2019 TRANSACTION PRIVILEGE TAX DEVELOPMENTS:
House Bill 2027, Chapter 124. Online Lodging Marketplaces.
This bill makes minor changes to A.R.S. § 42-6009 (the online lodging marketplace classification, enacted in 2016), including to specify that the Department of Revenue is to not only administer, collect, enforce, but also "distribute" taxes levied by a city, town or other taxing jurisdiction on online lodging marketplaces (previously the Department had authority to "remit" the tax to the cities; the amended version replaces "remit" with "distribute"). The bill also mandates uniform levies on all online lodging marketplaces and is effective August 27, 2019.
House Bill 2109, Chapter 50. County Transportation Excise Tax.
This bill increases the county transportation excise tax rate, if approved by the qualified electors voting at a countywide election from 10% to 20% of the state transaction privilege tax rate for the particular classification. The rate cannot exceed more than 20% (currently 10%) either alone or combined with any tax imposed for the county transportation excise tax for roads, under the rates for: (1) the transaction privilege classification rates; (2) the jet fuel excise tax rate; or (3) on the use or consumption of electricity or natural gas customers subject to use tax. The bill is effective August 27, 2019.
House Bill 2360, Chapter 290. Estimated Tax Payment Thresholds.
This bill increases the total tax liability thresholds for payment of estimated transaction privilege taxes as follows:
Estimated payments are due each year by June 20th. The bill is effective August 27, 2019.
House Bill 2445, Chapter 53. Notice of Tax Changes – Rental Properties.
This bill requires cities and towns to notify both the owner and tenant of a residential rental property by mail of any voter-approved new rental tax or rental tax increase 60 days before the tax change takes effect.
House Bill 2445, Chapter 53. Notice of Tax Changes – Rental Properties. This bill requires cities and towns to notify both the owner and tenant of a residential rental property by mail of any voter-approved new rental tax or rental tax increase 60 days before the tax change takes effect.
House Bill 2757, Chapter 273. Economic Nexus and Marketplace Facilitators.
On May 31, 2019, Governor Doug Ducey signed Arizona H.B. 2757 adopting economic nexus standards for internet sales made into Arizona. This change was in direct response to the U.S. Supreme Court's decision in South Dakota v. Wayfair, 138 S. Ct. 2080 (2018) and took effect on October 1, 2019. In addition to adopting economic nexus standards, H.B. 2757 requires marketplace facilitators (Amazon, et al.) to collect the sales tax on behalf of sellers using the facilitator's platform. It also preempts the retail classification for city sales taxes under the Model City Tax Code. The legislation establishes economic nexus thresholds based on the amount of sales into Arizona. Once the thresholds are passed, remote sellers (defined as a retailer without a physical presence in Arizona) and marketplace facilitators are required to collect and remit retail TPT on their sales to Arizona customers. The threshold for remote sellers is currently $200,000, phasing down to $100,000 by 2021. The threshold for marketplace facilitators is $100,000.
2019 Court Decisions
Phoenix. v. Orbitz Worldwide, Inc., CA-18-2075-PR (Ariz. Supreme Court, Sept. 9, 2019). Online travel companies are "brokers" engaged in the business of operating hotels under the Model City Tax Code but are not "hotels" themselves. This case involved online travel companies (websites like Expedia or Orbitz) that allow travelers to reserve and pay for hotel rooms; however, the online travel companies ("OTCs") do not own those rooms. Typically, the total price paid by travelers includes the "reservation rate" plus taxes and fees. The reservation rate is typically the room rate set by the hotel and the OTC, plus the OTC's mark-up. Fees usually include an additional service fee retained by the OTC. The case involved two separate taxes under the Model City Tax Code ("MCTC"): § 444, which is imposed on "every person" engaged in the business of operating hotels, and § 447 which was imposed on the gross income of "hotels." The Arizona Supreme Court held that OTCs were taxable under MCTC § 444 because they were brokers engaged in the business of operating hotels, but not under MCTC § 447 because they were not actually hotels. The Court also held that MCTC § 542(b) bars taxation under a new policy, procedure, or interpretation until a city has both adopted the change and provided impacted taxpayers with notice of that change.
The Arizona Supreme Court held that MCTC § 444 imposes a tax on "every person" engaged in the business of operating hotels. It also held that "operating a hotel" means the business activities that are central to keeping the brick-and-mortar lodging place functional or in operation. These activities include those performed by an OTC: advertising rooms and soliciting customers, collecting customer information, processing payments, confirming reservations, providing customer service, facilitating reservation modifications and cancellations. Furthermore, the OTC's service fees and mark-up on the hotel rooms was subject to tax because MCTC § 444 taxes the gross receipts from the business activity. Finally, the Court held that OTCs are "persons" under the MCTC because they are "brokers." The OTCs satisfied the three requirements for being considered a "broker" of a hotel: (1) they were acting on behalf of the hotels for a consideration (the mark-up and service fees); (2) they were engaged in the business of operating a hotel; and (3) they were receiving all or part of the gross income from that business.
However, the Supreme Court held that online travel companies are not themselves "hotels" under MCTC § 447. MCTC § 447 imposes an additional tax only on the "gross income from the business activity of any hotel... in the business of charging for lodging." The Court held that this additional tax does not extend to brokers because it is limited to the gross income of hotels, rather than persons operating hotels, and the MCTC defines a "hotel" as "any public or private hotel, inn, hostelry, tourist home, house, motel, rooming house, apartment house, trailer, or other lodging place within the City offering "lodging" to transients for a compensation.
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