Arizona 2025 Tax Developments: A Year-End Review

REMINDER: CITY RESIDENTIAL RENTAL SALES TAX REPEALED EFFECTIVE JANUARY 1, 2025 

Beginning last January 1, 2025, Arizona property owners were no longer required to collect and remit city Transaction Privilege Tax (TPT) on residential rental income for long-term stays of 30 consecutive days or more. This change stems from the amendment to A.R.S. § 42-6004(H), which eliminates the Arizona TPT on qualifying residential rental income.

What Changed

Under prior law, most residential rental properties in Arizona were subject to City TPT with rates varying depending on the city. This law standardizes and simplifies the tax landscape by prohibiting the imposition of TPT on residential rental income across the state, as residential rentals were already excluded from state and county TPT. This change, however, does not affect City TPT for commercial rentals or short-term residential rentals of 30 days or less.

TRANSACTION PRIVILEGE (SALES) AND USE TAX LEGISLATION AND CASES

Legislation¹

Senate Bill 1274, Chapter 182. Annual Tax Corrections Act; Qualifying Health Care Organizations No Longer Required to File Annual Financial Audit. This annual act makes various corrections and clarifications to the tax statutes. With respect to Sales Tax, this year’s bill removed from the definition of a qualifying health care organization, which qualifying organizations have certain exemptions from the sales tax, the requirement to annually file its annual financial audit with the Department of Revenue.

Senate Bill 1749, Chapter 247. Wastewater Pipes and Valves are Now Exempt. Pipes and valves 4” in diameter and larger used to transport oil, natural gas, artificial gas, water, or coal slurry are exempt from TPT. The Department of Revenue’s position had been that such pipes and valves used to transport wastewater did not qualify for the exemption. This legislation changes that, and pipes and valves used to transport wastewater are exempt beginning October 1, 2025. See ARS section 42-5061.B.7.

House Bill 2119, Chapter 144. Requires Cities to Provide Notice to Affected Taxpayers of Model City Tax Code Options. The Model City Tax Code provides various Model and Local Options that provide different tax treatment than what is in the Model City Tax Code itself, which can be adopted by a city. In the past, some cities tried to enforce the provisions of the options they adopted through audits of taxpayers and made retroactive assessments of tax. These retroactive assessments came as a surprise to the affected taxpayers who had no idea that they were subject to tax. The local option that was at the heart of this retroactive enforcement was Local Option H, which taxed (under the amusement classification) health spas, fitness centers, and dance studios. To prevent such surprises to taxpayers in the future, this legislation requires cities that wish to adopt or repeal a Model or Local option to notify all affected taxpayers by mail at least 60 days before voting on the proposed ordinance, and importantly to notify applicants for city business licenses of any options that could apply to them. 

The notification requirement does not apply to ordinances that impose a use tax or model or local option to exempt a city or town from use tax or a two-tiered tax rate structure for retail sales. A county or municipality may use confidential taxpayer information released by ADOR for the purpose of notifying affected taxpayers before a proposed ordinance is approved or rejected. A municipality that issues a business license must provide notice of any model or local option in the MCTC that will apply to an applicant at the time the applicant obtains a business license application.

House Bill 2639, Chapter 135. Qualifying Forest Products Equipment Exemption Extended. ARS section 42-5061.B.22 provides an exemption for qualifying equipment purchased from June 3, 2004 through December 31, 2026 used for harvesting or processing forest products removed from qualifying forests. This legislation extends the cutoff date to December 31, 2028.

House Concurrent Resolution 2021. Municipal Sales Tax Rate Cap on Food. Subject to voter approval, this would statutorily cap the tax or fee that a city, town or other taxing jurisdiction may impose on the sale of food and certain beverage items intended for home consumption at two percent and prohibits the adoption or increase of the tax or fee from occurring in the 24-month period preceding June 30, 2027. 

