House Bill 2324 sponsored by Gilbert Representative Eddie Farnsworth will be enacted in September of 2013, with many municipalities enacting it as of July 1, 2013.

The bill, which passed the Arizona State House AND Senate UNANIMOUSLY excepts certain commercial leases from Transaction Privilege Tax.  Additionally, the bill prohibits municipalities from taxing the transactions as well.

The exemption applies to certain affiliated companies, businesses, or persons.

Background: It is very common for a business owner that owns both the business and the land & building the business uses to utilize separate business entities to separate liabilities.  For example, a manufacturing company may choose to keep its operations in an S-Corporation but the building & land in a Limited Liability Company.  The Corporation would then pay rent to the LLC.

Under prior State Law, the LLC would be required to collect & remit transaction privilege tax of .5% (State) plus the municipality tax rate on this income.  This, therefore, creates a phantom tax.  A single owner is moving money from one entity to the next – for liability reasons – and then has to pay a tax on the transfer.

New Law: The new law eliminates the phantom tax and unifies the rules, ensuring consistent treatment across the entire state.

Aaron’s Take: This is a law which is incredibly business friendly makes a tremendous amount of sense from the standpoint of tax administration.  I don’t know why it took this long to come to pass.