Most states have a sales tax. Arizona has something that looks like one and works differently. Think of it as the javelina of taxes: looks like a pig, isn’t one, and causes trouble if you treat it like one.
Arizona’s transaction privilege tax (TPT) is a tax on the privilege of doing business here. That one word, privilege, explains most of the mistakes we see. Here are six of them.
1. Thinking it’s the customer’s tax
TPT is owed by the business, not the buyer. Most businesses pass it on to customers, and that’s allowed. But if you forget to charge it, you still owe it.
That’s how a small error becomes an expensive one. A business that didn’t collect TPT for two years doesn’t send customers a bill. It pays the tax, plus penalties and interest, out of its own margin.
2. Using last year’s rate
TPT is a stack: state, county and city. In Phoenix, the city rate on most retail sales rose to 2.8%, so the combined rate (opens in a new tab) is now 9.1% (5.6% state, 0.7% Maricopa County, 2.8% Phoenix). Restaurants, bars and prime contracting carry the same 9.1%.
Other cities have their own rates, and some charge less on single items above a dollar threshold. If your point-of-sale system or invoice template still has an old rate, you’re under-collecting on every sale. Check your rates against the Arizona Department of Revenue rate tables (opens in a new tab) at least once a year.
3. Assuming services are always exempt, or always taxable
Arizona taxes by business classification, not by “goods versus services.” Most professional and personal services aren’t taxable. But several classifications that feel like services are: restaurants, short-term lodging, amusements, certain rentals and contracting, among others.
So the better question is which TPT classifications your business falls into. Many businesses fall into more than one, with different rates for each.
4. Contractors: treating every job the same
Construction is where TPT goes from complicated to pull-up-a-chair. New construction is generally taxed under the prime contracting classification. Maintenance, repair, replacement and alteration work (often called MRRA) generally is not. On MRRA jobs, the contractor pays tax on materials when buying them instead.
Get the classification wrong in one direction and you overcharge customers. Get it wrong in the other and you owe tax you never collected. Either way, the paperwork on each job matters: contracts, certificates and how the job is invoiced.
5. Online sellers: the threshold doesn’t work the way you think
If you’re outside Arizona, you owe Arizona TPT once your direct sales into the state (opens in a new tab) reach $100,000 in the current or prior calendar year. Sales through a marketplace like Amazon or Etsy are excluded from your count, because the marketplace collects and remits on those.
If you’re based in Arizona, there’s no threshold to wait for. Selling from here generally means you need a TPT license and must report your own website and in-person sales from the start, even if most of your volume runs through a marketplace.
The state license is $12 per year, plus any city fees. It’s the cheapest compliance decision you’ll make.
6. Letting your TPT returns and your books disagree
This is the one that triggers letters. Not the kind with a birthday card inside. The gross sales on your monthly TPT returns should reconcile to the sales in your books, and both should reconcile to the gross receipts on your income tax return.
When they don’t, the Department of Revenue notices. A business that reports $400,000 of sales on its income tax return and $310,000 on its TPT returns has some explaining to do, even if the difference is legitimate (exempt sales, out-of-state shipments, marketplace sales).
The fix is a monthly reconciliation: TPT return to sales ledger, every period, with the reconciling items documented.
A quick note for landlords
Since January 1, 2025 (opens in a new tab), long-term residential rentals (30 days or more) are no longer subject to TPT in Arizona. If you’re still collecting it, stop, and check whether you’ve overpaid.
Short-term rentals are a different story. Stays under 30 days are still taxed under the transient lodging classification, at rates well above retail. In Phoenix, the combined lodging rate is 13.07%.
If you’d rather not think about TPT again
Arizona TPT is one of our specialties. Yes, we know that’s an unusual thing to be excited about. MCR Compliance handles licensing, classification and monthly or quarterly filing, and every return reconciles to your books’ sales ledger before it’s filed. If you think you’ve under-collected in past periods, we’ll help you size the problem and fix it.
This post is general information, not tax advice for your situation. Rates shown are City of Phoenix combined rates effective January 1, 2026; confirm current rates for your location.