Note: As a small business owner, you are required to maintain timely filings with taxing agencies. This post should be a primer on filing privilege tax in the City of Phoenix- but not the final word. The City is a great resource for information and welcomes your inquiries. Additionally, we are here to help you navigate the world of privilege tax.
Sales Tax vs Privilege Tax
Phoenix does not have sales tax, instead we have a privilege tax for the privilege of doing business with the City. The terms Sales Tax and Privilege Tax are used interchangeably, however. A privilege tax takes the burden off of the consumer and places it on the business owner. If your business is required to collect “sales” tax from your customers, you are responsible for remitting a sales tax report (based on your gross taxable sales minus deductions) with a payment on a monthly, quarterly or annual basis- depending on your filing requirements.
If you buy products to resell or for use in a project, you may be eligible to purchase products with no sales tax. You must have an Arizona Form 5000 on file with the vendor you are purchasing with in order to receive the benefit of not paying tax. Nonprofits, however, are not eligible to use this form and are required to pay sales tax on all purchases. As a vendor, you should keep this file on file for 6 years in the event you are audited. Be sure that the form is filled out completely and that the contact and entity information are correct. If the business changes locations or entities, the form becomes invalid and you may be subject to the tax that went uncollected.
A good rule of thumb when deciding whether or not to pay sales tax at the time of purchase is to consider who the final consumer will be. If you are purchasing products as the final consumer, then you should pay tax. If your client will be the final consumer, they should pay tax. If you purchase a product tax free with the intention of reselling it or incorporating it into a project, but then consume it within your business, you should pay use tax on it.
This may be a little confusing. The difference between sales tax and use tax is sales tax is paid by the seller, but use tax is usually paid by the buyer. Let’s pretend that as an owner you buy inventory tax free because you intend to sell it at a later date. If you pull this inventory item off of your shelves and consume it within your business, you are responsible for paying use tax on it. Here is a fancy pdf about Use Tax.
Sales Tax Return
If your business is required to collect tax from your customers, you must submit a sales tax report with payment on a monthly, quarterly or annual basis. Timely payers get the benefit of infrequent filing, so remember to file on time. You may request a change in filing frequency after you have established a minimum of 6 months of reporting history. After you obtain a sales tax license through the city, you will begin to get pre-populated sales tax forms in the mail. You may opt to fill these out and mail them back or e-file. E-filing is a more convenient way to pay and you can submit the form and payment online up to 11:59pm the day the form and payment are due.
If you collect more tax from your customers that necessary, you unfortunately do not get to keep it. You must remit it back to all taxing entities (City, State, County if applicable) or the customer (if you can identify them). You and your bookkeeper should double check your Quickbooks file to make sure you have set up your clients and item list properly. For instance, you should not be collecting sales tax for clients that reside in places you don’t have nexus in. If you don’t have inventory, sales people, or a large amount of clients in the state in which they reside- do not collect sales tax. You may also provide goods and services. You should ensure that you are only collecting sales tax on your goods and not the services. Again, working with a super smart bookkeeper will save you a lot of headaches come tax time.
Penalties and Interest
If, for some crazy reason, you fail to file and pay on time, you are going to get hit with penalties and interest. In fact, your penalties may be as high as 25% of your total tax due. Don’t fret over interest calculations, our friends at the City of Phoenix will do that for you. Just send in your payment and wait for a notice to arrive in the mail. When this arrives, please pay this on time to avoid further charges.
Did you get a notice in the mail that says you have a credit on your account? Before spending your new found dough on penny whistles and bubble gum, give the City of Phoenix a call and see why you have a credit. Your account may have been accidentally paid by another taxpayer. If this is the case, once the error is corrected, you may owe the money back. First rule when dealing with credits: Call First!
Did you make a sale and fail to collect tax? Did you include tax in your final price? Are you a contractor who does not itemize tax on your invoice? Factoring tax might be just what you are looking for. As a contractor, this form is incredibly helpful. If you are factoring tax in any other industry, check this link.
As a business owner, you are required to keep your tax filings up to date. Don’t wait until the last moment to ask questions- use your resources to get the help you need. Your accountant, bookkeeper and the City of Phoenix are here to help so please reach out when you need us.
Finally, while this post covered the City of Phoenix, don’t forget about other taxing entities. You may owe taxes in other cities or even other states. Your bookkeeper or accountant will help you make sense of your tax filing requirements.
Important Contact Information
Phone 602.262.6586, 602.256.4364
Cristina Garza | Chief Number Cruncher
530 E. McDowell Rd., Ste 107491, Phoenix, AZ 85004
o. 480-359-6149 | f. 866-611-6989