IN THIS ISSUE BEIJING BRUSSELS CENTURY CITY CHICAGO LONDON LOS ANGELES NEW YORK PALO ALTO PHOENIX WASHINGTON www.steptoe.com ARIZONA TAX UPDATE 2015 OVERVIEW The following update provides an overview of Arizona tax developments that occurred in 2015, with a focus on the year’s tax legislation and court cases. We trust that you will find this annual compilation of Arizona tax developments useful and interesting. Past editions of our Arizona Tax Update are also available on our website at www.steptoe.com/aztaxupdates. SALES AND USE TAX DEVELOPMENTS 2015 LEGISLATION AND DECISIONS House Bill 2131, Chapter 234. Attorneys’ fees. This bill increased to $350 per hour the maximum attorneys’ fees that may be awarded to a party that prevails on the merits in a case brought against the state, a county, or a municipality challenging a refund or the denial of a refund. Prior law capped attorneys’ fees at $175 per hour. The maximum amount of attorneys’ fees that can be awarded is increased to $75,000 for each level of judicial appeal (prior law capped total fees at $30,000). For each year after 2016, the attorney general must adjust the fee maximums using the Phoenix Consumer Price Index, and maximum fees may not be adjusted down. House Bill 2135, Chapter 235. Transportation networking companies exempt. State and local taxing authorities are prohibited from imposing sales and use taxes on services provided by transportation network companies and transportation network company drivers. Transportation network services are the transportation of a passenger between points chosen by the passenger and arranged with the driver using the company’s digital network or software application (i.e., Uber or Lyft). Sales and Use Tax Developments Property Tax Developments Income Tax Bills CONTACT US The following summaries are not intended as legal advice on any particular question of law. If you have any questions or concerns about these or related developments, please contact our state and local tax lawyers. Pat Derdenger Partner +1 602 257 5209 Ben Gardner Associate +1 602 257 5291 Karen Lowell Associate +1 602 257 5290 TPT EXEMPTION CERTIFICATES NOW VALID FOR ONLY ONE YEAR The Department of Revenue recently updated its Form 5000 (general TPT exemption certificate) and Form 5000A (resale certificate), limiting the period of validity to a maximum of one year. Previously, taxpayers had the option of issuing a single-use certificate or a “blanket” certificate, where the taxpayer would indicate the period for which the certificate was valid, with no maximum length of term. On the current forms, however, taxpayers are only permitted to state a period of validity of up to one year (the single-use option remains in place). This one-year limitation is not required by A.R.S. § 42-5009 and appears to be an arbitrary determination by the Department. Additionally, taxpayers may no longer use the Form 5000 to support exempt sales for resale; they must instead use the Form 5000A certificate. Spring 2016 Steptoe Arizona Tax Update 2 House Bill 2147, Chapter 72. Leased space on utility poles; definition of “replacement.” This bill exempts the leasing or renting space to make attachments to utility poles from state and local sales and use taxes under the utilities classification and rental of tangible personal property classification. This bill also defined “replacement” for purposes of the maintenance, repair, replacement, or alteration (MRRA) exemption from prime contracting tax to include the removal and replacement of tangible personal property or equipment from service, even if the component is not physically removed from the structure. House Bill 2670, Chapter 6. Energy sales to qualified international operations centers. This bill exempts purchases of electricity and natural gas by qualified international operations centers from state sales and use taxes. Cities and towns have option to add the exemption. A “qualified international operations center” must invest at least $1.25 billion in new capital assets (including cost of land, buildings, and equipment) within 10 years of certification and make a minimum annual investment of $100 million in new capital assets (including land, buildings, and equipment) for 10 consecutive years (excess investments can be carried forward). Senate Bill 1216, Chapter 230. Filing deadlines; changes to meaning of timely filed. This bill clarified that sales tax payments for quarterly filers are due on or before the 20th day of the month after the quarter in which the tax accrues. Payments are delinquent if not received by the Department of Revenue by the business day preceding the last business day of the month (or the last business day of the month if filing electronically). Quarterly filing is authorized for taxpayers with an annual liability between $2,000 and $8,000. The bill also clarified that sales tax payments for annual filers are due on or before January 20 of the following year. Payments are delinquent if not received by the business day preceding the last business day of January (or the last business day of January, if filing electronically). Annual filing is authorized for taxpayers with an annual liability of less than $2,000. Finally, the bill clarified that any