Anrok’s approach to SaaS and economic nexus in Arizona

Overview

Arizona's transaction privilege tax (TPT) is often called a sales tax, but it's a tax on the seller for the privilege of doing business in Arizona. The tax is imposed on the business, which may pass the cost on to its customers.

Anrok counts your Arizona SaaS sales toward the state's $100,000 TPT economic nexus threshold. The Arizona Department of Revenue (AZDOR) has released conflicting guidance on how SaaS is classified and whether it counts toward that threshold. The sections below explain why TPT classification affects nexus and the reasoning behind Anrok's approach.

How Arizona classifies SaaS

TPT is applied by business classification. Each business activity has its own code, its own rules, and sometimes its own tax rate. The AZDOR lists every classification on its Tax Rate Table, and you report your sales under the classifications that apply to your business. When you register with the AZDOR for a TPT license, you'll need to select the correct classifications to report your sales accurately.

Arizona taxes SaaS under one of two TPT business classifications, and which one applies changes how nexus works:

• Personal property rental — Covers renting or leasing tangible personal property for use in Arizona. The AZDOR treats pure SaaS as a personal property rental under TPR 24-1.
• Retail — Covers sales of tangible personal property, including certain software sold to Arizona customers.

Whether it's classified as a personal property rental or a retail sale, SaaS is taxable in Arizona. This means that if you don't charge TPT on your Arizona SaaS sales, your customers still owe Arizona use tax on the purchase.

Why classification matters for nexus

Arizona's $100,000 economic nexus threshold only counts retail sales. Under TPR 24-1, the AZDOR stated that income from personal property rentals, including pure SaaS subscriptions, doesn't count toward economic nexus. Read literally, a remote seller of pure SaaS could have unlimited Arizona sales and never reach economic nexus. However, the AZDOR website also states that personal property rentals establish physical nexus.

In our experience, the AZDOR is aggressive in challenging the personal property rental classification and will instead classify SaaS under the retail classification. Because retail sales count toward the threshold, a seller who relied on the personal property rental classification could find it had economic nexus all along.

Anrok's approach

Anrok includes your Arizona SaaS sales in the economic nexus calculation, treating them the same as retail sales. When your Arizona sales exceed $100,000 in a calendar year, Anrok treats you as having nexus and recommends registration. See Monitor your nexus status in jurisdictions.

While this is a conservative position, counting SaaS toward the threshold limits your potential exposure to your first $100,000 of Arizona sales if the AZDOR challenges the personal property rental classification.

Sources

• TPR 24-1: Nexus and sourcing for out-of-state businesses, Arizona Department of Revenue, December 6, 2024
• Arizona TPT Tax Rate Table, Arizona Department of Revenue