Transaction Privilege Tax | Affiliated Corporation Exemption Extended to Non-Corporate Affiliated Entities
HB 2324, passed in April 2013, provides that income from commercial leases of real property between businesses with at least 80% common ownership is exempt from transaction privilege taxes (sales tax) at all levels (state, county, and city) effective September 13, 2013.
In advance of HB 2324’s effective date, the cities who have adopted the Model City Tax Code (MCTC) have elected to provide the above exemption for the city sales tax effective July 1, 2013. Please visit the link for a list of cities participating in the MCTC: http://modelcitytaxcode.az.gov/City_profiles/City_profiles.htm.
What This Means
Under current law, Arizona provides an exemption from county and selected city sales tax for income derived from commercial leases of real property between affiliated corporations.
Effective September 13, 2013, HB 2324 provides an exemption from state, county, and municipal sales taxes for income derived from commercial leasing of real property between affiliated companies, businesses, or persons. An affiliated relationship exists when:
- The lessor holds a controlling interest in the lessee
- The lessee holds a controlling interest in the lessor
- An affiliated entity holds a controlling interest in both the lessor and the lessee, or
- An unrelated person holds a controlling interest in both the lessor and lessee.
“Controlling interest” means direct or indirect ownership of at least 80% of the voting shares of a corporation or of the interests in a company, business, or person other than a corporation.
Why This is Important to You
Indirect ownership portion of the controlling interest definition allows us to look at the ultimate owners of the two entities involved in the commercial lease of real property to determine if the lessor or lessee owns at least 80% of the other party. If this 80% threshold of common ownership is reached, then the commercial lease will be exempt from sales tax.
Effective July 1, 2013, a number of cities have elected to provide the common ownership exemption for commercial leases of real property in advance of HB 2324 becoming effective.
Some cities are requesting that entities provide proof that they qualify for the common ownership exemption. It is important to know if a city has these requirements and we recommend looking at the particular city’s request for documentation individually.
Because this is an exemption from sales tax as opposed to a deduction from sales tax, if an entity was previously filing solely due to commercial leases of real property between affiliated entities, they will be able to close their respective sales tax accounts once the exemption has become effective.
What to Take Away
Prior to this change, the sales tax exemption applied only to commercial leases among corporate entities with at least 80% common ownership. Effective July 1, 2013, many cities have expanded the exemption to include all entities with 80% or more common ownership. Some cities are requesting documentation to substantiate claiming this exemption.
Effective September 13, 2013, the sales tax exemption will be for commercial leases between all entities with at least 80% or more common ownership at all levels (state, county, and city).