If a city, town or other taxing jurisdiction has approved a tax or fee on the sale of food and certain beverage items intended for home consumption in an amount of less than two percent on or before January 1, 2025, or has not yet approved any such tax or fee, the adoption or increase of a tax or fee is subject to voter approval. 

A city, town or other taxing jurisdiction that has approved a tax or fee on the sale of food and certain beverage items intended for home consumption at a rate of more than two percent on or before January 1, 2025, may not increase the tax rate. Requires the Secretary of State to submit the proposition to the voters at the next general election. Becomes effective if approved by the voters and on proclamation of the Governor, retroactive to January 1, 2025. 

Court Decisions

Arizona Cardinals Football Club, LLC v. Ariz. Dept. of Revenue, No. 1 CA-TX 24-0003 (App 2025). The Facility Use Fee Collected in Connection with Ticket Sales is Subject to the TPT. 

The State of Arizona established the Arizona Sports and Tourism Authority to promote and finance State Farm Stadium. A.R.S. § 5-802.D. As part of the financing, Arizona law authorizes the Authority to impose a facility use fee. The Authority adopted the Fee, a facility use fee, “to be collected in conjunction with the sale of Tickets for events held at the Facility.” The Authority uses the monies it receives from the Fee to service the bonds used to finance the Stadium. The Team adds the fee to its ticket prices (as a separately stated “User Fee”), collects it from ticket purchasers and remits it to the Authority. During an audit, the Department discovered the Team had not been paying Arizona’s TPT on the Fee from ticket sales. The Department took the position that the User Fee was a part of the admission fee and thus taxable under the amusements classification. the Team disputed the Department’s assessment, arguing the Fee is not income because the Team is acting as the Authority’s agent when it collects the Fee. The Tax court and court of Appeals disagreed, concluding that the Team was not the agent of the Authority to collect the fee and thus was liable for both the State and City of Glendale TPT on the fee.

9W Halo Opco, LP v. ADOR, No. 1 CA-TX 23-0003 (11-7-2024). Laundry Rental Business Not Engaged in Processing; Machinery and Equipment Used in Laundry Operations Not Exempt M&E. 

Taxpayer launders and sanitizes textiles (sheets, etc.) and rents them to entities in the healthcare industry. Taxpayer sought a refund of use tax paid on their purchases of the laundry equipment used in their laundry and sanitization activities. The Department of Revenue denied the refund claim and the taxpayer appealed. The Court reasoned that the term “processing” as is commonly understood within its ordinary meaning does not fall within the meaning of processing. In denying the taxpayer’s claim for refund, the Court relied upon the definition of “processing” contained in Moore v. Farmers Mut. Mfg. & Ginning Co., 51 Ariz. 378 (1938), which stated: “to subject (especially raw material) to a process of manufacturing, development, preparation for market, etc.; to convert into marketable form, as livestock by slaughtering, grain by milling, cotton by spinning, milk by pasteurizing, fruits and vegetables by sorting and repacking.”

PROPERTY TAX LEGISLATION AND CASES

Legislation²

Senate Bill 1122, Chapter 16. Inflation Adjustment for Exemptions for Widows, Widowers, Disabled Persons and Disabled Veterans. Modifies the method used to annually increase the property assessment limit under which a widow, widower or person or veteran with a disability may qualify for a property tax exemption by requiring the Arizona Department of Revenue to increase the property assessment limit using the average annual percentage increase in the Federal Housing Finance Agency House Price Index for Arizona, rather than the GDP price deflator.

Senate Bill1549, Chapter 11. Conservation Easements Valuation. Requires the Department of Revenue and county assessors when determining the full cash value of a conservation easement to use and apply standard appraisal practices and techniques unless a statutory formula takes precedence.

