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Arizona Sales Tax Reform Simplifies Tax Structure

1 min readBy: Lyman Stone

On June 25, Governor Jan Brewer of Arizona signed HB 2111 into law, enacting a sweeping reform which will simplify Arizona’s sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. code. Arizona’s state sales taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. (or “transaction privilege tax”) is the worst-ranked in the nation in our State Business Tax Climate index, although Arizona’s relatively good property and corporate tax systems lead to a 25th overall ranking. Arizona is ranked dead-last on the Index’s sales tax component due to the complexity that has characterized the transaction privilege tax until now, uneven tax rates around the state, and heavy taxation of business inputs leading to tax-pyramiding, a problem we have often criticized elsewhere.

As we wrote several months ago, Gov. Brewer assembled a panel to recommend positive changes for Arizona’s tax policy, and HB 2111 implements many of the recommended changes. The taxing- and auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. ing-authorities of local and municipal governments are reduced, state-level auditing is consolidated into the Department of Revenue, and even that single form will be filled out in a single, online portal. The total effect of these reforms is to significantly reduce the number of forms Arizona businesses must fill out.

The new tax reform does not solve all of Arizona’s problems: tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. will continue, and business input taxes will continue to make Arizona’s tax code excessively burdensome on many businesses. But HB 2111 is a real step in the right direction.

Read more about Arizona here.

Read more about sales taxes here.

Real more about tax complexity here.

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