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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