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Among 23 states that impose sales tax on SaaS, Arizona is an outlier ? it is one of only three states that tax SaaS without any clear statutory authority. See COST, Best and Worst of State Sales Tax System (December 2022), available here.
The main takeaway: An Arizona court concluded that licensing software to customers in Arizona on a subscription basis is subject to the state's Transaction Privilege Tax as a rental of tangible personal property.
Tangible Personal Property: The personal property which may be seen, weighed, measured, felt or touched or is in any other manner perceptible to the senses (A.R.S. § 42-5061(17)). Next, both computer hardware and software are subject to TPT under the retail classification.
(3) Subscriptions. (A) Exempt Subscriptions. Tax does not apply to the sale or use of a periodical, including a newspaper, which appears at least four, but not more than 60 times each year, which is sold by subscription, and which is delivered by mail or common carrier.
The main takeaway: An Arizona court concluded that licensing software to customers in Arizona on a subscription basis is subject to the state's Transaction Privilege Tax as a rental of tangible personal property.
(2) A monthly charge billed to the clients for telephone support and periodic updates of software. The charge for a software maintenance contract, which provides updates and future releases, is a contract for the sale of tangible personal property and is taxable.
Arizona does not impose transaction privilege tax on repair charges or installation charges. However, charges for services in connection with retail sales of tangible personal property are taxable unless they are separately stated on invoices and records.
Common sales tax exemptions include: Professional or personal services where the sale of tangible personal property constitutes an inconsequential element. Services rendered in addition to the sale of tangible personal property at retail.