report, claim, tax return, statement, payment, deposit, or other tax-related material is considered timely if it is received by the taxing authority within five business days after the due date. This new definition does not apply to petitions or notices of appeal. Senate Bill 1446, Chapter 4E. Additional changes to prime contracting classification. This legislation again revamped the exemption certificate process, addressed the treatment of change orders, narrowed the definition of “alteration” by placing certain limitations on the scope of alteration projects, and clarified the meaning of “modification.” The bill also provided for the consistent treatment of MRRA projects when the contract is with a tax-exempt party, excluded road construction from MRRA treatment, and provided a “safe harbor” for contracts entered during a transition period. The bill is retroactive to January 1, 2015. Senate Bill 1471, Chapter 10. Recovery of costs for state administration of municipal sales taxes. This bill requires Department of Revenue to assess and collect fees from cities, towns, and counties to recover cost of collecting sales taxes on their behalf. The Department of Revenue can assess up to $20,755,835 per fiscal year. It also authorized a “tax recovery program” (amnesty) that ran from September 1, 2015 to October 31, 2015. The amnesty program relieved complying taxpayers from penalties and interest, and applied to income, sales and use, and certain other taxes. 2015 COURT DECISIONS KLP Enterprises, Inc. v. Ariz. Dep’t of Revenue, 1- CA-TX 13-0003 (10/16/2014) (memorandum decision). Certain services provided to farmers are subject to tax under the prime contracting classification as “landscaping services.” The taxpayer provided certain services to farmers, including removing obsolete orchards, leveling of fields, excavating dirt, installing and repairing berms, disking fields, rebuilding and reshaping field borders, and removing soil from irrigation ditches. The taxpayer did not collect tax, relying on an expired regulation that exempted work performed on improved farm land from the prime contracting tax. The court held that regulation had been superseded by statute that imposed prime contracting tax on “landscaping activities.” Additionally, the court held that the taxpayer could not meet any of four requirements for equitable estoppel, which would prevent the Department of Revenue from the assessing the tax. First, the Department of Revenue’s failure to repeal or amend the expired regulation was not an “affirmative act.” Next, the taxpayer did not demonstrate that its reliance on the expired regulation was reasonable. Third, the taxpayer did not demonstrate that actions of the Spring 2016 Steptoe Arizona Tax Update 3 Department of Revenue caused it to change its position. Finally, the court found that failing to assess the taxpayer would harm the public interest because “the public is harmed when businesses do not selfreport or are incorrectly self-reporting” tax. American Helicopters et al. v. ADOR, 1-CA-TX 14- 0001 (1/24/2015) (memorandum decision). Taxpayer providing helicopter tours of Grand Canyon was not a “supplemental air carrier” for purposes of sales and use tax exemption. An Arizona statute allows sales and use tax exemptions for sales to supplemental air carriers with a certificate from the FAA under a certain section of federal regulations. The court found that the taxpayer’s operations did not fall under the particular section of the regulations, so the taxpayer was not eligible for the sales and use tax exemption. CCI Europe, Inc. v. ADOR, 1-CA-TX 13-0002 (3/12/2015). Newspaper publishing is manufacturing for purposes of the “machinery and equipment exemption, and software used to produce the newspaper is exempt from sales tax. In this case the taxpayer developed and sold software that performs layout, formatting, and typesetting functions necessary to produce printed newspapers. The court held that the definition of manufacturing as “an integrated series of operations which place tangible personal property in a form, composition, or character different” from when it was acquired encompasses the transformation of newsprint and ink into a distinctive product (i.e., a printed newspaper). Additionally, the court found that the software was “used directly” in manufacturing the newspaper because it is “essential and necessary” to the completion of the final product. Desert Garden Mobile Homes, LLC v. Town of Quartzsite, 1-CA-TX 14-0009 (4/14/2015) (memorandum decision). Taxpayer did not satisfy all elements of promissory estoppel to prevent enforcement of assessment. Here, the taxpayer alleged that the Quartzite town’s manager promised tax amnesty in return for the taxpayer’s assistance with the local chamber of commerce. The taxpayer did not dispute tax assessment itself. Estoppel requires taxpayer to prove all four elements. The court found that the agreement with the town manager was not reduced to writing and lacked significant formalism. Additionally, the taxpayer’s reliance on the town manager’s promise was unreasonable because of the informality of the discussion and the size of the liability. Next, the taxpayer did not prospectively rely on town manager’s