Steve Newmark 2013-01-16 04:07:16
This bi-monthly column will present what I hope is useful, easily accessible information on current tax issues. The best place to start this discussion is where I have spent much of the past thirty years: Arizona sales taxes. A.R.S. § 42-5008 levies the transaction privilege tax, which is “measured by the amount or volume of business transacted by persons on account of their business activities.” Although the statute says that the tax is the “transaction privilege tax,” nobody calls it that. They call it the sales tax. Sales tax or not, the tax is measured by the gross income of the business. Arizona State Tax Comm’n v. Garrett Corp., 79 Ariz. 389, 291 P.2d 208 (1956). No deduction is allowed for the cost of doing business, Watkins Cigarette Service. Inc. v. Arizona State Tax Comm’n., 111 Ariz. 169, 526 P.2d 708 (1974), and it makes no difference whether the business makes a profit. Town of Somerton v. Moore, 58 Ariz. 279,119 P.2d 239 (1941). The law assumes that all gross receipts of a business are subject to sales tax. This means that a retailer must maintain records that clearly distinguish between gross income from sales of personal property and gross income from sales of services. In the absence of adequate records, the sales tax applies to income from both (taxable) sales of personal property and (nontaxable) sales of services. Similarly, when a business sells personal property at wholesale and retail, the tax should apply only to gross income from the retail sales. However, if the business maintains records that fail to distinguish clearly between gross income from (taxable) retail sales and gross income from (nontaxable) wholesale sales, the sales tax is measured by the total gross income of the business. The importance of the accountant’s role in record maintenance cannot be overemphasized. Business owners are good at doing business stuff, but they may not be so good at doing tax stuff. This is where the accountant comes in. The accountant must help the business identify what income is taxable and what is not; set up a recordkeeping system (including properly completed resale and exemption certificates) that enables the business accurately and consistently to assign income to taxable and nontaxable categories; and determine the amount of tax the business should collect. Although the sales tax applies to businesses, it does not apply to all businesses. A toy store is subject to tax under the retail classification when it sells a toy to a child. By contrast, when I do tax work for a client or write an estate plan for a family, my legal services are not taxable. The reason the tax applies to the retail business and not the lawyer business is simple: the Legislature has decided to tax one but not the other. The Legislature has identified 17 different taxable business classifications for sales tax purposes. Each classification has its own statute, and each of those statutes is written to make clear what business activity is subject to tax under the classification. The sales tax does not apply to a business activity unless the activity is described in the words of the statute. Wilderness World, Inc. v. Arizona Dep’t of Revenue, 182 Ariz. 196, 895 P.2d 108 (1995). Some of these classifications will be discussed in detail in future columns. For now, it is sufficient to list them: (1) Retail, A.R.S. § 42-5061; (2) Transporting, A.R.S. § 42-5062; (3) Utilities, A.R.S. § 42-5063; (4) Telecommunications, A.R.S. § 42-5064; (5) Publication, A.R.S. § 42-5065; (6) Job printing, A.R.S. § 42-5066; (7) Pipeline, A.R.S. § 42-5067; (8) Private car line, A.R.S. § 42-5068; (9) Commercial lease, A.R.S. § 42-5069; (10) Transient lodging, A.R.S. § 42-5070; (11) Personal property rental, A.R.S. § 42-5071; (12) Mining, A.R.S. § 42-5072; (13) Amusement, A.R.S. § 42-5073; (14) Restaurant, A.R.S. § 42-5074; (15) Prime contracting, A.R.S. § 42-5075; (16) Owner builder, A.R.S. § 42-5076; and (17) Membership camping. A.R.S. § 42-5077. Each of these sales tax classifications has its own little surprises for unwary businesses, and it is up to all professional advisors to identify them and suggest ways to avoid trouble. I look forward to sharing with you what I have learned about sales taxes over the years and my thoughts on new sales tax issues as they pop up. I will also write about federal tax matters, including estate and gift tax laws and rulings, which involve my other practice area, trusts, estates and probate. See you next time.
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