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4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ 85251 480.425.2600 www.sackstierney.com SERVING ARIZONA CLIENTS SINCE 1960 SERVING ARIZONA CLIENTS.

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Presentation on theme: "4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ 85251 480.425.2600 www.sackstierney.com SERVING ARIZONA CLIENTS SINCE 1960 SERVING ARIZONA CLIENTS."— Presentation transcript:

1 4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ SERVING ARIZONA CLIENTS SINCE 1960 SERVING ARIZONA CLIENTS SINCE 1960 Sharon Shively and Matthew Meaker – Sacks Tierney P.A. Ross Dietrich – Price Kong & Company, CPAs Scott Morrison, Morrison, Clark & Conover, CPAs

2 4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ SERVING ARIZONA CLIENTS SINCE 1960 SERVING ARIZONA CLIENTS SINCE 1960 Generally, what was the law and what is the law now (as of today)?

3 4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ SERVING ARIZONA CLIENTS SINCE 1960 SERVING ARIZONA CLIENTS SINCE 1960 On June 25, 2013, Governor Brewer signed HB 2111 (Arizona’s transaction privilege tax simplification bill), which some consider one of her legacy accomplishments. The legislation is intended to enact major changes to Arizona’s sales tax structure. At this point, it is not entirely clear what changes are going to take place and when.

4 4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ SERVING ARIZONA CLIENTS SINCE 1960 SERVING ARIZONA CLIENTS SINCE 1960 Contractors pay construction taxes on new projects upon completion, based on 65% of the total sales prices of the project. For example, a property owner contracts with a GC for the construction of an improvement. The GC enters into agreements with subcontractors. The property owner will pay the GC pursuant to the contract and the GC will pay the subcontractors pursuant to their agreements. The taxed entity is the GC.

5 4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ SERVING ARIZONA CLIENTS SINCE 1960 SERVING ARIZONA CLIENTS SINCE 1960 How about a speculative builder? The speculative builder will enter into agreements with subcontractors. If a contract to sell is in place prior to completion of the construction, the speculative builder will be taxed as a GC, otherwise it is the subcontractors. TPT is administered through the Arizona Department of Revenue, along with a number of cities that collect and audit the taxes themselves.

6 4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ SERVING ARIZONA CLIENTS SINCE 1960 SERVING ARIZONA CLIENTS SINCE 1960 Under the new law, contractors who only enter into contracts with owners of real property to maintain, repair, replace or alter their property are exempt from the TPT prime contracting classification and will be subject to tax at the point of purchase on the building materials. –Maintain generally means the upkeep of property or equipment. –Repair results in returning real property to a usable state. –Replace is the replacement of something that exists with something else, including upgrading. –Alteration is the act of causing a direct physical change to real property without causing a change to the identity.

7 4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ SERVING ARIZONA CLIENTS SINCE 1960 SERVING ARIZONA CLIENTS SINCE 1960 All other contracting activity remains taxable under the current statutes. What if a company does both new construction and repair work? The law, as it currently stands, could result in the company needing to split a bulk purchase of, for example wiring, paying taxes at the point of sale for one half of the purchase price (repair jobs) and present the tax-exemption certificate for the other half (new construction).

8 4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ SERVING ARIZONA CLIENTS SINCE 1960 SERVING ARIZONA CLIENTS SINCE 1960 Under the new law, ADOR becomes the single point of administration and collection for State, county and municipal TPT. –As of now, this will not be the case on January 1, –Contractors will continue to pay TPT to the state and most municipalities like they currently are, although taxes for Bullhead City, Somerton and Willcox will be paid to ADOR. –The new goal is that January 1, 2016, ADOR will be the single point of administration. This is going to be accomplished via an upgraded website. –At this point, the website is not ready.

9 4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ SERVING ARIZONA CLIENTS SINCE 1960 SERVING ARIZONA CLIENTS SINCE 1960 Starting January 1, 2015, all contractors who do not file electronically must have their returns received by ADOR by the second to the last business day before the due date. Even though there is a delay regarding being a single source point for payment, ADOR will be a single point for all audits for all cities. There will be standardized codes for businesses and deductions. –These have yet to be finalized.

