Does Your Arizona Business Need a License? State TPT, City & Trade-Specific Rules
When registering and licensing your business, there are many different levels of registration that must happen. Not only that, but how your business functions plays a significant role in how taxes are handled and what licenses you are required to obtain. An Arizona business lawyer can play a significant role in your success as you work to set up your legal framework.
The following article will help you understand the licenses you will need depending on your business type and how to remain compliant as you pursue success.
The Business License Registration Process: Entity vs. Tax ID vs. Operational Permit
In the state of Arizona, starting a business is not as simple as registering as an LLC or corporation and then starting operations. While you must start with a business entity to protect assets, determine income tax rules, and create official business structure, business licensing is a multi-tiered process that involves the state, local municipality, and the specific trade.
Arizona Transaction Privilege Tax
There is no state-specific overarching business license. Instead, Arizona requires a business to register for a Transaction Privilege (TPT) Tax License. This license is what governs the owed taxes and revenue for each entity. Taxes are the responsibility of the business instead of the consumer. The state imposes these taxes for the privilege of operating a business within the state.
City Licensing For Your Business
Each municipality operates its own licensing regulations. The city is where regulatory compliance, zoning, and public safety oversight will be governed. When starting a business, you will need to determine the licensing regulations for your specific area and you will need to register within your city.
Trade-Specific Rules & Regulations
The last tier that you will need to assess when starting a business is the licensing for your specific trade. For instance, if you are a contractor, you must register with the Arizona Registrar of Contractors. Real estate professionals must register with the Arizona Department of Real Estate. These individual trade-specific licenses will govern the regulations and rules within your specific area of expertise.
How To Handle Digital & SaaS Transactions
These days, goods and services are not always tangible goods sold out of brick-and-mortar locations. When it comes to software or digital products, there are different rules to apply to your business as it relates to registration and taxes. It will come down to whether or not the root of your operation is in Arizona or if you are located somewhere else, but selling to those in Arizona.
A business lawyer can be extremely helpful in ensuring compliance. However, if the physical address of your business is within Arizona, you will be subject to registration, licensing for the TPT tax, and municipal licensing as usual. Though the Arizona Department of Revenue sees the classification differently depending on how the consumer accesses the product.
- Software as a service and Cloud-hosted subscriptions: Personal Property Rental Classification
- Digital Goods and Downloads: Retail Classification
For businesses that are not located within the state, but sell to consumers within Arizona they must consider Arizona’s $100,000 Economic Nexus. This rule says that if their revenue from Arizona consumers is below the economic nexus, they do not have to register in Arizona and be subject to TPT taxes. However, if the revenue is $100,000 or above, registration and Arizona tax rules apply. Following table will help to understand how SaaS and digital products work under these rules:
| Product/Service | TPT Classification | Counts Toward $100,000 Economic Nexus? |
| SaaS and Cloud Software | Personal Property Rental | No |
| Downloadable and Perpetual Software | Retail | Yes |
| Custom Software Development | Exempt if Itemized | No |
| Digital Media and Cloud Storage | Personal Property Rental | No (Unless retail downloads) |
Transactions That Cross The Municipal Lines & How To Avoid Non-Compliance
Because each city has different rules and licensing requirements, it is important to consider the cities you do business in to avoid non-compliance penalties. When you do business over-the-counter in your location, the taxes and rules are subject to the municipality where you are licensed. However, things change if you ship or deliver to another municipality.
In general, delivering goods or services in another city will always require you to pay the TPT taxes of that particular area. However, whether you have to get a business license for that city depends on how often the delivery happens and whether or not you are using your own fleet of vehicles.
If you ship goods through UPS, USPS, or another public shipping company, you will only have to consider the TPT tax of the consumer’s city. If you are using your own fleet of vehicles to deliver a product, you will likely have to get a business license for the city unless the delivery is a one-off situation. For providing services within multiple cities, you will also have to be licensed in each city you do your work.
Licenses & Operating & Arizona Home Business
Running a business out of your home in Arizona does not exempt you from business licensing. When you are selling taxable goods or services out of your home, you will be required to register for TPT taxes, get a home occupation permit and general business license from your city, and follow all the trade-specific rules that are applicable.
For certain services that are non-taxable, you may not need to register for TPT taxes with the state. Each city has different regulations as it relates to home businesses, so be sure to look into the specifics of your city and contact a business lawyer to ensure compliance.
What Happens If You Don’t Pay Your TPT Taxes
How ADOR handles non-compliance in paying TPT taxes depends on whether it was willful or not. For anything that is willful refusal to file, fraudulent reporting, or collecting tax from customers, but refusing to pay it, you will be criminally charged and made to face criminal penalties.
However, in most cases, not paying taxes occurs as a mistake or because of financial hardship. These situations are handled civilly, but still come with hefty penalties. The penalties include:
- Not Filing Return on time: Penalty fee minimum of $25 then 4.5% of your tax total per month (capped at 25% or $100, whichever is greater).
- Filing, but not paying taxes on time: Penalty fee of 0.5% of your tax per month (capped at 10%).
- Interest: You will be charged interest on the owed tax amount until the balance is paid in full.
- Lost Statute of Limitations on Audits: Failing to file tax returns triggers a stop on the standard statute of limitations allowing ADOR to audit your business as far into the past as they want.
- Aggressive Enforcement and Collections: If notices and demands for payment are ignored, ADOR has the right to pursue collection without a court order. You could be subject to bank account levies, tax liens, or even a revocation of TPT license.
Hire Our Trusted Lawyers To Ensure Legal & Tax Compliance & a Successful Business!
Whether you are starting a business, are making some changes, or are realizing you are not yet fully compliant, our lawyers at Denton Peterson Dunn are prepared to help. With our in-depth understanding of Arizona law, we will look over your situation and will take the best legal steps forward to ensure you are staying compliant within the state. From brick-and-mortar locations in Scottsdale to businesses that are located outside of the state, but sell above the Economic Nexus in Mesa, to the complexities of software developers, let us be your go-to consultants for peace of mind.
Reach out to our law firm today to get started!
Brad Denton – Denton Peterson Dunn
1930 N Arboleda #200
Mesa, AZ 85213
Office: 480-660-3249
Email: [email protected]
Website: https://arizonabusinesslawyeraz.com
7272 E Indian School Rd #540-132
Scottsdale, AZ 85251
Phone: 480-690-3283
Email: [email protected]