On September 20, the Department issued TPR 16-1 updating Arizona’s nexus requirements. This ruling replaces TPR 08-1 (July 30, 2008), Arizona’s original nexus ruling. Below are the salient aspects of the ruling.
In order to establish nexus, a taxpayer must have physical presence in Arizona. The taxpayer will satisfy this requirement if it maintains real or personal property in Arizona, or if it has employees or agents acting on its behalf in Arizona. Furthermore, it makes no difference if the person acting on the taxpayer’s behalf is an actual employee or an independent contractor. Rather, the crucial factor in determining if a taxpayer establishes nexus is whether the activities performed in-state on the taxpayer’s behalf are significantly associated with the taxpayer’s ability to establish and maintain a market for its sales in Arizona. Arizona considers the following factors in making a nexus determination: (1) the type of activity or activities performed in Arizona for or by the business; and (2) the degree of the activity.
Type of activities performed in Arizona: The following is a general, non-exhaustive list of activities or factors that may establish nexus with Arizona, whether performed for or by the business:
- The business has an employee present in Arizona for more than two days per year
- The business maintains an office or other place of business, internet kiosk, or a locally listed telephone number in the state
- The business owns or leases real or personal property in Arizona
- The business maintains an inventory of products in the state
- The business’s merchandise or goods are delivered into Arizona on vehicles owned or leased by the business
- An independent contractor or other non-employee representative or agent is present in Arizona for more than two days per year, and acts on the business’s behalf to promote the business’s commercial interest
- Other activities performed in Arizona that enable the business to establish or maintain a market in the state, including:
- Soliciting sales
- Securing deposits on sales
- Collecting delinquent accounts
- Conducting banking activities
- Delivering property sold to customers
- Installing products
- Making repairs
- Conducting training for customers, employees, or representatives of the business
- Resolving customer complaints
- Providing consulting services
- Soliciting, negotiating, or entering into business or other franchising agreements
- Maintaining or improving the business’s name recognition, market share, goodwill, or individual customer relationships
- For affiliated companies and businesses, activities that enable the business to establish or maintain a market in Arizona also include:
- Cross-promotion and advertising
- Marketing to promote the operations of the affiliated business
- Accepting returns or exchanging merchandise purchased from the affiliated business
- Selling gift cards redeemable through any affiliated business
- Issuing credit for returned or exchanged merchandise purchased from the affiliated business, redeemable through any affiliated business
- Maintaining or providing a telephone or interest kiosk through which customers may purchase merchandise or access inventories from the affiliated business
- Fulfilling orders made through the affiliated business
- Providing a location at which the affiliated business’s customers may enroll in that business’s “member benefits” or other type of discount or benefits program
Degree of Activity
The degree of activity in Arizona that is sufficient to create nexus will depend on factors including:
- The function or purpose of the activity
- The frequency and duration of the activity
- The activity’s connection with or impact on the business’s in-state market
In general, the more frequently an activity occurs or longer it lasts within Arizona, the more likely the activity is to have an impact on the business’s in-state market, suggesting that the business may have nexus with the state. If, however, the business’s activities are limited and the functions or purpose are inconsequential or de minimis, the activities may not impact the business’s in-state market nor establish nexus with the state. Additionally, certain activities may have a more significant impact than others when it comes to the business’s Arizona market, regardless of their frequency or duration.
Factors Where Nexus May Not Be Present
An out-of-state business that sells merchandise to customers in Arizona may not have nexus with the state if all of the following are true:
- None of the nexus factors discussed above applies to the business
- The business makes the sale from an out-of-state location
- The business delivers the merchandise to the customer by US mail or common carrier only (if the agreement includes free on board (FOB) shipping point provisions)
Transaction Privilege Tax Nexus vs. Use Tax Collection Liability
Arizona takes the position that it does not have a higher nexus threshold for sales tax purposes than it does for use tax. However, a taxpayer will be required to collect use tax, instead of sales tax, if its Arizona presence is completely unrelated to its retail activity in Arizona. For example, if the taxpayer owns property or another business in Arizona that is completely disassociated from its retail activity, then it will only be subject to a use tax collection obligation on its sales into Arizona, and will not be subject to sales tax.
Sourcing of Sale
An out-of-state vendor that satisfies the nexus requirement of either sales or use tax is liable for tax (or responsible for tax collection). Arizona has five categories for determining the applicable tax rate:
1. General Retail Sales. The tax rate is determined by where the order is received – i.e., the location where the business has all information necessary to accept the order, regardless of actual acceptance or approval. If the seller receives the order at an Arizona business location, the sale is sourced to that location and the tax rate of that location applies. If the seller receives the order at a business location outside Arizona, the sale is sourced to the buyer’s Arizona location; usually the buyer’s shipping address. If the local jurisdiction where the sale is sourced does not tax the transaction, the municipal tax rate is zero.