promise because it was assisting with the chamber of commerce prior to agreement. Finally, the taxpayer did not face a significant detriment by relying on the town manager’s promise. Jones Outdoor Advertising, Inc. v. ADOR, 1-CATX 14-0006 (7/16/2015). Rental of billboard advertising space not subject to sales tax because taxpayer maintained possession and control of the billboard. In this case, the taxpayer owned billboards located throughout Arizona, and contracted with customers to display the customers’ advertising on the billboards. The Department of Revenue assessed sales tax against taxpayer under the personal property rental classification. Earlier court decisions required that for rentals to be taxable under the personal property rental classification, the customer must gain exclusive possession and control of the property during the rental period. The taxpayer maintained exclusive possession and control of the billboard – including ownership of the material on which the advertisement was printed – so here the rental was not taxable. 2015 DEPARTMENT OF REVENUE TAXPAYER INFORMATION RULINGS LTR15-002 (Feb. 24, 2015) Taxability of prepackaged food products sold in Arizona and online. Taxpayer was the manufacturer and retailer of individually wrapped, pre-packaged food items sold for off-site consumption via the internet, telephone, and in person. All food products were THE FOLLOWING DEPARTMENT OF REVENUE STATEMENT ACCOMPANIES ALL PRIVATE TAXPAYER RULINGS: “This response is a private taxpayer ruling and the determination herein is based solely on the facts provided in your request. The determination in this taxpayer ruling is the present position of the department. This determination is subject to change should the facts prove to be different on audit. If it is determined that undisclosed facts were substantial or material to the department’s making of an accurate determination, this taxpayer ruling shall be null and void. Further, the determination is subject to future change depending on changes in statutes, administrative rules, case law or notification of a different department position.” Spring 2016 Steptoe Arizona Tax Update 4 shipped or sold from the Arizona facility. Taxpayer had no facilities for on-site consumption, and was thus a “qualified retailer” pursuant to A.R.S. § 42- 5101(4) and R15-5-1860. The Department of Revenue held that sales shipped to a customer’s residential address were exempt sales for home consumption under A.R.S. § 42-5061(A)(15). Additionally, the Department of Revenue found that orders received from an out-of-state location and shipped to an out-of-state location were nontaxable interstate sales pursuant to A.R.S. § 42-5061(A)(24). Finally, the Department of Revenue ruled that sales made to other retailers were not sales for home consumption; however, the taxpayer could claim a “sale for resale” exemption if the customer provided the taxpayer with a Form 5000A: Resale Certificate Form. LTR 15-005 (May 15, 2015) Software used by customers to design webpages is subject to tax as the rental of tangible personal property. The taxpayer had a website creation and hosting business that allowed its customers to create their own websites. The taxpayer’s website offered photos, texts, maps, and videos that customers could use to create their own unique websites. The taxpayer also provided customer support via phone to its current and potential customers. Additionally, the taxpayer offered other services, including domain name registration, blogging, e-commerce, unlimited storage of information, e-mail, and advertising. The Department of Revenue found that customers gained sufficient possession and control over the software to constitute constructive possession because customers were able to manipulate the software and customize it to their own personal needs and level of sophistication. LTR 15-006 (June 4, 2015) Dual-arm contracting structure. The taxpayer was a homebuilder with two wholly-owned subsidiaries. The first subsidiary owned the underlying land, and sold the completed home plus lot to the final customer. The second subsidiary was responsible for off-site improvements, lot development, and construction of the home under a contract with the first subsidiary. The second subsidiary neither employed nor leased personnel to complete construction, instead contracting with an independent third party for the construction work. Taxpayer wanted to eliminate the second subsidiary, and instead have the first subsidiary engage the third party contractors to complete construction. The Department of Revenue held that if the taxpayer eliminated the second subsidiary and the first subsidiary hired the third party contractor directly, the third party contractor would be treated as the prime contractor for purposes of tax under A.R.S. § 42- 5075 because the first subsidiary was not acting as a prime contractor. The Department of Revenue further explained that when there is no contract for sale of the improved property in place and the first subsidiary does not receive any compensation for supervising the third party contractors, it had no tax liability for prime contracting. The Department of Revenue held that the taxpayer did not need to maintain the