State Board of Equalization Arizona Tax Research Association Jennifer Stielow, Vice President May 16, 2019

2019 LEGISLATIVE UPDATE Today marks the 123rd day of Session (typically 100 days) 1,289 bills posted, 245 bills passed, 7 bills vetoed, 236 bills signed State Budget Negotiations ongoing: Gov wants $1B Rainy Day Fund Balance – Currently at $460M ($155M+ Conformity; Wayfair up to $95M - $293M) Legislative budget demands: Wayfair Conformity reform for TY 2019 & beyond Debt pay down ($190M now to save $50M in interest over 10 yrs) - Gov refinanced $1B sale leaseback deal (House & Senate, Supreme Court, etc.) Repeal $32 VLT fee

ATRA GOOD/BAD BILL LIST GOOD BILLS: ATRA advocates and supports legislation that improves the efficiencies of government, broad-based tax reform, promotes transparency BAD BILLS: ATRA opposes legislation that seeks to unnecessarily expand government, provides targeted-tax breaks, erodes the integrity of our tax system ATRA Good/Bad Bill list can be viewed at www.arizonatax.org

GOOD BILLS – Property Tax SB1033 Property Tax Statements; mortgaged property – Gov signed Requires County Treasurer’s mail tax statements to ALL property owners Ten counties currently choose to mail statements to everyone SB1235 Possessory Improvements; gov. property – Awaits Final Vote Requires Assessor’s to value possessory improvements same as real property Defined as “improvements” located on federal, state, county or municipal property…that is owned by a nongovernmental possessor Unpaid taxes – subject to procedures for delinquent taxes

GOOD BILLS – Property Tax/Contracting SB1248 Property taxes; modifications (Rule B) – Awaiting House Rules Assessors apply inconsistently – DOR guideline 10% or discretion of Assessor As introduced, 20% or greater, not including TIs As amended, 15% or greater change in value Tenant improvements an ongoing issue HB2097 Personal property reporting; exemption – Gov Signed Clarifying legislation – taxpayers not required to file if under exemption threshold – constitutional amendment in 1996 Pinal/Maricopa, others? HB2734 Prime contracting study committee – Held in Senate DOR study – Noncompliance High Ad Hoc Committee likely

IRC Conformity - SB1143 (Good) In 2017, Congress passed & President Trump signed the Tax Cuts & Jobs Act (TCJA) – reduced rates & expanded base Limited SALT to 10k, eliminated personal exemptions, etc. Doubled standard deduction and reduced rates (~3%) AZ one of many states that uses Federal income definition as starting point for AZ corporate and personal income taxes Conforming not usually controversial - triggers major tax increase this time SB1143 would have conformed AZ’s income tax to current federal tax code for TY 2018 & reduced rates by 0.11 percentage points- Gov vetoed DOR prepared 2018 tax forms presuming full conformity Now part of budget negotiations

Wayfair v. South Dakota On June 21, 2018, U.S. Supreme Court decision overturned the physical presence requirement for sales tax collection and remittance (Quill) replaced with “economic &virtual presence” test Quill (1992): Court held that for purposes of the “substantial nexus” prong of Complete Auto, physical presence was required tor Commerce Clause purposes Commerce Clause prevents overly aggressive states from imposing barriers to trade on other states and the citizens of those other states Wayfair (2018): Court noted three key features about South Dakota’s law that appeared to be designed to prevent discrimination against undue burdens on interstate commerce: Safe Harbor – transactions of $100,000 in sales or 200 transactions No retroactive application Member of Streamlines Sales and Use Tax Agreement (SSUTA) State level administration of local sales & use taxes Uniform state & local tax bases Rate simplification No caps and thresholds The further a state’s law is from S.D.’s law, the higher the litigation risk

Arizona Readiness Single State/Municipal tax base Model City Tax Code (MCTC) allows different options (more than 50) for taxing and exempting certain transactions The exemptions/deductions under the MCTC do not match the exemptions/deductions found in state statute The MCTC is a separate code not codified in state statute and therefore any changes can be easily made with approval of the Municipal Tax Code Commission (MTCC) Not a member and not in compliance with SSUTA - not necessarily a requirement AZ does not currently have a threshold statute that would provide a safe harbor for the small business seller Single rate The MCTC allows different rates depending on the business classification The MCTC allows tiered rates and thresholds depending on the cost of the item. Approximately 25 cities have adopted this option and have varying rates and thresholds

AZ Wayfair Legislation (Good/Bad/Better) HB2702 Marketplace facilitators; nexus (Bad) Retailers Assoc., Amazon, League of Cities & Towns League – Amend MCTC to match state base where necessary Poorly written & no tax increase offset Held in House Rules SB1155 Wayfair Study Committee (Good) Internet should not be a tax-free zone Needs to be fair & avoid litigation HB2702 proponents opposed in Senate – Failed Senate 3rd Read ATRA teamed up with Rep. Toma to craft a better version that reduces legal risk

Wayfair Legislation – Compromise Preempt Cities on Retail base but with toggles to tax food, college textbooks, livestock feed, sand & gravel, fine art, motor vehicles to tribal members Economic Nexus threshold – Marketplace Facilitator (MF) $100k; Remote Seller (RS) not facilitated by MF (2019 $200k, 2020 $150k, 2021 $100k). No transaction threshold Silent on tiered rates MF/RS not required to obtain city TPT or business license Some liability relief for failure to remit due to an error other than sourcing: 2019 = 5%; 2020 = 3%; 2021 = 0 Effective October 1, 2019 Legislative Intent requested by the League: 5-year moratorium on statutory changes to further consistent tax treatment on RS & MF Part of state budget negotiations – Offset expected