Arizona doesn't apply the transaction privilege tax (TPT) to commercial leases. Property owners should, however, be aware that county and local governments may impose taxes on commercial leases.

Coconino, Gila, Maricopa, Pima, and Pinal Counties all require commercial property owners to pay county taxes on commercial leases. Cities and towns within those counties may or may not tax commercial leases.

Phoenix, for example, has a combined tax rate of 2.9 percent for commercial leases. Tempe, in comparison, has a 2.3 percent tax rate for commercial leases. These amounts cover both city and county taxes.

Cities and towns in counties that don't have any countywide taxes on commercial leases may still have local taxes. San Luis, for example, doesn't have any county taxes but does have a 4 percent tax on commercial leases.

Determining which governments do and don't tax commercial leases can be confusing. To make it easier, the Arizona Department of Revenue does have a search feature that allows property owners to check their specific addresses.

Even though they aren't required to pay tax on commercial leases, property owners must have a TPT license. Property considered commercial includes:

• Land
• Office buildings
• Stores
• Factories
• Warehouses
• Farmland
• Parking facilities
• Storage facilities
• Banquet halls
• Meeting rooms

Agricultural land and any building used for residential purposes, even if owned by a commercial leasing company, are not included. Similarly, residential properties offered as vacation or short-term rentals also don't fall under commercial leases.

What is Taxable?

Arizona defines the following as activities that may be taxable by either the state, county, or local government in the state. These taxable activities include:

• Rent
• Property tax
• Insurance reimbursement
• Common area maintenance
• If included in a lease agreement, clerical services
• Utility connect and disconnect charges
• Commissions from phone, food, and beverage machines
• Leasehold improvement payments
• Improvements to lease property

That the state doesn't have a tax on a certain item doesn't mean the county or local level can't impose a tax on that same item or service.

If you have questions about the TPT tax, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.