Arizona Use Tax – Does My Organization Need to Pay It?

by Aaron Vix, CPA, CFE, Senior Associate

Posted on March 1, 2018

Have you ever purchased something from an out of state vendor but were not sure if you owed use tax to the State of Arizona? If you answered yes, you are not alone!

When trying to solve this problem, the first question to ask yourself is “who pays use tax?” Arizona Department of Revenue’s (ADOR) Publication 610 sheds light on this question by stating “any person who uses, stores or consumes any tangible personal property upon which tax has not been collected by a retailer shall pay use tax.” Out-of-state retailers making sales to Arizona purchasers are required to register with ADOR for the collection of use tax. However, if the vendor fails to collect the appropriate amount of use tax, the Arizona purchaser is liable for this.

You also may have heard of Arizona’s transaction privilege tax (TPT), but how is the use tax different? To address this, it may be best to delve deeper into what these taxes actually are.

The TPT is commonly misidentified as a sales tax. But technically speaking, Arizona does not have a sales tax as it utilizes the TPT instead. A sales tax is essentially a consumption tax imposed on the consumer. In most cases, when sales taxes are imposed, the consumer owes the liability, whereas the vendor is simply responsible for collecting and remitting this tax. A TPT differs as this tax is actually imposed on the vendor, and the vendor can legally (and in most cases does) pass this onto the consumer to pay. But remember, generally, TPT is only imposed on vendors with nexus in Arizona who make sales within the state.

Now that we better understand how TPT works, an intuitive way to understand use tax is that it is a mechanism for the state to collect taxes on transactions otherwise exempt from TPT. Without use tax, there may be little to no disincentive for a consumer to avoid paying taxes by purchasing goods from out of state and returning to Arizona.

There are however, several transactions that are exempt from use tax in Arizona. While a comprehensive list can be found in Publication 610, a few common exemptions utilized are:

  • Tangible personal property purchased for resale in the regular course of business and not for consumption or use by the purchaser.
  • Tangible personal property on which the Arizona transaction privilege tax has already been paid
  • Items purchased from a person not engaged in the business of selling tangible personal property (casual sale).
  • Tangible personal property, the sale or use of which has already been subject to an equal to or greater excise tax under the laws of some other state of the United States.

So when you receive that invoice in the mail, a helpful approach may be to first determine if this vendor is an in-state or-out-of-state vendor. If it is an in-state vendor, you may recall that the vendor is liable for the TPT, and in that case, you have it easy as the consumer does not have a liability in Arizona. However, if it is an out-of-state vendor, and the transaction is otherwise not exempt from use tax, you will want to determine what amount, if any sales or excise tax has been charged to you as the consumer. From there, you can proceed to determining how much use tax is owed.

Now that you know you have a transaction for which you will owe use tax, you will need to know what use tax rate to use. Depending on the type of business activity this transaction falls under and where you live within Arizona, this rate may differ. The state applies a flat rate regardless of where you live, whereas some municipalities, and in some cases, counties may impose additional taxes in addition to the state rate. A valuable resource to determine what your use tax rate is based on location and business activity is by going to the Tax Rate Lookup at https://www.aztaxes.gov/Home/Address/.

But what if the vendor’s state already imposed a sales or excise tax on this transaction? If that tax was less than the Arizona use tax rate, the difference between the two taxes would still be owed to ADOR.

Okay, so I know how much I owe – now what? If you’re purchasing from out-of-state retailers who are not registered to collect the use tax ADOR states you must register with the department for use tax purposes. Don’t worry though, a Use Tax License is free of charge. Also, if you currently have a Transaction Privilege Tax License, you do not need a separate license for use tax. You can report and pay any use tax due using your Transaction Privilege or Use Tax License number. Use the Transaction Privilege, Use and Severance Tax Return, Form TPT to report and remit use tax. Please note, these reports and payments are due on the 20th day of the month following the month (or other reporting period) in which the tax is collected or accrued.