Arizona: Department Concludes that State Sourcing Statute Supersedes Model City Code

The Arizona Department of Revenue recently addressed the conflict between the sourcing provisions contained in the Arizona Revised Statutes and the Model City Tax Code (MCTC). For purposes of retail sales of tangible personal property, by state statute, sales are sourced to either the seller’s business location if the order is received in state or the purchaser’s location, if the order is received out-of-state. However, under the MCTC, out-of-city sales are exempt from the retail privilege tax. An out-of-city sale includes sales where title exchange and possession occur outside the city, the item was taken from stock outside the city, and the order was received outside the city. In other words, a sale made by a remote seller with no business location in Arizona would likely be sourced to the location of the purchaser under state law, but would be considered exempt from municipal transaction privilege tax under the MCTC. A similar inconsistency also exists for sourcing leases and rentals of tangible personal property. In a Transaction Privilege Tax Ruling (TPR 20-2), the Department concluded that because Arizona’s state statute reflected the general administrative laws for sourcing sales, leases and rentals of tangible personal property, the state sourcing statute superseded the inconsistent provisions in the MCTC.  When administering city privilege taxes, Arizona state law generally applies “unless the context otherwise requires.” The Department interpreted this phrase to mean that the MCTC’s provisions should be reviewed and “if necessary and based on the context” followed in lieu of the state statute to arrive to a proper result. The Department noted that the plain language of Arizona’s state statute allows the Department to designate a location for purposes of determining the appropriate taxing provisions and tax rate, which is administrative in nature. In the Department’s view, there was no “context” that existed justifying a variance from the state statute with respect to sourcing. Moreover, the state sourcing method should prevail because the “provisions involve a subject of statewide concern.” The ruling is to be applied prospectively only, and the guidance cannot be used to assess tax against a taxpayer for a sales period to the ruling. For more information on TPR 20-2, please contact John Schneider at 213-955-8534.