dual-arm structure as long as the first subsidiary could document that any and all prime contracting parties were undertaken by independent third parties or the third party general contractor, if the first subsidiary used one. PROPERTY TAX DEVELOPMENTS 2015 LEGISLATION House Bill 2108, Chapter 233. Class 9 Property modified. The Class 9 property tax classification (A.R.S. § 42-12009) is modified to include improvements located on federal, state, county, or municipal property and owned by a lessee of the property if: (1) the improvements become the property of the government on termination of the leasehold interest in the property; and (2) the improvements and property are used exclusively for convention activities. Previously, property was only required to be used primarily for convention purposes. House Bill 2110, Chapter 98. Deadlines for special taxing jurisdiction extended. Under this bill, the Department of Revenue may extend the deadline for municipal, school district, community college district, and other special taxing district governing bodies to file information relating to changes in the boundaries of existing jurisdictions and boundaries of newly-created jurisdictions. The deadline may be extended until December 20 of the preceding year if an extension is requested by November 30 of that year. Former law permitted an extension through February 15 of the year of assessment if requested by December 31 of the preceding year. House Bill 2129, Chapter 49. Property leased to a church, religious assembly, or religious institution. Under this bill, A.R.S. § 42–11132.01 Spring 2016 Steptoe Arizona Tax Update 5 was amended to specify that property, buildings, and fixtures leased to a non-profit church or religious organization and used primarily for religious worship are classified as Class 9 property. The church or religious institution must file an annual affidavit to qualify for the classification. Additionally, property owned by an educational, religious, or charitable organization that is leased to a non-profit church or religious institution and used primarily for religious worship is exempt from property tax. House Bill 2131, Chapter 234. Attorneys’ fees. This bill increased to $350 per hour the maximum attorneys’ fees that may be awarded to a party that prevails on the merits in a case brought against the state, a county, or a municipality challenging a refund or the denial of a refund. Prior law capped attorneys’ fees at $175 per hour. The maximum amount of attorneys’ fees that can be awarded is increased to $75,000 for each level of judicial appeal (prior law capped total fees at $30,000). For each year after 2016, the attorney general must adjust the fee maximums using the Phoenix Consumer Price Index, and maximum fees may not be adjusted down. House Bill 2615, Chapter 221. Review by Property Tax Oversight Commission. The Property Tax Oversight Commission is now required to review the secondary tax levy of each county, municipality, and community college district to identify violations of constitutional and statutory requirements. If the Commission finds a levy is in violation of law, the Commission must notify the affected political subdivision, the county board of supervisors, the county attorney, and the attorney general by December 31. House Bill 2653, Chapter 324. Elderly assistance fund. This bill eliminated the requirement to pay interest at a delinquency rate of 16% when redeeming a property tax lien in a county that has established an elderly assistance fund. Formerly, taxpayers paid interest at the rate stated in the certificate of purchase. The bill also eliminated the requirement that the county treasurer deposit an amount equal to the difference between the stated rate and 16% in the elderly assistance fund. House Bill 2661, Chapter 224. Central Arizona Project assessment. This bill extended the end date for Central Arizona property tax assessment from January 1, 2017 to January 1, 2030. It also reduced the maximum levy from $0.04 per $100 of assessed value to $0.03 per $100 of assessed value, effective January 1, 2025. Now, proceeds may be used for operations and maintenance of Central Arizona Project infrastructure, repayment of federal government for cost of construction, or funding of underground water storage. Senate Bill 1135, Chapter 322. Partial payment of delinquent taxes. Under this bill, a county treasurer must accept partial payment on delinquent taxes of at least 25% of the principal amount shown on oldest remaining year of delinquency plus any accrued interest and fees due on the principal. This law applies to certificates of purchase: (1) sold in 2016 and after; (2) for tax year 2014 and after; and (3) in counties with a population of more than three million (Maricopa); however, no prior certificates of purchase can be outstanding. If no certificate of purchase is outstanding, the county treasurer must credit the taxpayer for the payment. Senate Bill 1216, Chapter 230. Changes to meaning of timely filed. This bill clarified that any report, claim, tax return, statement, payment, deposit, or other tax-related material is considered timely if it is received by the taxing authority within five business days after the due date. This new definition does not apply to petitions or notices of appeal. 