10 4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ SERVING ARIZONA CLIENTS SINCE 1960 SERVING ARIZONA CLIENTS SINCE 1960  AZDOR’s “goal” is to simplify the manner in which taxpayers report and pay TPT.  Committed to making it as “easy” as possible.  Created a broad reaching tax rewrite that is intended to take effect on January 1,  Problems on two tracks: ◦ IT track ◦ Substantive track

11 4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ SERVING ARIZONA CLIENTS SINCE 1960 SERVING ARIZONA CLIENTS SINCE 1960  Implementation will require an entire new software program that will take a minimum of one year to accomplish.  Assumes the State has the funds to pay for the development of the program.  Implementation of online portal has been delayed until January 1, 2016.

12 4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ SERVING ARIZONA CLIENTS SINCE 1960 SERVING ARIZONA CLIENTS SINCE 1960  Who is required to obtain TPT license under the prime contracting classification? ◦ Prime contractor who performs, coordinates, supervises modification work, including contracting with subcontractors.  Who is not required to obtain TPT license under the prime contracting classification? ◦ Prime contractor who contracts with owners of real property or the owners of improvements to real property for maintenance, repair, replacement or alteration of existing property. Tax at point of sale.

13 4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ SERVING ARIZONA CLIENTS SINCE 1960 SERVING ARIZONA CLIENTS SINCE 1960  Definition of “modification” versus “maintenance, repair, replace and alter.”  What if contractor does both?  What about existing inventories purchased exempt but will be used in MRRA not modification? How/when to pay the tax?  What about change orders?

14 4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ SERVING ARIZONA CLIENTS SINCE 1960 SERVING ARIZONA CLIENTS SINCE 1960  Cornerstone Legislation: “Legacy”  Stakeholders efforts to clarify, define and modify as necessary.  Numerous meetings among stakeholders to attempt to slow down the process so that “roll-out” is successful. ◦ Special session ◦ Meet with AZDOR ◦ Meet with specific legislators

15 4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ SERVING ARIZONA CLIENTS SINCE 1960 SERVING ARIZONA CLIENTS SINCE 1960  AZDOR has issued several versions of FAQs for circulation, review and comment.  AZDOR to issue FAQs again November 13,  Need a chance to review the (hopefully) comprehensive FAQs to determine what issues remain; whether modifications are needed.

16 4250 N. Drinkwater Blvd., Fourth Floor, Scottsdale, AZ SERVING ARIZONA CLIENTS SINCE 1960 SERVING ARIZONA CLIENTS SINCE 1960  November 2014 Election ◦ No change in makeup of chambers by number. ◦ Are changes in philosophy. ◦ Are changes in Chairmanships of committees. ◦ New Governor

17 ADOR New Sales Taxes November 19, 2014

18 Prime Contracting Changes Effective January 1, 2015 Prime contractors: This definition remains intact. Prime contracting services are still taxable on 65% of their gross receipts. Subcontractors working for a Prime Contractor are exempt from sales taxes. The sales of building materials to prime contractors or subcontractors are exempt as before. No changes here.

19 New Exemption FROM Prime Contracting Effective January 1, 2015 “Service” Contractors Subject to Tax at Point of Purchase: Now exempted from prime contracting on both the state and city levels. Contractors who only enter into contracts with owners of real property OR owners of the improvements to real property to maintain, repair, replace, or alter (MRRA) their property will be subject to tax at the point of purchase on the building materials used in those projects. No License Needed: Service contractors who only enter into contracts with owners of real property OR owners of the improvements to real property, to maintain, repair, replace, or alter (MRRA) their property are not required to obtain or renew TPT licenses. Retail Tax: Service contractors will now pay retail tax at the point of sale when materials are purchased. This leads to Inventory Changes…..

20 Inventory Changes Effective January 1, 2015 Prime contractors: The sales of building materials to prime contractors or subcontractors are exempt. Service contactors: Service contractors will now pay retail tax at the point of sale when materials are purchased.

21 Prime and Service Contracting Inventory Prime Inventory – Must be purchased using Resale Number and then held SEPARATELY from Service Inventory Service Inventory – Must be purchased and sales taxes paid at date of purchase then held SEPARATELY from Prime Inventory.