Senate Bill 1224, Chapter 96. Rule B for Setting Limited Value for Real Property Expanded to Cover 2 More Situations. Limited value increases by 5% per year but can never exceed the full cash value of a property. But when there is new construction, a change in use, omissions, or parcel splits or combinations, Rule B is used to determine the limited value. Rule B sets the limited value at a level or percentage of full cash value that is comparable to that of other properties of the same or a similar use or classification. The Rule B percentage is established on a county-by-county basis. As an example, the Rule B percentage in Maricopa County for class 1 commercial property for the 2026 tax year was 54%. This legislation adds two more situations where Rule B is to be used for properties that previously qualified for, but no longer qualify for (1) property valuation protection for residencies of low-income persons 65 years and older; and (2) statutory valuation formulas. As a note, limited value and thus Rule B does not apply to personal property.

Senate Bill 1700, Chapter 76. County Boards of Equalization are Precluded From Increasing Value above The Assessor’s Value. Administrative appeals from the Assessor’s notice of valuation go either to the State Board of Equalization if the property is in Maricopa or Pima Counties and to the local county board of equalization (which is the County Board of Supervisors sitting as the board of equalization) for all other counties. The State Board of Equalization is precluded from increasing the value above what the Assessor’s notice of was, but the local county boards were not. This legislation now precludes the county boards from increasing the value above what the Assessor’s noticed value was, so that both boards now have the same limitation.

Senate Bill 1749, Chapter 247. Increases Exemption for Personal Property to $500,000. A number of years ago, voters approved an exemption from tax for the first $50,000 of business personal property, with the purpose to essentially exclude small businesses from personal property tax. That amount has increased over the years and for 2025 the exemption amount was $269, 905. This legislation increases the amount to $500,000 beginning January 1, 2026 and also provides that $500,000 exemption amount increase annually with inflation.

Court Decisions

A & P Ranch Ltd v. Cochise County, 1 CA-TX 24-0002 (App. 2025). Orchards and Vineyards Are to be Valued as a Part of the Land and Not Separately. A.R.S. § 42-13101 requires “land that is used for agricultural purposes” to be valued using an income approach to value. For decades, the Arizona Department of Revenue has interpreted that language to refer only to the raw land, and not to any plants, trees, or vines planted on the land. Accordingly, ADOR has instructed county assessors to value orchards and vineyards as if they consist of two separate components of value: (1) the raw land, valued using the income approach; and (2) the “permanent crops” like trees and vines, valued as “improvements” using a market valuation approach. The Court concluded that orchards and vineyards must be valued as a whole—that is, as units inclusive of both the plants and the land— according to the income approach prescribed in the Valuation Method Statute (A.R.S. § 42-13101(A)). The Department’s practice of valuing trees and vines separately from the underlying land thus contradicts the statutory scheme.

INCOME TAX LEGISLATION³

House Bill 2688 and Senate Bill 1222 (Chapter 1): Annual Internal Revenue Code; Conformity. Conforms the Arizona income tax statutes to the U.S. Internal Revenue Code (IRC) of 1986 as amended, and in effect as of January 1, 2025, including those provisions that became effective during 2024 with the specific adoption of all the retroactive dates, but excluding any changes to the IRC enacted after January 1, 2025.

Senate Bill 1274, Chapter 182. Annual Tax Corrections Act; Corrects Errors and Obsolete Language; Makes Clarifying Changes. This Annual Act made the following changes relating to income tax:

• No Interest on Families Tax Rebate. Specifies, retroactive to October 30, 2023, that interest does not accrue and is not payable on the 2023 Arizona Families Tax Rebate.
• Withholding for Part Time and Seasonal Employees. Allows a part-time or seasonal employee whose services consist solely of planting, cultivating, harvesting or field packing seasonal agricultural crops to elect to have income tax withheld.
• Withholding on Gambling Winnings. Requires the Arizona State Lottery Commission, a permittee conducting horse or dog racing, a fantasy sports contest operator or an event wagering operator to deduct and withhold from each payment of gambling winnings an amount equal to the highest individual income tax rate of 2.5 percent, rather than 20 percent of the amount prescribed by federal law.
• Election to be Taxed at Entity Level. Retroactive to January 1, 2022, the election to be taxed at the entity level is made by filing a partnership’s or S corporation’s business tax return. Requires a partnership that amends its tax return to reflect an administrative adjustment to file a return that shows the adjustments for the reviewed year.

