Beginning January 1, 2025, Arizona lessors will no longer be required to collect and remit city Transaction Privilege Tax (TPT) on residential rentals. Senate Bill 1131, Chapter 204, Laws 2023 amended Ariz. Rev. Stat. Ann. § 42-6004, which precludes cities from taxing residential rentals. This preclusion does not apply to health care facilities, long-term care facilities, or hotel, motel or other transient lodging businesses

What Is Changing?
Under prior law, most cities taxed residential long term (30 days or more) rentals with rates varying depending on the local jurisdiction. This law standardizes and simplifies the tax landscape by prohibiting the imposition of TPT on residential rental income statewide, as residential rentals were already excluded from state and county TPT.

Who Is Affected?
• Property owners currently paying TPT on residential rentals in cities and towns that taxed residential rentals.
• Tenants should also see a reduction in overall costs as landlords can no longer pass the tax through to their tenants. 
What Does This Mean for Property Owners?
After January 1, 2025, property owners will no longer be required to collect and remit TPT on residential rentals. Property owners should continue to collect and remit municipal TPT on residential rentals through December 31, 2024. If property owners are charging residential tenants for the cost of the TPT, this practice must stop on January 1, 2025.

Next Steps for Property Owners
• Review current compliance requirements and ensure that all TPT filings and payments for 2024 are accurate and up to date.
• Prepare for the transition by updating lease agreements, billing systems, and accounting practices to remove TPT charges passed through to tenants effective January 1, 2025.
• Notify tenants of any changes in rent amounts, if applicable.

What to Expect from the ADOR
The Arizona Department of Revenue will automatically cancel all TPT licenses that exclusively list Business Code 045 (Residential Rental) on the account. For licenses with other business activity codes, the residential rental code will be removed, but other business codes will remain active. Property owners do not need to take any action to close or cancel these TPT licenses. However, the cancellation of TPT licenses and/or business codes does not relieve taxpayers of any outstanding tax liabilities or filing obligations for periods before January 1, 2025.
 

Property Tax Legislation and Court Decisions

LEGISLATION¹

Property Tax on Destroyed Property Must be Prorated (Laws 2024, chapter 34)
County assessors are required to prorate the value of properties destroyed after they were valued for the year and county treasurers are required to prorate the tax bills.

Property Tax Refunds for Expenses to Mitigate Effects of Illegal Camping and Loitering (HCR 2023-2024)
The Arizona Legislature authorized putting to the voters at the 2024 November general election, the approval of a law that would provide for city and county (when property is located in unincorporated county area) property tax refunds to owners who have incurred expenses to mitigate the effects of illegal camping, loitering, panhandling, public consumption of alcoholic beverages or the use of illegal drugs on their property when a city or county adopts or follows a policy declining to enforce such laws. The refund is limited to the city or county portion of the property tax paid (and does not include school taxes). This measure was approved by the voters, to begin in 2025. The purpose of this measure was to force cities and counties to enforce existing laws against camping, loitering, etc.

Taxpayers Are Entitled to Receive the Equity in their Property When Sold for Delinquent Taxes (Laws 2024, chapter 176)
When a property is sold for delinquent property tax, the owner is entitled to request that the equity in their property over and above the delinquent tax amount be refunded to them rather than just losing their property in an action to foreclose.

Valuation of Golf Courses (Laws 2024, chapter 8). Golf course land is valued at $500 per acre, fairways and tees are valued based on the Department’s per hole cost, and improvements like clubhouses and other structures are valued based on replacement cost new, less depreciation. To obtain this favorable valuation treatment, the owner of the golf course must record a deed restriction that restricts the use of the property as a golf course for at least 10 years. This legislation provides that to continue to be valued as a golf course, the deed restriction must be refiled when the properties are split or combined. It also requires the owner to notify the county assessor within 30 days of converting any portion of the property to a different use.

Military Reuse Zone Status Renewed for Phoenix-Mesa Gateway Airport (House Joint Resolution 2001). Phoenix-Mesa Gateway Airport was formerly Williams Air Force Base and its status as a military reuse zone was renewed through October 19, 2031. There are both TPT and property tax incentives available for military reuse zones. 

