New legislation would end Arizona sales tax exemption for out-of-state online retailers

Arizona legislators recently introduced a new non-partisan bill to correct what proponents call a “fundamental unfairness” in Arizona tax law that provides an advantage to out-of-state sellers without a physical presence in the state by exempting them from state sales tax when selling to Arizona consumers.

House Bill 2702 is Arizona’s response to a June 2018 U.S. Supreme Court decision, South Dakota v. Wayfair, that allows states to require remote (out-of-state) retailers and marketplace facilitators, such as eBay or Amazon, to apply local sales tax to purchases by in-state residents. Already, 37 states — all but eight U.S. states with a sales tax — have made changes to address the new precedent.

“We’ve been working on this issue for 20 years, to try and get parity with online-only retailers, and this is our opportunity, since the Supreme Court ruled that you didn’t have to have a physical nexus,” said Michelle Ahlmer, executive director of the Arizona Retailers Association. “We have been working with our retail members and with the League of [Arizona] Cities and Towns, the counties and Amazon marketplaces, and… we feel like we’re at a spot where we’ve taken care of all the questions, and we’re very excited to be able to have parity for brick-and-mortar retailers.”

H.B. 2702 allows fair competition among retailers, especially those selling high-priced products, where a potential 10 percent variation in price can be significant, Ahlmer said.

Arizonans for Main Street Fairness, a broad, non-partisan coalition of local and national retailers and community leaders — including Amazon, Walmart, Target, Walgreens, Arizona Ace Hardware locations, Changing Hands Bookstore and the Arizona Retailers Association, among others — is leading the charge in favor of H.B. 2702. The organization says the bill will create better market fairness by requiring out-of-state businesses to pay the same taxes that local businesses already pay.

“I see it as being a fairer playing field for everybody in Arizona,” said John Arterburn, owner of Pinnacle Peak Ace Hardware in Scottsdale. “It’s just completing or applying a tax that’s already in place. I think it’s a benefit for everybody.”

Arterburn, who served in the military, said paying a sales tax is an easy way for consumers to contribute to their community and support the ingredients of a society with peace, civility and freedom. Sales tax revenue helps provide many of the things from which Arizonans benefit, he said.

“I’ve had policewomen and policemen come to my store late at night when a burglar alarm goes off; I appreciate that,” Arterburn said. “The professors at ASU that educated my wife, myself and my two daughters, I appreciate supporting them for future generations. It’s what we do.”

Arterburn said consumers often come to his store for a particular product or piece of advice, but once they realize they can get it tax-free from out-of-state they will go home and order the product online.

“I’ve got somebody on the outside who’s taking dollars out of Arizona, and they’re not paying taxes to support all the amenities that we have in a free and civilized society here in Arizona — police, fire, everybody else,” Arterburn said.

Competition is not the problem — Ace Hardware was founded in 1925 and has survived a lot, he said.

“I compete every day against everybody — against Home Depot, against Lowe’s, against Target, against Walmart, against Amazon — everybody,” Arterburn said. “That’s no problem.”

The Arizona Tax Research Association (ATRA), a statewide taxpayer organization dedicated to ensuring government tax revenue is used efficiently and effectively, opposes the bill because it does not go far enough to protect sellers from undue burden.

“We think it provides an excellent opportunity to apply taxes to remote sellers and provide fairness to main street businesses that have to comply with sales tax, but the burden issues addressed by the Court are a complex topic that we think need to be ironed out in a deliberative process,” said Sean McCarthy, senior research analyst at ATRA, regarding the Wayfair decision.

Arizona’s tax law is too complex in its current form for H.B. 2702 to have the desired effect, McCarthy said. Because Arizona municipalities can levy taxes separately from the state government, there are 92 different tax bases in the state based on the location of the consumer, and it is unfair to expect out-of-state sellers to comply with so many different tax codes, he said.

Arizona also has what are called “blended and tiered” rates, meaning tax rates change based on the value of a product or service, and that can be difficult to calculate, McCarthy said.

“Not only are the bases of tax different, but the way that they apply rates may be different as well,” he said. “That’s a pretty laborious task to have to do, particularly if you’re a remote seller out of state trying to sell into all 50 states, and then here’s Arizona with 92 different tax bases and… blended and tiered rates.”

Some states with similarly complicated systems, such as Alabama and Louisiana, are handling this issues by creating a separate, constant tax rate for out-of-state retailers without a physical presence in the state, McCarthy said. Arizona has made strides to simplify its tax system, but it is far from perfect, he said.

“What we are encouraging lawmakers to do is to pump the brakes, study this, understand fully the implications of the [Wayfair] decision,” McCarthy said. “We wouldn’t want other states to treat our small businesses this way… and so, we would expect that Arizona would do the same to businesses outside of Arizona as well.”

NetChoice, a national trade association of eCommerce businesses that promotes convenience, choice and commerce online, opposes H.B. 2702 in its present form. According to a NetChoice analysis, H.B. 2702 would discriminate against interstate commerce by requiring out-of-state business to pay the Transaction Privilege Tax (sales tax) of the location where Arizona purchasers reside, while in-state businesses could simply use the rates and rules applying to the physical business location regardless of where customers reside.

Requiring out-of-state sellers to adhere to Arizona’s complex tax system in its current form would place unnecessary burden on out-of-state sellers and reduce their incentive to sell to Arizona consumers, McCarthy said.

“Our opposition is mostly related to process, in that we share many of the goals of the proponents, but we are about measuring twice and cutting once and making sure that we are being fair to remote sellers and we have a good system that we’re proud of, and that we meet the… dicta of the Supreme Court, where they talk about not creating undue burdens,” McCarthy said.