2. Construction Materials for a Prime Contracting Project. If the sale is made to a transaction privilege tax (TPT) licensed contractor or subcontractor and no tax was assessed on the purchase price due to an exemption or deduction, the sale of materials is sourced to the location of the construction project or job site. The prime contracting tax rate in effect at that site will apply to the materials.
3. Construction Materials for a Maintenance, Repair, Replacement, Alteration (MRRA) Project. If the sale is made to a TPT-licensed contractor or subcontractor and no tax was assessed on the purchase price due to an exemption or deduction, the sale of materials is sourced to the location of the construction project or job site. The retail tax rate in effect at that site will apply to the materials. If the contractor later cancels its TPTlicense and sells or disposes of the materials in a manner that is not subject to tax, the materials will be sourced to the contractor’s principal place of business and the retail tax rate at that location will apply.
4. Sales of Manufactured Buildings. The tax rate is determined by whether the seller contracts to deliver the manufactured building to a set-up site or perform the set-up in Arizona. If the seller contracts to deliver the building to a set-up site or to perform the set-up in Arizona, the sale is sourced to the set-up site and the tax rate in effect in that jurisdiction applies. If not, the sale is sourced to the seller’s location, where the buyer takes delivery of the building.
5. Leasing or Rental Activities. The sourcing of the sale depends on whether the lessor has a business location in Arizona. If the lessor has an Arizona business location, the activity is sourced to the business location as it appears on the lessor’s TPTlicense, and the tax rate in effect at that location applies. If the lessor does not have an Arizona business location, the activity is sourced to the lessee’s location in Arizona, and the tax rate in effect at the lessee’s location applies. In this circumstance, the lessor may use the lessee’s residential or business address, as appropriate.
Examples Where Nexus Exists
1. A corporation’s principal place of business is in New Orleans. It owns and operates 13 department stores in various locations in Arizona, employs 5,000 workers in the state, and has thousands of customers in Arizona. The corporation contracts with a third-party company located outside Arizona to design, print, and mail catalogs to existing and potential customers, for the purpose of advertising the corporation’s business, promoting sales, and instilling name recognition in future customers. As part of instructions to the company, the corporation provided a list of Arizona customers to whom the catalogs should be mailed and further instructed the company to send any undelivered catalogs back to the corporation in New Orleans. The corporation did not pay any taxes on the production or purchase of any of the catalogs distributed in Arizona. Arizona wants to impose use tax on the corporation for its purchase and use of the catalogs in Arizona. The corporation’s catalog distribution in Arizona, as well as its in-state retail locations and significant volume of in-state sales, are sufficient activity within Arizona to satisfy the substantial nexus requirement. Notably, the catalog distribution by itself is satisfactory because the catalogs were intended to improve the corporation’s sales and name recognition in Arizona. The corporation also had sufficient control over the distribution process in Arizona (i.e., order and paying for the catalogs, designating recipients, and retaining possession of undelivered catalogs).
2. An organization owns a national magazine. It also operates a “mail-order business” that sells maps, atlases, globes, and books at retail. Orders for the mail-order business are made using forms mailed to subscribers or nonprofit members of the organization’s national magazine, or that are provided as part of the national magazine. Completed order forms are mailed directly to the organization’s headquarters outside Arizona, where the orders are fulfilled. The organization also maintains two offices in Arizona. Those offices solicit advertising copy for the national magazine but do not perform any activities related to the mail-order business. The organization is subject to transaction privilege tax because the organization’s Arizona offices establish a substantial nexus, even though those offices’ activities are not related to the organization’s mail-order business.
3. A manufacturer is in the business of manufacturing widgets. The widgets are manufactured entirely outside of Arizona but sold in large volume to customers in Arizona. The manufacturer has no office or employees in Arizona, and does not own any other property in Arizona. However, the manufacturer pays an independent contractor located in Arizona to represent its interests in Arizona. The independent contractor provides the manufacturer with substantial information about the Arizona market, including product performances, competing products, pricing, market trends and conditions, and customer financial liability. The manufacturer is subject to transaction privilege tax. The activities performed by the Arizona independent contractor for and on behalf of the manufacturer are substantial, and they are significantly associated with the manufacturer’s ability to establish and maintain a market in Arizona for its widget sales.