2015 CASES Sonoran Peaks, LLC & Wildcat Ridge, LLC v. Maricopa County, 1-CA-TX 13-005 & 13-006 (1/13/2015). Appeal was properly dismissed because taxpayers had not timely paid their firsthalf tax payment (nor paid the full year’s tax by December 31). In this case, the court affirmed dismissal of the case because while the taxpayers had paid the taxes due… pursuant to a settlement agreement, its delinquency was not cured by the statutory deadline in A.R.S. § 42-16210(B). The settlement agreement did not alter the dates by which delinquency needed to be cured prior to an appeal. The first half payment was delinquent as of November 1; second half was delinquent as of May 1. Taxpayers can cure the first half delinquency by paying the full year’s tax by December 31. Sulphur Springs Valley Elec. Coop., Inc. v. ADOR, 1-CA-TX 14-0002 (2/24/2015) (memorandum decision). Appeal was appropriately dismissed because income based method of valuation is not an appropriate method a non-profit electrical coop. In this case, the taxpayer challenged the county’s valuation of property and presented Spring 2016 Steptoe Arizona Tax Update 6 valuation evidence using an income based approach. Although the statute required use of “standard appraisal methods and techniques,” earlier Arizona Supreme Court precedent prohibited the use of income based methods to value non-profit electrical co-ops because rates were set not to make a profit. In this case, however, for the tax year in question there was no statutory method for co-ops. The court found that the taxpayer had not met its burden of proof to rebut the presumption that the County’s valuation was correct. The statutory method to value co-ops is effective for tax years beginning January 1, 2014. Edw. C. Levy Co. v. Maricopa County, 1-CA-TX 14-007 (5/7/2015) (memorandum decision). Error corrections statute applies to errors of classification and provides relief beyond the annual appeals process; is not precluded by A.R.S. § 42-16255(B). Taxpayer owned a gravel pit that was mined out in 2006 and closed. Maricopa County classified the pit as Class 1 (commercial). The taxpayer filed a notice of claim in 2011 for the 2008 through 2011 years requesting that pit be reclassified as Class 2 (other) because it was no longer used for commercial purposes. The taxpayer had not appealed classification during the annual appeal process for 2008 through 2011. The State Board of Equalization and the Tax Court denied the claim because the taxpayer should have known the error existed in time to file an appeal during the annual appeal process. The Court of Appeals reversed, and held that taxpayer was not required to raise classification during the annual appeal process because the legislature intended error correction to provide an additional means of relief. Additionally, errors of classification are specifically included within the scope of the error correction statute. Finally, A.R.S. § 42-16255(B) does not preclude error correction of classification because such an interpretation would undermine the legislature’s intent. When the taxpayer filed its complaint, § 42- 16255(B) provided: “This article does not authorize an independent review of the overall valuation or legal classification or property that could have been appealed pursuant to article 2, 3, 4 or 5 of this chapter (the annual appeal process)…” In 2014 the legislature amended § 42-16255(B) to omit the sentence quoted above and added the following language: “This article does not authorize an independent review of the overall valuation or legal classification or property that is not the result of an error as defined in 42-16251.” The court then held “while the amended version of § 42-16256 does not apply to the case at hand, which involves tax years 2008 through 2011, the amendment clarifies the legislature’s original intent and persuades us that the prior version of 42-16255(B) does not prevent an overall review of valuation or classification that results from the correction of a statutorily defined error.” Strawberry Ridge Estates, LLC v. Gila County, 1- CA-TX 14-004 (5/26/2015). A.R.S. § 42-18352 does not require timely payment of taxes before property owner can appeal for removal of tax lien based on error resulting in improper imposition of tax. The taxpayer asserted that the county had committed an error resulting in the improper imposition of a property tax. Prior to filing the appeal, the taxpayer redeemed the tax lien and paid the delinquent taxes on the property. The statue is an exception to the general rule that property owners must timely pay all property taxes before filing an appeal. According to the court, the legislature intended this exception because statute contemplates an appeal where property owner’s taxes have become so delinquent a lien is placed on the property. However, delinquent taxes must nonetheless be paid before appealing. General Motors v. Maricopa County, 1-CA-TX 13- 0004 (5/28/2015). “Change of use” of real property must be a physical, objectively verifiable, or demonstrable use or activity on the property itself, not just a change in ownership or purpose, plan, or intent for purposes of “rollover” statute; a