The starting point for determining the taxable amount of a retail sale is to look at the gross receipts (the tax base) received from the sale and then to determine whether any deductions or exclusions apply. Gross receipts include whatever is received for the sale of tangible personal property, including any taxes collected. 

For example, a retailer sells a pair of shoes for $50 plus tax. The gross receipts (tax base) for the sale is $50 plus the tax collected. 

To determine whether any deductions or exclusions apply to a retail sale, the retail statutes must be thoroughly reviewed. If a deduction or exemption is not specifically listed in the statutes, it does not apply. Therefore, gross receipts (tax base) minus deductions/exemptions equals the net taxable amount. 

For example, the $50 collected above by the retailer is the retailer’s gross receipts. If there were any applicable deductions/exemptions, then the retailer would deduct from the gross receipts (tax base) to get the net taxable amount. Visit Deduction Codes for more information.

Deduction Code Listings

A deduction code is used to deduct income from gross receipts that are deductible or excluded from tax. The deduction code listings provide the deduction code number, a description (often abbreviated), and the corresponding business codes for state and city business categories to which the deduction code may be applied. Deduction codes applying to the retail classification include the code “017” under the “State Business Codes” and/or “City Business Codes” column(s). 

Deduction codes are:

• only permitted to be used with the business codes listed, 
• can be specific to a jurisdiction, and 
• must correspond to a statutory deduction within the classification in which the business activity is being conducted. 

Deductions relating to selling at retail correspond to A.R.S. § 42-5061 (for state TPT county excise tax and city privilege tax) and A.R.S. § 42-6017 (for city privilege tax - in certain circumstances).

View deduction codes for all business classifications. 

Some Common Retail Deductions

Sale for Resale

Resale sales (or wholesale activities) are exempt from taxation under the retail classification. The retail classification of the Arizona transaction privilege tax (TPT) imposes tax on sales of items made at retail. Sales made at retail do not include sales for resale, where the purchaser intends to sell the purchased item as part of its regular business. Sales for resale also include sales of component materials that will become  part of a final product to be sold, such as wood sold to a furniture manufacturer. To properly document an exempt sale for resale, a purchaser must provide an accurately completed Form 5000A to the seller. 

When filing a TPT return, a retail seller will report its sales from all sources, including sales for resale. The seller will then deduct income from sales for resale from its tax base using deduction code 503. This will be done after the retailer reports all the income from its retail business. See the current list of deduction codes.

For example, a retailer that sells furniture with $10,000 in total income from its retail business, $5,000 of which came from sales for resale, would file its TPT return as follows: The retailer will report $10,000 in income under business code 017. The retailer will then deduct $5,000 in income using deduction code 503. The remaining $5,000 will be subject to state TPT, county excise tax, and city privilege tax.

Sales to Out-of-State Customers

What is considered an out-of-state retail sale (or sale in interstate/foreign commerce)?

An out-of-state retail sale is when an order is received from anywhere outside of Arizona, where the retailer ships or delivers the product outside of Arizona and the product is used at a location outside of Arizona. See Arizona Administrative Code (A.A.C.) R15-5-170.

Are sales to out-of-state customers subject to the transaction privilege tax (TPT)?

If the order is placed from a location outside of Arizona, and the Arizona vendor shipped or delivered the product outside of Arizona, and the product is used outside of Arizona, then the sale is not subject to TPT. 

The Arizona retailer would report the gross receipts from the out-of-state retail sale and use deduction code 504 - RET: INTERSTATE or FOREIGN COMMERCE Sales.

Common Out-of-State Sale Scenarios/Examples

I am a business owner in Arizona. A customer came into my store and purchased an item that will be shipped to their home in New Mexico. Is this considered an out-of-state sale?

No. An order placed in Arizona by a customer who was also present in Arizona is not considered an out-of-state sale and thus taxable. To qualify as a sale in interstate commerce, the order must be placed from a location outside Arizona.

I am a business owner in Arizona. A customer ordered an item on my website. The item will be shipped to Oregon. Is this considered an out-of-state sale?

An order received at the Arizona location, placed from a location outside of Arizona, is shipped outside Arizona, and will be used outside of Arizona is considered an out-of-state sale and is exempt. The Arizona vendor would report the sale and would use deduction code 504 - RET: INTERSTATE or FOREIGN COMMERCE Sales.

I am a business owner and have a physical store in Arizona. A customer called my store to order an item that will be shipped to Oregon. Is this considered an out-of-state sale?

An order received at the Arizona location, placed from a location outside of Arizona, is shipped outside Arizona, and will be used outside of Arizona is considered an out-of-state sale and is exempt. The Arizona vendor would report the sale and would use deduction code 504 - RET: INTERSTATE or FOREIGN COMMERCE Sales.

What records should the vendor keep for any out-of-state sales?

The vendor should keep records to substantiate the deduction for a sale made out-of-state. The records should identify the tangible personal property sold and where it was delivered. For example, the purchase orders, letters, or written memoranda on the receipt of orders placed by telephone  along with the receipts of expenses incurred in delivering the property and signed on the delivery date by the person who delivers the property; common carrier’s receipt; parcel post receipt; export declaration; a receipt from a licensed broker; or proof of export or import signed by a customs officer. See Arizona Administrative Code (A.A.C.) R15-5-170(C).

