Arizona Transaction Privilege (Sales) Tax
Arizona Transaction Privilege Tax (TPT) is a tax imposed on vendors for the privilege of doing business in the State of Arizona. Businesses having a presence in or a nexus connection with Arizona are required to be licensed, and if engaging in taxable sales, are required to remit applicable TPT to the Arizona Department of Revenue (ADOR). Only vendors who are licensed in Arizona can collect taxes on sales made in Arizona.
Although commonly referred to as sales tax, TPT is differentiated from sales tax in most states in that it is a tax imposed on the seller, rather than on the purchaser. Therefore, it is ultimately the vendor, not the customer, who is liable to ADOR for TPT associated with taxable sales made in Arizona. Although not required to do so, vendors generally choose to pass this tax to the customer, so we generally tend to think of TPT as a sales tax.
Arizona Revised Statutes (ARS) state that "all gross proceeds of sales and gross income derived from a business activity classified under a taxable business classification comprise the tax base from the business until the contrary is established." In other words, all sales are considered taxable unless the seller of goods or services provides proof that the sale should be nontaxable or tax exempt.
The University is not an exempt entity for Arizona sales and use tax purposes and generally pays sales tax on taxable purchases. When making purchases from local vendors, the University can expect to pay combined State and Pima County sales tax of 6.1% on most transactions. If a University department’s business location is not in Pima County, this total can vary. If vendors also have city business licenses and charge city sales tax, the University pays this tax as well (currently 2.6% in Tucson for most transactions, or 4.5% for utilities and telecommunications).
The University does not provide documentation indicating that all purchases from a given vendor would be tax exempt. However, there are certain purchases that are exempt from sales tax pursuant to ARS §42-5061. Common sales tax exemptions include:
- Professional or personal services where the sale of tangible personal property constitutes an inconsequential element
- Services rendered in addition to the sale of tangible personal property at retail
- Warranty or service contracts, but tangible personal property provided under the conditions of the contract are taxable
- Custom computer software (pre-written software and pre-written software updates are taxable)
- Internet access and cable services
- Conference fees
- Professional membership dues
- Food for (human) home consumption
- Freight and shipping (if separately stated on the invoice and not combined with handling)
- Commercial leases
Additionally, there are sales tax exemptions granted by ARS §42-5061 that are based on intended use. The eligibility of a purchase for these exemptions is determined on a purchase-by-purchase basis and, when found to be applicable, the University tries to claim these exemptions.
- Tangible personal property purchased for resale
- Printed and other media materials purchased by publicly funded libraries in Arizona, and made available to the public (materials not available to public are not exempt and most library equipment is also not exempt)
- Machinery and equipment used in research and development as defined by the State
- Chemicals used in research and development as defined by the State
- Software purchased by the University and accessed online that is used to test or assess enrolled student learning, or to promote curriculum design and enhancement
- Prescription drugs, certain medical equipment, prostheses, or insulin prescribed by a medical professional licensed to do so
- Prescription eyeglasses
- Hearing aids
- Others as set forth in ARS §42-5061
In order to claim an exemption from TPT for reasons listed above, the University should provide an Arizona Form 5000, also known as an exemption certificate, to the seller to document their claim of exemption. For taxable purchases where the University has provided no tax exemption certificate, a licensed vendor should assume that the purchase is taxable for the University and charge appropriate sales tax. More information on exemption certificates, along with partially prefilled certificates for campus use, can be found on the Sales Tax Exemption Certificates webpage.
Any corrections needed in relation to the payment of TPT or another state’s sales tax must be handled directly with the vendor.
When sales tax is not collected by a vendor on an otherwise taxable purchase, Arizona use tax must be considered for self-assessment. Please refer to the Use Tax section below for more information.
Collecting Sales Tax on University Sales
TPT requirements must always be considered when making external sales. When conducting a taxable transaction, departments must separately state the tax amount on the invoice or receipt unless a written statement is provided to the customer that the price includes tax. This statement must be displayed when the terms of the sale are being offered and once stated, the University must factor sales tax out of the total collected. Departments are required to record sales using the appropriate object codes for either scenario (tax added or tax included) so the correct amount of TPT is reported and remitted to ADOR. Only if an external customer provides a valid exemption certificate for a taxable sale should the department consider not collecting tax.