Department of Revenue Now Has Responsibility for Military Reuse Zones Laws 2024, chapter 43). The responsibility for designating military reuse zones and certifying taxpayers’ eligibility for military reuse zone incentives is transferred from the Arizona Commerce Authority to the Department of Revenue.

COURT DECISIONS

Mesquite Power, LLC v. ADOR, 2024 Ariz. LEXIS 179 (2024). Income From Power Purchase Agreement Is to Be Taken into Account when Valuing Electric Generation Plant.

While there is a statutory method the value electric generation plants (basically a cost approach), the statutory value cannot exceed its fair market value. Mesquite argued that the statutory value was indeed higher than the plant’s fair market value because the statutory value included the value of a power purchase agreement. Mesquite’s position was that the power purchase agreement was an intangible and under Arizona law intangibles cannot be taxed. The Arizona Supreme Court though observed that the power purchase agreement itself was not being valued but rather under an income approach, the income from that contract should be considered when valuing the plant and remanded to the Arizona Tax Court so the owner’s appraiser could recalculate the value of the facility taking the income from the power purchase agreement into consideration.

Agua Caliente Solar, LLC v. Arizona Dep't of Revenue, 257 Ariz. 437 (Ct. App. 2024). Full Amount of ITC Attributable to Solar Plant Is to Be Used to Reduce the Plant’s “Original Cost” Although the Credits Had Not Yet Been Utilized. 

Solar Generation Facilities are valued at 20% of their “original cost” with a reduction for the value of any investment tax credits applicable to the plant. Aqua Caliente though was not able to utilize the full amount of the ITC on its federal income tax return because it didn’t have sufficient taxable income to absorb the ITC. The Department took the position that since Aqua Caliente did not utilize the ITC, it was not entitled to use it to reduce the plant’s original cost. The Arizona Court of Appeals held that the value should be reduced by the value of federal investment tax credits not yet utilized.

South. Point Energy Ctr. LLC v. Arizona Dep't of Revenue, 257 Ariz. 189 (Ct. App. 2024). Power Plant on Indian Reservation Subject to Property Tax.

South Point owned an electric generation plant located on the Fort Mohave Indian Reservation in northwest Arizona. The land was leased from the Indian Tribe under a ground lease approved by the BIA. South Point built the plant and owned it, but the Tribe owned the underlying land. South Point argued that under the 9th Circuit Court of Appeals decision in the Chehalis case, the state and county could not impose property tax on the plant because it became a permanent improvement to the land owned by the Tribe and Tribal property cannot be taxed. The Arizona Supreme Court in a prior decision refused to apply the Chehalis case and remanded to the Court of Appeals to consider an additional argument that under the Bracker balancing test, the state cannot tax the plant. In this decision, the Arizona Court of Appeals held that under Bracker, the plant was also subject to property tax because the: (1) extent of the federal and tribal regulations did not weigh in favor of implied federal preemption, (2) economic burden of the tax fell on the lessee rather than on the tribe, and (3) taxes were not impliedly preempted by federal law because the state had substantial interests that justified the tax.

San Diego Gas & Elec. Co. v. ADOR, 256 Ariz. 344 (App. 2023). (Review granted by Arizona Supreme Court.) Statutory Value for Electric Transmission Property Cannot be a Negative Value.

Electric transmission facilities are valued using a statutory cost approach with a reduction for accumulated depreciation. As a part of Federal Energy Regulatory Commission regulations, electric utilities must include as a part of accumulated depreciation, the future cost of removing the transmission lines. San Diego Gas & Electric included the accumulated cost of decommissioning, which reduced the statutory formula value below zero and used the negative amount to reduce the value of construction work in progress. the Court of Appeals held that the full cash value includes the accumulated depreciation of the future cost of removal but that the full cash value cannot be a negative value and that the negative amount cannot be used to reduce the value of construction work in progress.