Shipping

A charge by a retailer to ship an item from the retailer’s location to the purchaser’s location, if separately stated on the sales invoice and in the books and records, is not taxable. A.A.C. R15-5-133(A). Shipping charges are actual costs incurred by a retailer to ship merchandise to a customer. Shipping the merchandise to a customer is considered to be a service provided by the retailer. See A.R.S. § 42‑5061(A)(2). 

Flat fee shipping or handling charges are those that are added to the purchase price at a flat rate. These charges have no relation to the size or weight of the package, or to the distance that the package will travel. Flat fee shipping or handling charges, therefore, are not considered to be the actual costs of delivery, and so are not deductible from the tax base as a service provided by the retailer. This is true for state/county and city privilege tax purposes.

If the sale is exempt pursuant to a statutory deduction or exemption, then shipping charges on the tax-exempt sale are also not subject to TPT.

I charge a flat rate for shipping, is this deductible?

No. Flat fee shipping or handling charges are those that are added to the purchase price at a flat rate. These charges have no relation to the size or weight of the package, or to the distance that the package will travel. Flat fee shipping or handling charges, therefore, are not considered to be the actual costs of delivery, and so are not deductible from the tax base as a service provided by the retailer. This is true for state/county and city privilege tax purposes.

I sell items from my home and factor the shipping rate in the price of the item. Is this deductible?

No. The shipping must be the actual cost of shipping and must be separately stated on the invoice and in the books and records.

The item sold is not subject to tax. Is the shipping and handling charge subject to transaction privilege tax (TPT)?

No. Shipping charges on tax-exempt sales are not subject to TPT.

Sale to Non-Profit Organizations

The State of Arizona does not provide an overall exemption from transaction privilege tax (TPT) for nonprofit organizations. For details and explanations, see Nonprofit and Qualifying Healthcare and Arizona Transaction Privilege Tax Procedure TPP-00-4.

There are certain, narrow exemptions provided in the statutes for nonprofits from Arizona TPT and city privilege tax under the retail classification when acting as a customer (i.e. sales to nonprofit organizations). Some organizations must apply for an exemption letter from ADOR in order to take advantage of the exemptions while others do not. Visit Nonprofit and Qualifying Healthcare for more information. 

Retail sales by nonprofit organizations are tax exempt.

Bad Debt Deduction

Bad debt occurs where there is a valid and enforceable financial obligation between a debtor and a creditor to pay a fixed or determinable sum of money that is not honored by the debtor. The debt must be uncollectible/worthless and all legal actions to collect the debt must have been exhausted by the creditor.

What is a worthless debt?

A debt is considered worthless if:

1. The surrounding circumstances indicate that the debt is uncollectible; and
2. Legal action to enforce payment has not or, in all probability, would not result in the satisfaction of the debt. See A.A.C. R15-5-2011(B).

When should the bad debt deduction be reported and applied?

A bad debt deduction shall be taken in the month in which the conditions are met (A.A.C. R15-5-2011(A)):

1. The gross receipts from the transaction on which the bad debt deduction is being taken have been reported as taxable;
2. The debt arose from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money; and
3. All or part of the debt is worthless.

Note: Any recovery of a bad debt subsequent to taking a bad debt deduction must be reported as taxable gross receipts in the period when received. See A.A.C. R15-5-2011(F).

How do I calculate the bad debt?

A bad debt deduction is calculated by subtracting the amounts received on the debt from the original amount reported. The remaining amount is the bad debt deduction. Note: Any portion of amounts received on the debt representing carrying charges, interest, and repossession expenses is not allowed as a bad debt deduction if not originally reported as taxable. See A.A.C. R15-5-2011(C). 

The business reported the bad debt deduction in the previous month. Then the customer paid towards the bad debt. Is the income from the customer considered gross receipts and therefore subject to transaction privilege tax (TPT)?

Yes. Any recovery of a bad debt subsequent to a bad debt deduction shall be reported as taxable gross receipts when received. See A.A.C. R15-5-2011(F).

Example of Bad Debt Deduction

ABC Company sells a refrigerator to Dee. Dee pays with a check for the full amount of the transaction. ABC Company reports the sale in their gross receipts for the current reporting period. ABC Company gets notification that the check has been returned. ABC Company tries to recover the amount but is unsuccessful. ABC is allowed a bad debt deduction equal to the amount which Dee has not paid. ABC Company will report the bad debt deduction in the month it realizes the debt is unrecoverable up to the amount of gross receipts. If the gross receipts are less than the deduction amount, the business will continue to take the deduction amount forward until it is exhausted. 

For example, the transaction was for $1,000. The company only had sales of $500. The company would report $500 in gross receipts and then deduct $500 for the bad debt deduction. The following period, the company will report the gross receipts and then deduct the remaining $500 if it does not create a negative balance. Note that if any of the bad debt is recovered then it must be reported in the month that it was received as gross receipts. Please review the list of deduction codes to determine the appropriate deduction code.