22 Problems: Can you separate the inventories? Can you train the employees/purchasing agents to carefully identify the type of contract first before purchasing inventory? What do you do to pay the sales taxes on the exempt materials you have on hand at December 31, 2014? These issues above deal directly with your resale license so…

23 License Renewals Effective January 1, 2015 Taxpayers who have a state TPT license and/or a municipal excise tax license are required to annually renew the license(s). The license(s) for both the State and the cities are valid for one calendar year and must be renewed by January 1 st each year. Taxpayers will be receiving a notice to renew the State and Program City licenses. Taxpayers must complete and submit this renewal form to the Arizona Department of Revenue even if the taxpayer’s business information has not been changed. There is no fee to renew the State TPT or current Program City license.

24 UPCOMING: An electronic license renewal process for all taxpayers, including non-program city taxpayers between October and December, 2015, to be included in your Portal. Renewal notices will be sent in the month of November. If you do not receive your notice by December 31, 2014, please call It may take up to forty five days to process your renewal. This annual renewal means a decision is required each year to be licensed or not depending on what type of contractor you are……

25 License Problems Effective January 1, 2015 CRITICAL NOTES: You are responsible to renew or not renew your license each year. Calendar it and do it early if possible! If you are now only a Service contractor and choose NOT to renew your license then are you obligated to inform all suppliers that you no longer qualify for the resale exemption? We believe you are. If you are now only a Service contractor and DO renew your license then are you obligated to inform all suppliers when you don’t qualify for the resale exemption on the Service purchases? We believe you are.

26 More License Problems If you are a Service contractor and might in the future have an opportunity to enter into a Prime contract situation that needs a resale number, should you consider keeping your license current? We believe you should. There is a way to obtain a contract specific exemption license number for the above but it is very problematic and could severely delay your ability to purchase the items for resale. Let’s discuss this……

27 Project Specific Exemption Certificates Effective January 1, 2015 “In order to reign in abuse of exemption certificates, the Department is required under House Bill 2111 to issue project-specific exemption certificates that contractors can use to purchase building materials tax free.” We put this here so that you could note the word “abuse” used by the ADOR in their own literature.

28 To qualify for a project-specific exemption certificate, the contractor must meet the following conditions: The contractor may not work directly for the owner of the real property, but rather must work on a job that is in the control of a taxable prime contractor; The contractor may only use the exemption certificate for material that will be incorporated into a taxable construction project; The contractor may not have a delinquent tax balance; The contractor must submit documentation to the Department showing that it meets these conditions. It appears that this new exemption certificate requirement applies only to subcontractors.

29 License Renewals ADOR has indicated that license renewals may take up to 45 days so plan accordingly for any project specific exemption certificates that you might need. Now how do you go about filing…..

30 How Will You File Sales Tax Reports Effective January 1, 2015 Business Owners MUST e-file their TPT returns if they have more than 1 business location. There will no longer be the e-signature document required when registering on AZTaxes.gov ADOR expects to have a new Form TPT-1.

31 Filing in 2015: Program Cities: You will file only the ADOR TPT reports for all cities for which the ADOR licenses and collects TPT on behalf of. You will report all monthly activity on the Arizona TPT form and pay the TPT taxes due for the state and cities. Except for: Non-Program Cities: Apache Junction, Avondale, Chandler, Douglas, Flagsta ff, Glendale, Mesa, Nogales, Peoria, Phoenix, Prescott, Scottsdale, Sedona, Tempe, and Tucson. These cities will continue to administer their own privilege taxes through the 2015 calendar year. You will need to file separate TPT reports with these cities.

32 Filing in 2016: All cities will be Program cities. The only TPT report to be filed each month will be electronically with the Arizona Department of Revenue. This TPT report will include the activities in all cities. Where do you go for the most current information….

