1. Arizona’s change in the statute of limitations for assessment of individual or withholding tax liabilities.
In 2019, the Arizona legislature enacted changes to the assessment of tax when no income and withholding tax is filed. Previously, the rule for all taxes was that there was no statute of limitations if no tax return was filed – regardless of the type of tax.
While that rule remains in place for all other taxes (such as the Transaction Privilege Tax), it is no longer true in many cases where income tax or withholding tax returns that should have been filed are not filed. Now, instances where the rule was deemed unduly harsh, the Arizona Department of Revenue (“ADOR”) must assess the tax within seven (7) years of the date the return was due if the return in question is an income tax or withholding tax return. ARS §42-1104.B.10 as amended.
EXAMPLE: Mary lives in Texas. A partnership in which she invested owns properties in several states, including Arizona. In 2020, she receives income from the partnership. However, the partnership failed to inform Mary that some of its income came from Arizona sources and Mary herself was not aware of that fact. Mary therefore does not file an Arizona income tax return by the due date in April 2021.
Under this scenario, Arizona must assess any tax against Mary on or before April of 2028.
Mary is not involved in the management of the partnership nor the filing of its income tax returns or reporting requirements. The 7-year limitation applies unless the ADOR can show that Mary’s failure to file the return was due to an intent to evade tax. See ARS §42-1104.B.1(c) as amended.
2. Electronic filing of tax returns.
The ADOR is now accepting electronically filed corporate and partnership income tax returns for 2019 returns and, beginning with 2020 returns, these entities will be required to file returns electronically.
There is a multi-year phase-in period for businesses required to file and pay transaction privilege tax (TPT) electronically. For 2020, businesses with an annual TPT and use tax liability of $5,000 or more during the prior calendar year will be required to file electronically. In 2021, the threshold is reduced to $500 or more during the prior calendar year.
3. New rules for claiming tax credits for public schools, qualified charitable organizations and qualified foster care organizations.
For 2018 tax returns, the ADOR began imposing new requirements in order for taxpayers to claim either the credit for certain contributions to public schools on Form 322 or the credits for contributions to qualified charitable organizations (CTOs) or qualified foster care charitable organizations (QFCOs) on Forms 321 and 352, respectively.
In February 2019, the ADOR posted new requirements of which many taxpayers are still not aware (https://azdor.gov/news-events-notices/news/newprocess-claiming-tax-credits-public-schools-qualified-charitable). In order for the credit against Arizona income taxes, a specific identifying number – specific to the organization – must be included on the appropriate form.
(a) For public schools, the number, by school, can be found here: https://azdor.gov/tax-credits/public-school-tax-cred.
(b) For qualifying charitable organizations and qualifying foster care charitable organizations, a five digit code assigned by the ADOR to these organizations (referred to as either the QCO Code or QFCO Code) can be found here: https://azdor.gov/tax-credits/contributions-qcos-and-qfcos.
If the requisite number or code is not set forth on the requisite form claiming the credit on the 2019 return, the credit will be disallowed by the ADOR.
4. California successfully asserts its business tax against an Arizona individual author.
In the Matter of the Appeal of Blair S. Bindley (OTA Case No. 18032402, 5/30/19), an Arizona individual who had a contract to provide screenwriting services for two limited liability companies organized and located in California. The California Office of Tax Appeals (“OTA”) ruled that the Arizona individual had California source income on which he had to pay California income tax, even though all services were performed in Arizona. The OTA opinion noted that nothing in the California statute requires that the taxpayer be physically present in the state of California and that it was sufficient that the taxpayer received income from the California LLCs. Thus, the taxpayer’s business (his sole proprietorship) was deemed to be conducting business in California, making the proprietorship’s income subject to apportionment under California’s apportionment rules.
This is yet another instance where states are moving to impose income tax liability based on the amount of revenue generated within its borders, irrespective of where the work or services were performed.