17 July 2019 Arizona law updates conformity to the IRC, addresses provisions of federal tax reform, adopts economic nexus provisions for remote sellers and marketplace facilitators On May 31, 2019, Governor Doug Ducey signed into law HB 2757 (Ch. 273), provisions of which make various changes to the state's tax laws. Notably, the new law updates the state's conformity date to the Internal Revenue Code of 1986, as amended (IRC), addresses certain provisions of the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) and adopts economic nexus provisions for remote sellers and marketplace facilitators for purposes of the state's transaction privilege (sales) and use taxes, among other changes. Below is a summary of these changes. Effective for tax years beginning from and after December 31, 2018, Arizona conforms to the IRC in effect as of January 1, 2019 (updated from the previous conformity date of January 1, 2018), including those provisions that became effective during 2018 and with specific adoption of all retroactive effective dates for the applicable provisions. Changes to the IRC enacted after January 1, 2019, are not adopted. For purposes of computing Arizona income tax for tax years beginning from and after December 31, 2017 through December 31, 2018, the IRC means the IRC as amended, in effect on January 1, 2018, including provisions that became effective during 2017 (with adoption of all retroactive effective dates). Thus, Arizona now specifically conforms to the measures included in the Bipartisan Budget Act of 2018 (P.L. 115-123) and the Consolidated Appropriations Act, 2018 (P.L. 115-141) that are retroactively effective during tax years beginning from and after December 31, 2017 through December 31, 2018. In updating its conformity to the IRC, the law makes certain modifications. Effective for tax years beginning from and after December 31, 2018, in computing Arizona taxable income, a corporation must add to Arizona gross income the amount of dividend income received from corporations and allowed as a deduction under both IRC Sections 245A and 250(a)(1)(B) (i.e., the new federal dividend received deduction and the new deduction for global intangible low-taxed income, or GILTI, enacted as part of the TCJA). A subtraction from Arizona gross income is required for dividend income from foreign corporations. The new law makes clear that the following will be considered foreign dividends for Arizona corporate income tax purposes: (1) gross up income described in IRC Section 78, (2) GILTI under IRC Section 951A, and (3) Subpart F income under IRC Section 952. Notably, HB 2757 did not change/clarify Arizona law relative to tax years beginning from and after December 31, 2017 through December 31, 2018 for these provisions in IRC Sections 245A and 250(a)(1)(B), nor did it broaden the definition of "dividend income from foreign corporations" to include IRC Section 78, GILTI under IRC Section 951A, and Subpart F income under IRC Section 952 (which would have included the one-time transition tax under IRC Section 965). We anticipate, but it is not guaranteed, the introduction of a technical correction bill during the 2020 legislative session that will provide clarity in this regard (e.g., the subtraction modification for GILTI under IRC Section 951A to apply retroactively to the 2018 tax year). Regarding the transition tax under IRC Section 965, the Arizona Department of Revenue explained, in an income tax notice posted to its website, that IRC Section 965(a) income is treated for Arizona corporate income tax purposes as a foreign dividend that may be subtracted to the extent included in federal taxable income. Since this income is not taxed, the amount of IRC Section 965(a) income deducted for federal income tax purposes will need to be added back on the Arizona return. The new law adopts economic nexus provisions for remote sellers and marketplace facilitators for Arizona transaction privilege (TPT) and use tax purposes, with differing thresholds; in both cases, however, sales of all affiliated persons must be aggregated. The collection and remittance requirements for both begin October 1, 2019. A remote seller must collect and remit tax if its gross proceeds or gross income from direct sales to Arizona customers (not including sales facilitated by a marketplace facilitator) is more than:
A marketplace facilitator must collect and remit tax if it generates more than $100,000 in gross proceeds or gross income from direct sales to Arizona customers through its platform. Reporting and collection requirements also apply if the facilitator generates over $100,000 in gross proceeds or gross income from sales made to Arizona customers on behalf of one or more marketplace sellers. Remote sellers and marketplace facilitators that did not meet the threshold in the previous calendar year, but meet it partway through the current calendar year, must obtain a TPT license once the threshold for the current year is met. The remote seller/marketplace facilitator will need to begin collecting and remitting tax on the first day of the month that starts at least 30 days after that threshold is met. In addition, during 2019 and 2020, the law provides liability relief for remote sellers and marketplace facilitators if certain conditions are met. Liability relief is capped at 5% of the total tax due on facilitated sales sourced to Arizona in calendar year 2019; the relief decreases to 3% in 2020 and to 0% for 2021 and thereafter. The Arizona Department of Revenue (Department) is further authorized by the law to waive penalties and interest for remote sellers and marketplace facilitators seeking liability relief, if the Department finds reasonable cause exists for such waiver and the remote seller/marketplace facilitator paid tax on the sales during the period for which relief is requested. A marketplace facilitator must report the tax due from transactions facilitated on behalf of marketplace sellers. Tax can be reported on a separate or combined tax return. Further, the tax imposed on "retail classification" does not apply to a marketplace seller's sales of tangible personal property that are facilitated by a marketplace facilitator that has (or will) remit the applicable tax due. Lastly, remote sellers and marketplace facilitators that are only required to obtain a TPT license are not required to pay the annual $50 municipal privilege tax license fee (or renewal fee). Subject to certain exceptions (e.g., selling food at retail), the law also provides that state provisions related to taxation of the retail classification under Ariz. Rev. Stat. Ann. Section 42-5061 supersedes all city or town ordinances or other local laws insofar as these ordinances and laws relate to the taxation of business activities classified under the retail classification. In addition, the law makes various changes to Arizona's individual income tax provisions. First, the individual income tax rates and brackets are modified starting in 2019. (The brackets will be adjusted annually, starting in 2020.) For tax years beginning from and after December 31, 2018, Arizona adopts federal standard deduction amounts for purposes of its individual income tax but increases the deduction by 25% of the total charitable deduction the taxpayer could have claimed had he/she elected to itemize deductions. Personal exemption provisions, however, are repealed, consistent with the TCJA. Considering Arizona's updated conformity date to the IRC, corporate and individual income taxpayers should review their Arizona income tax positions, estimated payments, and previously prepared or filed returns, including retroactive effective dates for specific provisions, and determine whether they should file amended returns for both tax years 2017 and 2018. Further, remote sellers and marketplace facilitators should review Arizona's new TPT and use tax law and adjust their sales and use tax compliance systems accordingly, particularly as they meet the new "phase down" thresholders, which trigger a registration, collection and reporting obligation.
Document ID: 2019-1272 | |||||||||