33 New “On-Line Portal” Effective January 1, 2015 In 2012, the Arizona Legislature passed House Bill 2446, which required the Arizona Department of Revenue (the “Department”) to establish a central online portal where taxpayers could elect to report city sales taxes for cities whose sales taxes are not administered and collected by the Department. Then…

34 …came House Bill 2111 which dramatically expanded the online portal. It requires that the portal constitute a single point of contact where taxpayers may obtain all necessary state and city tax licenses, file a single return for state, county and city taxes, and pay all state, county and city sales tax. Previously, taxpayers had to file a return with the Department for state and county taxes, and cities whose taxes were administered by the Department, but taxpayers had to file a separate return with each city that administered its own sales taxes.

35 Payment to? Taxpayers who do not elect to report and pay city taxes through the online portal, but instead choose to submit paper returns, are now required to file the paper returns and pay the taxes owed to the Department rather than sending the returns and payment directly to the relevant city. (This appears to have been amended to start January 1, 2016 with both State and cities instead) So you have a new Portal, what is expected to change on the new TPT-1 Form…

36 Standardized Code Changes Effective January 1, 2015 Standardized Business Codes-Transaction Detail Column A Beginning January 1, 2015, there will be one list of business codes for the State/county and cities. For example, if you currently file under the retail classification at the state/county level (business class 017), you will file business code 017 for the city in which you conduct business in. The standardized list will be posted by ADOR once they are finalized.

37 Standardized Deduction Codes-Schedule A Beginning January 1, 2015, there will be one list of deduction codes for the State/county and cities. The standardized list will be posted by ADOR once they are finalized. You may no longer use deduction codes 888(Other City-Exempt Income) or 999(Other State-Exempt Income). Use of these codes will be disallowed and penalties and interest may apply. Indian land? What about Exemption changes…

38 Tax Exemption Changes Effective January 1, 2015 Repeal of Sales Tax exemptions. Current law contains an exemption for sales of tangible personal property to a non-resident of Arizona if the property is shipped or delivered to the purchaser outside Arizona for use outside the state. Ariz. Rev. Stat. § (A)(14). Under House Bill 2111, this exemption is limited to sales of motor vehicles only.

39 House Bill 2111, cont. House Bill 2111 also repeals the current exemption for sales of tangible personal property shipped directly to a destination outside of the United States for use in a foreign country (currently, Ariz. Rev. Stat. § (A)(35)). Such foreign sales are not taxable under the foreign commerce clause of the US Constitution and evidently the Legislature thought that a separate statutory exemption was unnecessary. We believe that ALL sales to anyone inside & outside the state of Arizona, except foreign destinations, are now subject to retail sales tax on personal property.

40 Other Exemptions Effective January 1, 2015 Pre-construction services exemption modified. Arizona law currently contains an exemption for the gross receipts attributable to a “separate, written design phase services contract or professional services contract.” Ariz. Rev. Stat. § (N). This exemption is modified so that design phase services and professional services no longer need to be contained within a separate contract. Rather, the terms, conditions, and pricing for the design phase services or professional services merely need to be separately stated from those for construction phase services in the contract. Owner-builder classification repealed. The rarely applicable owner-builder tax classification contained in Ariz. Rev. Stat. § , is repealed.

41 Property Management Companies & Residential Rental Property Property managers and property management companies may no longer obtain a transaction privilege tax (TPT) license on behalf of their clients. Effective January 1, 2015, each real property owner is required to have a TPT license per location. To obtain a TPT license, the property owner must apply using the Arizona Joint Tax Application (JT-1). If a property owner would like a property manager or property management company to file and pay their TPT, the property owner must file a General Disclosure/Representation Authorization Form (aka Power of Attorney, Arizona Form 285) with the Arizona Department of Revenue.

42 Other Things to Look for in the Upcoming Months Ability to look up taxing jurisdiction and applicable tax rate by January 1, Bulk filing by jurisdiction by January 1, New joint tax application (JT-1) with jurisdiction address functionality: July 1, Enhanced AZTaxes.gov e-file system: October 1, New TPT form for filing monthly TPT returns which will allow taxpayers to report data by business location: October 1, Bulk filing capabilities for taxpayers to file by business location: October 1, An electronic license renewal process for all taxpayers, including non-program city taxpayers between October and December, 2015 Updates at https://www.azdor.gov/TPTSimplification/Updates.aspx


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