United States

Arizona issues new Transactional Privilege Tax rulings and procedure

Addresses nexus, online marketplaces and exemption certificates


The Arizona Department of Revenue recently released two Transaction Privilege Tax (TPT) Rulings (TPR 16-1 and TPR 16-3) and one TPT Procedure (TPP 16-1) updating guidance on a number of TPT related issues. TPR 16-1 focuses on determining whether an out-of-state business has a “substantial nexus” with Arizona for purposes of imposing the TPT and use tax. TPR 16-3 rules on the issue of whether a business with Arizona that operates an online marketplace is responsible for the TPT on sales to Arizona customers. Finally, TPP 16-1 offers procedural guidance on the use of TPT exemption certificates.

Arizona Transaction Privilege Tax Ruling TPR 16-1 (“TPR 16-1”)

TPR 16-1 rescinds and supersedes TPR 08-1, which was issued in 2008 and addressed the imposition of the Arizona transaction privilege tax and use tax on sales of tangible personal property by out-of-state mail-order or internet-based vendors.

Similar to TPR 08-1, TPR-16-1 provides guidance on the following:

  1. What factors determine if an out-of-state business has a “substantial nexus” with Arizona for purposes of imposing Arizona’s transaction privilege tax (“TPT”) or use taxes and municipal privilege taxes?
  2. Once nexus is established, how should an out-of-state business determine the appropriate tax rate for calculating TPT?

However, there are some key differences between TPR 08-1 and TPR 16-1, as follows:

State nexus now gives nexus in all cities

In line with Arizona’s recent simplification efforts, TPR 16-1 establishes that once a business has established nexus with the state, then the business is deemed to have nexus in all cities for municipal privilege tax purposes. The previous ruling did not contain an outright statement that establishing nexus with the state also establishes nexus will all cities. In 2015, Arizona began a simplification effort to bring all of Arizona’s “non-program” (i.e., self-reporting) cities onto one system to reduce the burden on taxpayers of filing in multiple municipal jurisdictions. This reduced filing burden is likely the reason that Arizona now officially deems nexus with the state to establish nexus with all municipal taxing jurisdictions. 

Determining the appropriate tax rate

TPR 16-1 includes a discussion of the new sourcing rules which became effective in 2015.  The ruling addresses five categories of sourcing rules: (1) general retail sales; (2) sales of construction materials to be incorporated or fabricated into a prime contracting project; (3) sales of construction materials to be incorporated or fabricated into a non-prime contracting project (i.e., a maintenance, repair, replacement or alteration (“MRRA”) project); (4) sales of manufactured buildings; and (5) leasing or rental activities.

Transaction privilege tax nexus vs. use tax nexus

In line with its previous guidance in TPR 08-1, the ruling asserts that, in almost all cases, if a “substantial presence” is established in the state, the taxpayer will be subject to the transaction privilege tax, rather than the use tax. This distinction is important because of a rate differential between the transaction privilege tax rate and the use tax rate. However, the ruling does recognize that substantial authority (i.e., the seminal Quill case) could be interpreted to require a higher level of connection to impose a “sales tax” such as the TPT (i.e., the activities which establish nexus must be connected with the revenue sought to be taxed). The department states that it has not adopted the interpretation that a higher level of connection must be established to impose the TPT rather than a use tax; but that this interpretation may be considered when making nexus determinations.  

Arizona Transaction Privilege Tax Ruling TPR 16-3 (“TPR 16-3”)

Online marketplaces as retailers for purposes of TPT

Online marketplaces allow merchants to list their merchandise and provide a platform through which merchandise is sold under a single portal. TPR 16-3 addresses whether a marketplace operator through which third-party merchants sell tangible personal property at retail, is a retailer making sales on behalf of third-party merchants and therefore, responsible for the retail TPT on those sales to Arizona customers.