Sales and Use Tax Legislation and Court Decisions

2024 LEGISLATION

Senate Bill 1370, Chapter 237. Youth Businesses (Lemonade Stands) Don’t Need Sales Tax Licenses. Persons under 19 no longer need a transaction privilege (sales) tax (TPT) license if their gross receipts don’t exceed $10,000 per year.

Senate Bill 2382, Chapter 142. Department of Revenue to Certify Third Parties for Sourcing City and County Transaction Privilege Tax (TPT). The Department of Revenue is required to certify third-party companies to provide sourcing services for purposes of sourcing city and county TPT by January 1, 2028 (extended from January 1, 2026 by House Bill 2909, below). Taxpayers that use certified sourcing services will not be liable for any additional tax due to sourcing errors.

House Bill 2875, Chapter 44, Electronic Funds Payments Deemed to be Made When Authorized. Taxpayers’ electronic funds payments will be deemed to be made on the date and at a time when the taxpayer successfully authorized an electronic funds transfer. The transfer must be evidenced by e-payment confirmation from their financial institution.

House Bill 2380, Chapter 33, Cities Can’t Audit Taxpayer Engaged in Business in More than One City, Unified Audit Committee Must Publish City Audit Guidelines. This legislation prohibits a city from auditing a taxpayer engaged in business in more than one city or town unless that city obtained prior approval from the Department. This bill also requires the Unified Audit Committee (composed of representatives from cities and the Department of Revenue) to publish uniform audit guidelines applicable to all cities and towns.

House Joint Resolution 2001, Military Reuse Zone Status Renewed for Phoenix-Mesa Gateway Airport. Phoenix-Mesa Gateway Airport was formerly Williams Air Force Base and its status as a military reuse zone was renewed through October 19, 2031. There are both TPT and property tax incentives available for military reuse zones.

House Bill 2634, Chapter 43, Department of Revenue Now Has Responsibility for Military Reuse Zones. The responsibility for designating military reuse zones and certifying taxpayers’ eligibility for military reuse zone incentives is transferred from the Arizona Commerce Authority to the Department of Revenue.

House Bill 2909, Chapter 221, Extended Third-Party Sourcing Date and Extends Exemption for Qualifying Forest Products Equipment. In order to give the Department of Revenue more time to certify third parties for sourcing city and county TPT, this bill extended the date from January 1, 2026 to January 1, 2028. Also extended the sales and use tax exemptions for the purchase of harvesting or processing qualifying forest products equipment through December 31, 2026. This bill was passed with an emergency clause, so it went into effect on June 18, 2024 when signed by Governor Hobbs.

COURT DECISIONS

9W Halo Opco, LP v. ADOR, No. 1 CA-TX 23-0003 (11-7-2024). Laundry Rental Business Not Engaged in Processing; Machinery and Equipment Used in Laundry Operations Not Exempt M&E. 
Taxpayer launders and sanitizes textiles (sheets, etc.) and rents them to entities in the healthcare industry. Taxpayer sought a refund of use tax paid on their purchases of the laundry equipment used in their laundry and sanitization activities. The Department of Revenue denied the refund claim and the taxpayer appealed. The Court reasoned that the term “processing” as is commonly understood within its ordinary meaning does not fall within the meaning of processing. In denying the taxpayer’s claim for refund, the Court relied upon the definition of “processing” contained in Moore v. Farmers Mut. Mfg. & Ginning Co., 51 Ariz. 378 (1938), which stated: “to subject (especially raw material) to a process of manufacturing, development, preparation for market, etc.; to convert into marketable form, as livestock by slaughtering, grain by milling, cotton by spinning, milk by pasteurizing, fruits and vegetables by sorting and repacking.”
RockAuto, LLC v. Ariz. Dept. of Revenue (App 2024) (petition for review to Arizona Supreme Court pending); In-State Distributors Provided Nexus for Sales Tax Collection.