4. A Washington-based company sells computer hardware and software across the country, including in Arizona. Most of the company's Arizona business is both initiated by existing customers through word-of-mouth type promotion, and conducted by mail or fax. The company’s sales are made through mail orders and delivered from the Washington office using a common carrier or US mail. The only contacts the company has with Arizona are through its salesperson and training staff. The salesperson is a resident of California, but travels to Arizona on occasion to perform follow-up visits with the company’s Arizona business prospects. Some sales result from these visits. Otherwise, the salesperson does not initiate sales relationships in Arizona. The company also sends staff from its Washington office to Arizona to provide in-person training to new customers on a one-time basis. The company has no inventory, property owned or rented, office, or employees or agents residing in Arizona. The company is subject to transaction privilege tax. The company’s employment of a salesperson to cover Arizona is intended to and did increase the company’s sales. Additionally, the company’s dispatch of trainers to Arizona is intended to increase customer satisfaction in Arizona, as well as encourage others to buy. Even if the company’s volume of sales in Arizona are low, the purpose for and effect of its Arizona employees satisfies the substantial nexus requirement.
5. A manufacturer builds custom office furniture. It is located out-of-state and does not maintain any office space in Arizona, but it contracts with an independent retailer in Arizona to serve as its in-state representative on occasion. The manufacturer has only one customer in Arizona. The customer initially ordered one shipment of furniture, but later ordered more. All sales negotiations took place in person in Arizona or by telephone, including when the manufacturer sent its own employees to Arizona to assemble furniture prototypes for the customer to review. All furniture orders were delivered by the manufacturer’s employees to the independent retailer in Arizona who then installed the furniture under the supervision of a factory representative employed by the manufacturer. Thereafter, the manufacturer sent employees to the customer on warranty claims. It also sent the independent retailer to visit the customer to solicit additional orders. The manufacturer is subject to transaction privilege tax. Even though it had only one customer in Arizona, many of the manufacturer’s in-state activities resulted in sales and they were essential to the manufacturer’s ability to establish and maintain a market in Arizona.
6. An out-of-state company is in the business of leasing vending machines. One of its customers is a retailer in Arizona. The company leased 200 machines to the Arizona retailer over a period of four years. During the leasing period, the company employed two Arizona residents to deliver and install the machines at the retailer’s designated locations in Arizona, relocate the machines on occasion, perform maintenance and respond to service calls, and train the retailer’s personnel on the machines’ use. The company had no other contacts with Arizona. The company is subject to transaction privilege tax. The company’s in-state activities performed in connection with the leasing of its machines to the Arizona retailer were done to establish and maintain the company’s market in Arizona.
7. Company A is an online marketplace business that allows third-party merchants to list products for sale on its website. Company A is also a retailer and sells its own products on its website. Company A provides customer service to its own customers, as well as to customers purchasing goods from the third-party merchants. Company A provides purchasing information to all customers, such as order status and shipping information. It provides payment and refund processing to all customers and also controls the fulfillment process. However, it does not have actual possession or title to any inventory. The marketplace has a fulfillment center located in Arizona. The marketplace is considered agent for the third-party merchants on the site as a result of providing customer service and payment processing, and being able to control the fulfillment process. Company A is subject to transaction privilege tax. Company A is a retailer of tangible personal property. The location of a fulfillment center in Arizona satisfies the nexus requirements.
Examples Where Nexus Does Not Exist
1. A corporation is a mail order vendor that ships to customers across the country. Its principal place of business is in Missouri where it receives all sales orders. The only contacts Corporation X has with Arizona are that it mails its catalogs and supplemental advertising flyers to active or recent customers located in Arizona twice a year, and it delivers any orders to Arizona customers via US mail or a common carrier. It has no place of business, distribution, or sales house or warehouse in Arizona. It has no agent, salesperson, solicitor, delivery person, or other type of representative in Arizona. It does not own any property (real or personal) in Arizona, nor does the corporation advertise in Arizona. The corporation’s mail order activities by themselves do not satisfy the substantial nexus requirement to impose TPT or use tax.
2. Company D is an online marketplace that provides a platform for third-party retailers to sell products. Company D does not sell any merchandise on its own website, and so is not otherwise a retailer. It provides customer service and payment processing, but it does not have any control over the delivery/fulfillment process. Company D does not have any control over the delivery/fulfillment process and is not otherwise a retailer, therefore, Company D is not considered an agent for third-party retailers on its site and is not subject to Arizona TPT.