TPR 16-3 establishes that an online marketplace will be deemed to be making sales on behalf of third-party merchants, and thus responsible for the collection of the TPT on the third party merchant’s sales to Arizona customers (provided that the online marketplace already has nexus for Arizona TPT purposes), if the following factors exist: 

  1. The online marketplace serves as the primary contact point for customer service;
  2. The online marketplace processes payments on behalf of the merchant; and
  3. The online marketplace provides or controls the fulfillment process.

If these factors, particularly control over the fulfillment process, do not exist, then the online marketplace will not be deemed to be marking sales on behalf of the third-party merchant, and the third-party merchant will be responsible for the collection of the TPT, provided the third-party merchant has nexus for Arizona TPT purposes. 

Questions left unanswered by TPR 16-3

While TPR 16-3 clarifies the liability of an online marketplace to collect and remit the retail TPT, the ruling leaves some important questions about how an online marketplace’s activities in Arizona may affect the filing requirements of the third party merchant. For example, TPR 16-1 (addressed above) establishes that maintaining a stock of inventory in the state establishes nexus for TPT purposes. Based on this guidance, it appears that a third-party merchant who maintains inventory at an online marketplace’s warehouse in Arizona would have nexus in Arizona, even if the third-party merchant does not control the fulfillment process. This could have a significant impact on third-party merchants who sell through their own websites, in addition to online marketplaces. The third-party merchant who normally would not have nexus in Arizona for its online sales would appear to establish nexus simply by using an online marketplace that chooses to hold the third-party merchant’s inventory in Arizona.   

The ruling also does not address how the sales made on behalf of the third-party merchant should be reported by the third-party merchant. Would the third-party merchant be required to report and deduct these sales on their own TPT return? Or should the sales not be reported by third-party merchant at all?  Does the third-party merchant even need to be registered with Arizona for TPT purposes if the merchant’s only sales are made through an online marketplace which is deemed to be making sales on behalf of the merchant? This can have a significant impact on taxpayers because of Arizona’s statute of limitations rules. If a business is not registered for TPT purposes, there is no statute of limitations on assessments.  Even if a taxpayer is registered, if the taxpayer “substantially underreports” its gross receipts, the state can assess back six years, rather than the normal four. 

Arizona Transaction Privilege Tax Procedure TPP 16-1 (“TPP 16-1”)

Procedures for use of exemption certificates

The department released Transaction Privilege Tax Procedure TPP 16-1 providing guidance on using exemption certificates and resale certificates. 

TPP 16-1 supersedes and updates Arizona Transaction Privilege Tax Procedure TPP 00-3.  Though TPP 16-1 provides specific instructions on the information necessary for an exemption or resale certificate to be valid, the requirements to qualify for an exemption or resale certificate remain essentially unchanged.

A notable change from TPP 00-3 is that TPP 16-1 establishes that exemption certificates may be valid for a maximum of one year. This requirement is in line with a new policy that all licenses must be renewed annually. The Procedure states that the acceptance of a certificate for a period longer than one year will not be in “good faith,” and therefore, its acceptance will not shift the liability of providing the validity of the exemption from the seller to the purchaser. A seller that has not accepted an exemption certificate in “good faith” and cannot establish the accuracy of the information provided in the exemption certificate will be liable for all applicable taxes, plus penalties and interest. Thus, based on this guidance, Arizona sellers who collect exemption certificates should review their exemption certificate collection procedures to ensure that exemption certificates are marked for a one year period only and are updated annually to ensure they will be considered to accept the certificates in “good faith.”   


Out-of-state taxpayers conducting business in Arizona should review TPR 16-1 to determine its potential impact on their nexus profile. Based upon the ruling in TPR 16-3, Arizona is subjecting marketplace business, such as Amazon, to retail TPT. As online marketplaces become more prevalent in an increasingly e-commerce environment, both marketplace operators and merchants selling through the marketplace need to be cognizant of tax collection responsibilities. Vendors who pay Arizona TPT should review the TPP 16-1 to determine if they can establish a statutory exemption or alternatively to determine if they are following the exemption certificate guidelines correctly.  Vendors should particularly be aware of the new one year limitation on exemption certificates and update their exemption certification collection policies accordingly. 


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