The most common taxable sales made by the University to outside customers include:
- Printing, copying, and binding services
- Prepared foods
- Bookstore sales (other than required course textbooks)
Refer to Policy 8.11 Sales Tax for more detailed information about departmental responsibilities, taxable sales, object codes, and other related topics. If a department does not collect required tax from its customers, it will be factored from gross receipts and assessed to the department. ADOR provides a factoring sheet for this purpose as a reference on their website. If any departmental collection or recording error results in additional tax, penalties, or interest, Financial Services will charge these fees to the department.
Local & In-State Sales
In most cases, department-to-department transactions do not require TPT and it should not be charged or collected. However, if a department makes tax exempt purchases intended for taxable resale and any items are reclassified for internal use or sale, sales tax will need to be collected or use tax will need to be assessed.
When making taxable sales in Pima County, University departments should generally charge TPT of 6.1%. If the business location is in a different county, the tax rate can vary. This tax rate does not include Tucson tax as the University is exempt from the collection of city taxes.
Please refer to the Complete Sales and Use Tax Rate Table to identify other rates the University may be required to charge its customers. Please contact Tax Services if there are any questions.
Online & Out-of-State Sales
Sales are generally subject to tax in the state where property is delivered. If an item is shipped to a customer out of state, then tax usually applies for the delivery state and TPT should not be collected. If an out-of-state customer picks up an item at an Arizona location, this qualifies as an Arizona sale and TPT should be collected.
If a department is traveling to another state and plans on potentially making sales to customers or even taking orders while present, contact Tax Services to determine if appropriate temporary sales tax licenses can be obtained allowing for legal sales in that location. Without such an allowance, if sales are taxable in the state in question, no sales are permitted while present.
Arizona use tax is a self-assessed tax on the use, storage, or consumption of taxable tangible personal property in the State of Arizona upon which a tax of at least 5.6% was not collected. Services are not subject to Arizona use tax. Use tax is similar to sales tax, in that it is a tax remitted in relation to purchases by customers.
The purpose of a use tax is to prevent the avoidance of sales tax made possible by purchasing tangible property from out-of-state vendors. Such purchasing habits put in-state vendors at a disadvantage and can lead to loss of revenue for a state. Arizona's use tax was enacted in 1955 to protect sellers in the state of Arizona from inequities that would result without a use tax. In general, the purchaser, rather than the out-of-state vendor, is liable to ADOR for use tax. The Arizona use tax rate as of June 1, 2013, is 5.60%.
Many of the tangible personal property exemptions granted for sales tax by ARS §42-5061 are also granted for use tax by ARS §42-5159. The list of exemptions previously provided for sales tax can be referred to for use tax exemptions as well.
Paying Use Tax on University Purchases
Unless an out-of-state vendor has established nexus and registered with ADOR, they should not collect Arizona sales tax. When making taxable purchases from out-of-state vendors on which another state's sales tax or other excise tax was not imposed or the rate of that tax is less than the Arizona use tax rate of 5.6%, the University must self-assess use tax on tangible personal property. This self-assessed tax is paid directly to ADOR with the monthly TPT return.
Purchases that fall within the following object codes are not subject to Arizona sales or use tax. As such, the system will not automatically assess use tax on:
- 3820 - Postage & Mailing
- 3870 - Express Shipping
- 5520 - Conference Registration Fees
- 5535 - Purchasing Transaction Fees
- 5540 - Dues
- 5560 - Freight In/Out (Noncapital Related)
- 5810 & 5830 - Resale Supplies - Tax Collected at Sale
- 7810 - Library Acquisitions - Books
- 7820 - Library Acquisitions - Periodicals
- 7830 - Library Acquisitions - Other
Correcting Use Tax Errors
Because it is self-assessed, errors in use tax are corrected internally. The correction process varies based on the original purchase method: PCard purchase or Purchase Order.
Purchase via PCard
To correct use tax erroneously processed on a Procurement Card Transaction (PCDO), refer to our documentation on Correcting Use Tax on a PCDO. Most use tax errors related to PCard transactions result from incorrect reconciliation or failure to use a purchase invoice when reconciling transactions. Guidance for best reconciliation practices can be found in the Purchasing Card Policies Manual on the PCard website.
Purchase via Purchase Order
If use tax was charged inappropriately on a purchase order, Accounts Payable should be contacted directly. The same procedure is followed if use tax was not paid on a purchase but should have been assessed.
Occasionally, both sales and use tax are paid on a purchase. When sales and use tax have both been paid, the use tax should be reversed. Follow the guidelines outlined above to correct the error making sure that the amount being reversed is the use tax amount, not the sales tax amount.