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Updated Jun 25, 2013 - 1:51 pm

Arizona Gov. Brewer signs sales tax overhaul bill

PHOENIX — Gov. Jan Brewer notched another political win on Tuesday when
she signed a major overhaul of the state’s sales tax collection system that was
crafted in a compromise with cities and towns that worried it could cut their
revenue.

The changes to the Transaction Privilege Tax system set the stage for the
eventual collection of taxes on Internet sales in Arizona but won’t affect what
consumers pay at retail stores. That’s because a proposed federal law giving
state’s the power to require online retailers to collect state and local sales
taxes for purchases made over the Internet requires states to have simplified
systems like those adopted Tuesday.

The biggest impact will be on businesses that complain the system is one of the
most complex in the nation. Currently, owners have to file tax returns in each
municipality where they do business and they can undergo multiple audits.

However, when the overhaul goes into effect in January 2015, there will be just
one online filing and one audit statewide.

“We’ve been talking about simplifying the Arizona sales tax since my days in
the Legislature — that was a long time ago,” Brewer said. “By now we all know
that the Arizona sales tax code is the most complex in the nation. I don’t know
how many times I said it over and over and over again in the last six months.
Well, today is the last time. Thirty years of waiting is long enough.”

Arizonans are already supposed to pay sales taxes on internet purchases, but
few do. That’s a big drain on brick-and-mortar retailers who must collect
taxes, said Sen. Steve Farley, D-Tucson.

“We’re at risk of losing most of our brick-an- mortar retailers, who not only
create revenues in our state, they create jobs in our state,” Farley said.
“They’re at a 10 percent disadvantage almost to the online retailers.”

Cities and towns fought changes in new construction taxes that would cut
revenue from growing cities. Brewer agreed to a revision that leaves that tax in
place.

The construction tax is based on 65 percent of the cost of the total job, 35
percent of which reflects labor costs. Much of that tax now flows to the
community where the building is done, helping offset increased costs of
providing services.

Brewer’s original proposal would have scrapped that system in favor of a sales
tax paid when companies buy materials. Municipalities howled, complaining to
lawmakers that they would lose the tax on labor while sales could be driven to
larger cities or out of state.

Brewer compromised on the contracting issues in May, but two issues continued
to hold up a deal. Cities wanted a say in the audits and ultimately got it, with
the state getting overall oversight but cities maintaining their auditors to
help or do their own reviews with state approval. Cities also
held out for detailed information on collections so they could issue bonds and
hire workers based on that revenue and identify audit candidates.

A deal was finally struck a day before adjournment.

“It’s because there were senators and representatives who … said that
they’re not going to vote for it until the concerns in their districts were
taken care of,” said Ken Strobeck, executive director of the League of Arizona
Cities and Towns, which spearheaded the negotiations.

A solution on the collections issue finally broke the impasse on June 13, when
the state Revenue Department agreed to provide detailed collection information
by the time the changes take effect.

Businesses that do household repairs such as plumbing and air conditioning will
now be relieved of the complex requirements of the old system. But Strobeck
noted that some others businesses, including wholesale houses that supply the
trades, will have additional burdens.

“They’re going to have a choice to make,” he said. “Either they’re going to
continue to do wholesale to only contractors or they’re going to have to get
into the sales tax business for the service contractors.”

Rep. Debbie Lesko, R-Peoria, who sponsored the legislation, said it will help
consumers by cutting the taxes they must pay on their home repair bill. And she
said unscrupulous contractors who know avoid taxes will be forced to pay them.

“There are also contractors out there that offer cash deal that don’t pay any
taxes, sales taxes or income taxes,” Lesko said. “So with this new system
where service contractors pay for tax on materials, not only will it help them,
it will reduce taxes to the consumers, it will also possibly increase revenues
to the cities that have building suppliers in their town, because at least now
they’re getting some taxes.”

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