valuation appeal may be pursued even if taxes for subsequent years that come due while the appeal is pending are not timely paid. The taxpayer sold property in 2008 under a saleleaseback arrangement. The taxpayer’s use of the property as a tenant in 2008 was identical to its use in 2007 as an owner. The new owner, however, intended to develop the property at some point in the future. The court held that the use of property should be determined by reference to the property, not to the owner. Additionally, the taxpayer timely paid in full the taxes for the tax year in appeal (2008). During the appeal of the 2008 tax year, the taxpayer became delinquent on 2010 property taxes. The court held that statute barring an appeal when taxes are delinquent (A.R.S. § 42-11004) did not apply to valuation appeals because they are not an action to “test the validity or amount of tax.” Additionally, the statute governing valuation appeals (A.R.S. § 42-16210) only required Spring 2016 Steptoe Arizona Tax Update 7 payment of all taxes for the year of appeal, not future tax obligations. The court rejected county’s argument of harm to the public treasury. Hubs Props. Trust v. Maricopa County, 1-CA-TX 14-005 (8/20/2015). Decision: Property sold by government entity to private taxpayer lost its taxexempt status as of date of sale. The taxpayer argued that a property’s tax-exempt status was fixed as of the lien date (January 1, 2011), when the property was owned by a municipal government (Phoenix). Phoenix sold the property to Hub Properties on March 4, 2011. The court held that period of tax-exempt status ran from the date the government took ownership of the property to the date the property was sold to Hub Properties—March 4. Because the property was owned by a private taxpayer during the assessment period, and was not subject to any other exemption, the property was taxable. Scottsdale/101 Assoc. LLC et al. v. Maricopa County, 1-CA-TX 14-0003, 14-0012, 14-0011, & 14- 0008 (9/29/2015). Decision: Categorization for valuation purposes is not determinative of categorization for assessment purposes; mixeduse assessment ratio was appropriate. The taxpayers owned commercial properties in the North Phoenix area, located on state trust lands. The taxpayers appealed assessor’s classification of movie theaters that were located in shopping centers as Class 1 (commercial) rather than Class 9 (facilities on government property used exclusively for entertainment) property. According to the court, while movie theaters come within the scope of Class 1, they also meet the requirements for Class 9 classification. The county advanced “no reasoned basis” for why a mixed use ratio should not apply. Phoenix Cement Co. v. Yavapai County, 1-CA-TX 14-0010 (10/22/2015) (memorandum decision). Decision: Taxpayer must account for temporary economic obsolescence when requesting a reduction in value; county cannot bypass statutory error correction procedures unless taxpayer consents. The taxpayer, the owner of a cement manufacturing plant, appealed the tax court’s decision denying a reduction in value of the plant based on economic obsolescence. The court of appeals affirmed the tax court’s decision, holding that the taxpayer’s expert did not account for the temporary nature of the economic obsolescence, and thus the tax court’s finding that the expert’s testimony was not persuasive. The court of appeals affirmed the economic obsolescence test set forth in Eurofresh, Inc. v. Graham County, 218 Ariz. 382 (App. 2007), and vacated the tax court’s opinion to the extent it held that Arizona did not support the application of temporary economic obsolescence. Additionally, the court of appeals rejected the county’s addition of certain “escaped” property to the appeal. The court held that a 2014 amendment to the error corrections statute was a clarification of the legislature’s original intent, and that the county was required to follow statutory procedures allowing for administrative resolution before adding error corrections to a pending appeal. In other words, the county had to first issue a notice of proposed correction and allow the taxpayer to accept or appeal the notice. The county cannot skip that statutory requirement. The court noted, however, that if the taxpayer consented, the property could be added to a pending appeal. Vista Verde Homeowners Association v. Maricopa County, 1-CA-TX 14-0014 (11/24/2015) (memorandum decision). Decision: Taxpayer’s alleged classification error may be raised under the error corrections statute. Applying the principles set forth in Edw. C. Levy Co. v. Maricopa County, 1-CA-TX 14-007 (5/7/2015), which the court cited pursuant to Ariz. R. Sup. Ct. 111(c) (permitting the citation of unpublished decisions in certain circumstances), the court of appeals reversed the tax court and held that the taxpayer can utilize the notice of claim procedures to contest the county’s valuation of its common area property based upon the county’s incorrect designation of the use of the common area. INCOME TAX BILLS House Bill 2001, Chapter 91: Income Tax Brackets, Inflation Index. This bill provides that Arizona’s income tax brackets will be indexed for inflation annually. House Bill 2066, Chapter 