorized to sign on behalf of or as representative for the purchaser. 22 Exemption certificates may be valid for a one-time transaction or for a specified period of time not to exceed a 12-month calendar year ARIZ. REV. STAT (14). 20 ARIZ. REV. STAT (A). 21 ARIZ. REV. STAT (A); ARIZ. ADMIN. CODE R ARIZ. REV. STAT ARIZ. REV. STAT requires an annual license renewal by persons who receive gross proceeds of sales or gross income subject to TPT. An exemption certificate is accepted in good faith for any blanket period not exceeding a 12-month calendar year. An exemption certificate

5 Grant Thornton LLP - 5 Multistate Tax Commission (MTC) Uniform Sales and Use Tax Certificate Multijurisdiction TPP 16-1 also addresses acceptance of the MTC s Uniform Sales and Use Tax Certificate Multi-jurisdiction for resale purposes only, and not for other types of statutory deductions and exemptions. 24 In order to be accepted by the Department, the certificate must be complete and signed by a person authorized to sign on behalf of or as a representative for the purchaser. Border States Caucus and Uniform Sale for Resale Certificate Finally, TPP 16-1 addresses use of the Border States Uniform Sale for Resale Certificate (Form ), which was developed by the Border States Caucus 25 to simplify the transactions in the Southwest area of the United States. To clarify, Form was designed to be used in lieu of a state resale certificate by businesses buying goods for resale that will be transported across state and/or national borders in the border states or the northern border strip and border region of Mexico. To be accepted, this certificate must be complete and signed by a person authorized to sign on behalf of or as a representative for the purchaser. A vendor may also, within its discretion, request additional documentation from a purchaser to support an exemption certificate or substantiate information contained on the certificate, regardless of the type of exemption certificate being used by the purchaser. 26 Commentary The policy documents and procedural guidance issued by Arizona are designed to address evolving indirect tax matters including what constitutes substantial nexus and how to apply sourcing rules, along with a consideration of the new Arizona jet fuel excise and use tax and an update to the TPT exemption certificate procedures. The publication of these documents was driven both by statutory changes and the continued need to address the TPT treatment of new-technology industries. In addition, the guidance on TPT exemption certificate procedures serves to highlight Arizona s efforts to simplify the acceptance of the resale exemption in border state and multijurisdictional transactions. As has been observed throughout the country, states are taking a broad range of approaches when it comes to imposing nexus on participants in the online business marketplace. Arizona s decision to publish detailed guidance on the substantial nexus standard that is based on U.S. Supreme Court and relevant Arizona case law is notable. Unlike certain states, Arizona still appears to accept the Quill physical presence standard covering a specified period of time is only effective for the period it was issued. Vendors must retain copies of exemption certificates during the time period specified on the certificate. 24 The Department warns that the MTC certificate is not acceptable for purposes of establishing the right to other statutory deductions and exemptions pursuant to ARIZ. REV. STAT According to the guidance, the Caucus includes Arizona, California, New Mexico and Texas, together with the United Mexican States, and was formed to work out programs to promote trade in the Southwest in accordance with the objectives set out under the North American Free Trade Agreement (NAFTA). 26 Additional requirements, if any, are listed in ARIZ. REV. STAT and , and Title 15 of the Arizona Administrative Code.

6 Grant Thornton LLP - 6 adopted by the U.S. Supreme Court, 27 at least with respect to examining the sales and use tax consequences of a mail-order company with facts that are practically identical to the facts in Quill. However, with respect to new-technology businesses like online marketplaces (which Quill clearly did not envision), the Department has interpreted substantial nexus in an example to include entities that do not have actual physical presence in the state, but sell items on their Web site and have fulfillment centers that essentially act as in-state agents. By the same token, online marketplaces that do not sell items on their Web site and do not have controlled fulfillment centers do not have substantial nexus in Arizona, according to another example in the guidance. It remains to be seen how online marketplaces that do not neatly fit into these examples will be treated for purposes of substantial nexus, and whether Arizona s position changes over time, or is used as a model for other states to address how to treat online marketplaces for purposes of the sales and use tax. The information contained herein is general in nature and based on authorities that are subject to change. It is not intended and should not be construed as legal, accounting or tax advice or opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to or suitable for specific circumstances or needs and may require consideration of nontax and other tax factors. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Grant Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, re-keying or using any information storage and retrieval system without written permission from Grant Thornton LLP. This document supports the marketing of professional services by Grant Thornton LLP. It is not written tax advice directed at the particular facts and circumstances of any person. Persons interested in the subject of this document should contact Grant Thornton or their tax advisor to discuss the potential application of this subject matter to their particular facts and circumstances. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed. 27 Quill Corp. v. North Dakota, 504 U.S. 298 (1992).