Senate Bill1496, Chapter 257. Tax Credit for Qualifying Charitable Organizations (QCO) Modified. Modifies the definition of qualifying charitable organizations to require a QCO to direct or spend, rather than only spend, at least 50 percent of its budget on qualifying services to Arizona residents who receive Temporary Assistance for Needy Families benefits, are low-income or have a chronic illness or physical disability. Defines direct as providing monies or financial or in-kind assistance to a QCO. Also, expands the definition of services by adding behavioral health services, workforce readiness services and workforce development programs.  

OTHER TAX RELATED LEGISLATION

House Bill 2704, Chapter 251. Sales Tax to Be Used to Finance Improvements to Chase Field. Chase Field in Downtown Phoenix is some 25 years old and in need of repairs and improvements to being up to current major league baseball stadiums. To help finance the repair of improvements, the entire state and county portion of the TPT and a portion of the City of Phoenix TPT collected from persons engaging in business under the retail, restaurant and bar, prime contracting and amusements classifications at, or with respect to, events held at Chase Field or its adjacent buildings is diverted to the Maricopa County Stadium District Fund to finance the repairs and improvements. 

In addition, 82 percent of the state income tax from the Arizona Diamondbacks, Arizona Diamondback employees and any professional baseball franchise organizations from outside Arizona that play at Chase Field is to the District Fund. 

Taxes diverted to the District Fund may be used only for capital repairs, reconstruction, replacement, maintenance and improvements to the infrastructure of Chase Field and its adjacent buildings.

House Bill 2749, Chapter 150. Unclaimed Property Includes Digital Assets. Arizona’s unclaimed property statutes did not specifically mention digital assets. This legislation updates the statute to account for digital assets. Digital assets are presumed abandoned after 3 years and requires the holders to deliver the digital assets to the Department or a qualified custodian designated by the Department in their native form within 30 days after reporting them as abandoned. Digital assets are defined to mean any of the following that confers economic, proprietary or access rights or powers: (a) virtual currencies; (b) cryptocurrencies; and (c) any other digital only asset. See ARS section 41-180 and 44-301 and following. 

Any airdrops or staking rewards must be transferred to the Bitcoin and Digital Asset Reserve Fund (Reserve Fund) on the expiration of three years after the date the abandoned digital asset was transferred to a qualified custodian. Outlines requirements for ADOR when selling abandoned digital assets. Establishes the Reserve Fund, administered by the State Treasurer, and consisting of any airdrops, staking rewards and interest. Reserve Fund monies are subject to legislative appropriation. On approval of the Legislature, the State Treasurer must deposit 10 percent of the digital assets held in the Reserve Fund in the state General Fund. The Legislature may not deposit Bitcoin into the State General Fund.

NOTABLE TAX LEGISLATION VETOED

Senate Bill 1050. Further Restriction on the Government Property Lease Excise Tax (GPLET). Would have prohibited GPLET revenue designated for school districts from being abated during the 8-year abatement period. 

The Governor indicated in her veto message that S.B. 1050 has the potential to stunt Arizona’s economic development and negatively affect opportunity in the state. 

Senate Bill 1464. Allows Affected Taxpayers to Request a Legislative Hearing  tax laws; interpretation; application; hearing (S.B. 1464). Would have allowed an affected taxpayer to notify the Legislature of a proposed interpretation or application of tax law by the Department of Revenue that would adversely affect taxpayers before the new interpretation or application is adopted. If the Legislature holds a hearing on the application or interpretation, the Department is required to provide testimony regarding its necessity. 

The Governor indicated in her veto message that S.B. 1464 would politicize the administration of the Arizona tax code and interfere with responsibilities in the Arizona Constitution.

Source: House Ways and Means Committee and Senate Finance Committee Staff Summaries of 2025 Tax Legislation.