47: Public Schools Tax Credit, Testing. This bill expands the scope of the income tax credit available for contributions supporting extracurricular activities or character education programs at public schools. Qualifying contributions now include preparation courses, materials, and fees for standardized test for college credit (i.e., Advanced Placement credit) and readiness (i.e., the SAT and ACT), as well as for career and technical educational certifications. The credit is $200 for taxpayers filing single or head of Spring 2016 Steptoe Arizona Tax Update 8 household, and $400 for married taxpayers filing jointly. The bill is retroactive to January 1, 2015. House Bill 2131, Chapter 234: Tax Adjudications, Attorneys’ Fees. This bill increases the amount of attorneys’ fees and other professional fees that taxpayers may recover when they prevail in disputes with state, county, or municipal authorities. In administrative tax proceedings, the hourly rate cap is raised from $100 per hour to $350 per hour, and the overall fee cap is raised from $20,000 to $75,000. For tax disputes that go to court, the hourly cap is raised from $175 per hour to $350 per hour, and the overall cap is increased from $30,000 to $75,000. Additionally, the bill provides that Arizona’s attorney general must adjust these caps for inflation on an annual basis. House Bill 2153, Chapter 301: Tax Credits, STOs, Pre-Approval, Entities. This bill extends the existing corporate income tax credit to S corporations for a contribution to qualifying student tuition organization (STO). The contribution must be at least $5,000 in the tax year. Shareholders are permitted to claim pro rata shares of the credit and to carry forward unused portions of the credit for five years. The bill is retroactive to January 1, 2015. House Bill 2274, Chapter 208: Emergency & Military Affairs Omnibus. This bill eliminated the National Guard Relief Fund and the requirement that the Arizona individual income tax return contain a space for taxpayers to contribute to the fund. House Bill 2483, Chapter 217: School Tax Credit, Classroom Expenses. This bill permits individuals who make qualifying contributions to public schools on or before April 15 of the year following the close of the tax year to claim a credit for the contribution in either the current or the preceding year. For example, if an individual makes a contribution in March 2016, the taxpayer has the option to claim the credit on either the 2015 or the 2016 tax return. House Bill 2670, Chapter 6: International Operations Centers. This bill increases the amount of the income tax credit for investments in new renewable energy facilities that produce energy for self-consumption, and also extends the credit to include taxpayers who use the energy primarily for international operations centers (in addition to manufacturing operations). To qualify as an international operations center, the owner or operator of the center must: (1) invest at least $1.25 billion in capital assets within 10 years of certification and (2) make a minimum annual investment of $100 million in new capital assets for 10 consecutive years (excess investment may be carried forward to meet this threshold). Capital assets include the cost of land, buildings, and equipment. The credit is increased from $1 million per year to $5 million per year. This bill is retroactive to January 1, 2015. Senate Bill 1103, Chapter 250: Charitable Tax Credit, Foster Children. This bill expands the income tax credit available for contributions to qualifying foster care charitable organizations to include contributions to qualifying charitable organizations that spend at least 50% of their budget on providing services to certain qualifying transitional independent living programs. Services must be provided to at least 200 individuals under 21 years of age. The credit is for up to $400 for taxpayers filing under the status single or head of household, and $800 for taxpayers using the status married filing joint. Senate Bill 1188, Chapter 227: Internal Revenue Code Conformity. This bill provides conformity to most provisions of the Internal Revenue Code retroactive to January 1, 2015. It does not supersede additions and subtractions created in prior years, when Arizona did not fully conform to the Internal Revenue Code. Senate Bill 1216, Chapter 230: 2015 Tax Corrections Act. This bill makes numerous technical corrections to Arizona’s tax laws. Notably, the bill clarifies that a 2014 amendment stating that any tax document (other than notices of appeal) that is not postmarked is considered timely filed if “performed by the taxpayer” within five business days of the filing deadline means that the tax document is timely if it is received by the taxing authority within five business days of the filing deadline. (This clarification applies to all tax filings, not just income tax). Senate Bill 1471, Chapter 10: Revenue & Budget Reconciliation. This bill authorized Arizona’s tax amnesty program, which ran from September 1, 2015 through October 31, 2015. The Department of Revenue granted relief to 2,071 taxpayers and collected $55,498,119 in taxes, including $20,921,401 in corporate income taxes and $10,993,914 in individual income taxes.