Sales tax is one of the most important components of running a business, and arguably one of the most confusing. Things can get particularly challenging in some states, for example Arizona with its Arizona Transaction Privilege Tax (TPT) – which is in effect a (sales) tax on the privilege of doing business in the state.
Whether your business is Arizona-based, or you are located elsewhere in the country but have Arizona activity, it’s imperative that you are familiar with Arizona tax requirements - and (at the very least) avoid the three most common sales tax (or AZ TPT) mistakes:
Probably the most basic mistake is non-filing. This can include collecting sales tax, but not remitting it to the taxing jurisdiction – or simply not collecting tax on your sales (or even registering to collect) – even if you claim that you didn’t realize it was necessary. When it comes to taxes, ignorance is simply not an excuse!
In Arizona, sales tax is typically collected when you are selling a product versus providing a service. So simply stated - if you are selling a product, you do need to collect sales tax – and if you are selling a service, you do not. However, while that may sound rather straightforward, realize that for many businesses, things are not always so clear cut.
For example, if a photography portrait studio takes photos and shares them online with clients, the photographer does NOT need to collect sales tax, as that activity is considered a service which is not typically taxable in Arizona. However, if that same studio prints those same images for the client, those photos do become taxable as they are now considered a product, and the photographer needs to collect (and remit) sales tax.
2) Not Charging / Collecting the Correct Sales Tax Rate:
Sales tax rates can vary by jurisdiction and this is especially important in Arizona where there are local tax jurisdictions which can each set their own rates, which are subject to change at any time. It is important to be aware of rates changes, as soon as they occur. You can be notified of these changes by subscribing to www.AZtaxes.gov where they will notify you via email or send a notice in the mail. Do not discard such notices - and be sure to update your tax calculation (or accounting) software immediately. If you do not make the appropriate adjustments, you will be liable for any shortfall which occurs which is the difference between what you were collecting and what you should have been collecting.
3) Not Understanding Industry Requirements:
Just as rules and rates can vary by jurisdiction – rates and taxability rules can vary dramatically by industry. For example, if you own an automobile repair shop, the hours spent fixing vehicles are not taxable, but the parts used are taxable. In the construction industry things get a bit trickier. If a contractor is brought onto a job to build something brand new (such as a new house), sales tax must be collected. In contrast, if a contractor is asked to add something onto an already existing building (such as adding an air conditioner or updating the flooring), it is not necessary to collect sales tax. However, it’s important to note that sales tax might apply even to a partial build on old construction - if it is over a certain threshold in size and scope. Industry requirements are always subject to change, so once again it is critical to keep updated through www.AZtaxes.gov.
Sales tax can be complicated whether you are a traditional brick and mortar business or an on-line seller, shipping products across the country. Either way, it’s imperative that you are meeting Arizona’s (TPT ) sales tax requirements, as well as those of any other states where you have any activity. Read our post about Arizona sales tax nexus for more information – or if you require assistance in deciphering Arizona sales tax compliance, please contact us directly to discuss. We welcome your questions and comments!
Other recent “Arizona (AZ)” posts by Gabrielle Luoma, CPA, CGMA:
- Arizona Sales Tax: Small Business Set-Up Process
- 3 Sales Tax Mistakes To Avoid in Arizona
- Arizona Business: Sales Tax Nexus Considerations
- Arizona MAAR Contractors: Simplified Sales Tax Facts
- Should Arizona Service-Based Businesses - Charge Sales Tax?