RockAuto is an internet seller of auto parts throughout the United States. It used local distributors to fulfill their internet orders. It had no physical presence in Arizona but had local distributors in the state that fulfilled RockAuto’s orders for orders to be shipped to Arizona customers. The Court of Appeals found that the local Arizona distributors acted on RockAuto’s behalf and constituted the sufficient physical presence requiring RockAuto to collect and remit the Arizona sales tax. It should be noted that the years at issue in this case were prior to Arizona’s adoption of economic nexus, so that the applicable test used in this case was “physical presence.”
Dove Mountain Hotelco, LLC v. Arizona Dep't of Revenue, 257 Ariz. 366 (2024). Compensation Received from a Hotel Rewards Program for Complimentary Stays is Subject to TPT. 
Marriott, as most hotels, has a loyalty marketing program that Dove Mountain, a Marriott branded hotel, participated in. The Marriott rewards program was administered by Marriott Rewards, LLC. When a guest would use points for a complimentary stay at Dove Mountain, Marriot Rewards would compensate Dove Mountain. The issue is whether that compensation was subject to the transaction privilege tax under the hotel classification. The Arizona Supreme Court held that the compensation for the complimentary stays was taxable.

 
City of Tucson v. Orbitz Worldwide, Inc., No. 1 CA-TX 23-0001, 2024 WL 123640 (Ariz. Ct. App. Jan. 11, 2024). (Memorandum decision. Review denied by Arizona Supreme Court.) Orbitz is Not an “Operator” of Hotels.

Tucson has an occupational license tax on persons that “operate or cause to be operated a hotel.” Tucson assessed Orbitz for that tax, but the Court of Appeals held that Orbitz was not subject to the tax because it did not operate or cause hotels to be operated.

Income Tax Legislation

Senate Bill 1358, Chapter 55. Can Request Arizona Withholding on Distributions from Pension and Retirement Accounts. A recipient of a distribution from a pension or retirement account may request that Arizona income tax be withheld and the distribution is treated as if it were a payment of wages by an employee for a payroll period.

House Bill 2379, Chapter 7. Internal Revenue Code Conformity. This is the annual bill that conforms the Arizona income tax statutes to the Internal Revenue Code as amended and in effect as of January 1, 2024. According to the Arizona Department of Revenue, there is no anticipated fiscal impact to the state General Fund since no enacted federal acts modified the U.S. IRC in 2023.

House Bill 2875, Chapter 44, Electronic Funds Payments Deemed to be Made When Authorized. Taxpayers’ electronic funds payments will be deemed to be made on the date and at a time when the taxpayer successfully authorized an electronic funds transfer. The transfer must be evidenced by e-payment confirmation from their financial institution.

House Bill 2909, Chapter 221. Caps Corporate Tuition Tax Credit at $135 Million Annually, Eliminated Inflation Adjusted Increase. Caps the aggregate dollar level of the Corporate Low Income Student Tuition Tax Credit at $135 million annually, beginning in FY25. Previously, the aggregate cap was $10 million to be increased annually 2020 through 2024 by set percentages and thereafter by the greater of 2% or the percentage of the annual increase in the Metro Phoenix consumer price index.

Other Tax Legislation

Senate Bill 1636, Chapter 242. Expands Definition of Jet Fuel. 
An excise tax is imposed on the retail sale of jet fuel. Jet fuel was previously defined based on reference to “crude oil.” This definition is expanded to include (a) aviation turbine fuel that consists of conventional and synthetic blending components that can be used without the need to modify aircraft engines and existing fuel distribution infrastructure; and b) jet fuels derived from coprocessed feedstocks at a conventional petroleum refinery.

House Bill 2909, Chapter 221. 
Department Can Assess and Collect Fees from Cities, Counties and Other Governmental Bodies to Pay for Department’s Tax System Modification. Provides that the amount to be charged to counties, cities, towns, Council of Governments and regional transportation authorities with a population greater than 800,000 for the Integrated Tax System Project, may not exceed $6,626,900 for FY25.

Allows Property Tax Districts to Issue Tax Anticipation Notes to Cover Qasimyar Refunds. Taxing jurisdictions, including school districts, that are liable for tax refunds in the Qasimyar v. Maricopa County litigation where the refunds would result in a property tax increase of 4% or more may issue tax anticipation notes that mature in four years to pay the refunds.