corporate tax; business income; allocation

SB1575 - 572R - I Ver

REFERENCE TITLE:
corporate tax; business income; allocation

State of Arizona

Senate

Fifty-seventh Legislature

Second Regular Session

2026

SB 1575

Introduced by

Senator
Epstein: Representative Sandoval

AN
ACT

amending
sections 43-1139 and 43-1147, Arizona Revised Statutes; relating to
corporate income tax.

(TEXT OF BILL BEGINS ON NEXT PAGE)

Be it enacted by the Legislature of the State of Arizona:

Section 1. Section 43-1139, Arizona Revised
Statutes, is amended to read:

START_STATUTE
43-1139.

Allocation of business income

A. Except as provided in subsection B of this
section, the taxpayer shall elect to apportion all business income to this
state for taxable years beginning from and after:

1. December 31, 2006 through December 31, 2007 by
either:

(a) Multiplying the income by a fraction, the
numerator of which is the property factor plus the payroll factor plus two
times the sales factor, and the denominator of which is four.

(b) Multiplying the income by a fraction, the
numerator of which is two times the property factor plus two times the payroll
factor plus six times the sales factor, and the denominator of which is ten.

2. December 31, 2007 through December 31, 2008 by
either:

(a) Multiplying the income by a fraction, the
numerator of which is the property factor plus the payroll factor plus two
times the sales factor, and the denominator of which is four.

(b) Multiplying the income by a fraction, the
numerator of which is one and one-half times the property factor plus one
and one-half times the payroll factor plus seven times the sales factor,
and the denominator of which is ten.

3. December 31, 2008 through December 31, 2013 by
either:

(a) Multiplying the income by a fraction, the
numerator of which is the property factor plus the payroll factor plus two
times the sales factor, and the denominator of which is four.

(b) Multiplying the income by a fraction, the
numerator of which is the property factor plus the payroll factor plus eight
times the sales factor, and the denominator of which is ten.

4. December 31, 2013 through December 31, 2014 by
either:

(a) Multiplying the income by a fraction, the
numerator of which is the property factor plus the payroll factor plus two
times the sales factor, and the denominator of which is four.

(b) Multiplying the income by a fraction, the
numerator of which is seven and one-half times the property factor plus seven
and one-half times the payroll factor plus eighty-five times the sales factor,
and the denominator of which is one hundred.

5. December 31, 2014 through December 31, 2015 by
either:

(a) Multiplying the income by a fraction, the
numerator of which is the property factor plus the payroll factor plus two
times the sales factor, and the denominator of which is four.

(b) Multiplying the income by a fraction, the
numerator of which is five times the property factor plus five times the
payroll factor plus ninety times the sales factor, and the denominator of which
is one hundred.

6. December 31, 2015 through December 31, 2016 by
either:

(a) Multiplying the income by a fraction, the
numerator of which is the property factor plus the payroll factor plus two
times the sales factor, and the denominator of which is four.

(b) Multiplying the income by a fraction, the
numerator of which is two and one-half times the property factor plus two and
one-half times the payroll factor plus ninety-five times the sales factor, and
the denominator of which is one hundred.

7. December 31, 2016
through December
31, 2026
by either:

(a) Multiplying the income by a fraction, the
numerator of which is the property factor plus the payroll factor plus two
times the sales factor, and the denominator of which is four.

(b) Multiplying the income by the sales factor.

8. December 31, 2026 by multiplying
the income by a fraction, the numerator of which is the property factor plus
the payroll factor plus two times the sales factor, and the denominator of
which is four.

B. All business income of a taxpayer engaged in air
commerce shall be apportioned to this state by multiplying the income by a
fraction, the numerator of which is the revenue aircraft miles flown within
this state for flights beginning or ending in this state and the denominator of
which is the total revenue aircraft miles flown by the taxpayer's aircraft
everywhere. This subsection applies to each taxpayer, including a
combined group filing a combined return or an affiliated group electing to file
a consolidated return under section 43-947, if fifty
per
cent

percent
or more of that taxpayer's gross
income is derived from air commerce.� For the purposes of this subsection:

1. "Air commerce" means transporting
persons or property for hire by aircraft in interstate, intrastate or
international transportation.

2. "Revenue aircraft miles flown" has the
same meaning prescribed by the United States department of transportation
uniform system of accounts and reports for large certificated air carriers (14
Code of Federal Regulations part 241).
END_STATUTE

Sec. 2. Section 43-1147, Arizona Revised
Statutes, is amended to read:

START_STATUTE
43-1147.

Situs of sales of other than tangible personal property; rules;
definitions

A.
For taxable years beginning before
December 31, 2026,
except as provided by subsection B of this section,
sales, other than sales of tangible personal property, are in this state if
either of the following applies:

1. The income-producing activity is performed in
this state.

2. The income-producing activity is performed both
in and outside this state and a greater proportion of the income-producing
activity is performed in this state than in any other state, based on costs of
performance.

B. For taxable years beginning from and after
December 31, 2013
through December 31, 2025
, a multistate
service provider may elect to treat sales from services as being in this state
based on a combination of income-producing activity sales and market
sales.� If the election under this subsection is made pursuant to subsection
C

F
of this section, the sales of
services that are in this state shall be determined for taxable years beginning
from and after:

1. December 31, 2013 through December 31, 2014, by
the sum of the following:

(a) Eighty-five percent of the market sales.

(b) Fifteen percent of the income-producing
activity sales.

2. December 31, 2014 through December 31, 2015, by
the sum of the following:

(a) Ninety percent of the market sales.

(b) Ten percent of the income-producing activity
sales.

3. December 31, 2015 through December 31, 2016, by
the sum of the following:

(a) Ninety-five percent of the market sales.

(b) Five percent of the income-producing activity
sales.

4. December 31, 2016
through december
31, 2026
, by one hundred percent of the market sales.

C. For taxable years beginning from
and after December 31, 2026, sales, other than sales of tangible personal
property, are in this state if the taxpayer's market for the sales is in this
state. The taxpayer's market for sales is in this state as follows:

1. For the sale, rental, lease or
license of real property, if and to the extent the property is located in this
state.

2. For the rental, lease or license
of tangible personal property, if and to the extent the property is located in
this state. Except for transportation property, the location of the
property is determined when the property is first placed in service by the
lessee. For transportation property, the property is located in this
state to the extent the property is used in this state. An aircraft is
deemed to be used in this state based on a fraction, the numerator of which is
the number of landings of the aircraft in this state and the denominator of
which is the total number of landings of the aircraft.

3. For interest, fees and penalties,
in connection with loans secured by real property and the sale of the loans
secured by real property, the market is in this state if the property is
located in this state. The determination of real property securing a loan
is made at the time of the original agreement without regard to subsequent
substitutions of collateral.

4. For interest, fees and penalties
in connection with loans not secured by real property and the sale of the loans
not secured by real property, the market is in this state if the borrower is
located in this state.

5. For interest, dividends and other
income from investment and trading assets and activities, the market is in this
state if the asset is properly assigned to a regular place of business of the
taxpayer in this state. An asset is properly assigned to a regular place
of business in this state if the trading policies or guidelines with respect to
the asset or activity are established in this state. The market for the
sale of the investment or trading assets is in this state if the customer is in
this state.

6. For the sale of a service, if and
to the extent the service is delivered to a location in this state.

7. For intangible property that is:

(
a
) Rented,
leased or licensed, if and to the extent the property is used in this state,
except intangible property used in marketing a good or service to a consumer,
is used in this state if that good or service is purchased by a consumer who is
in this state.

(
b
) Sold, if
and to the extent the property is used in this state, except:

(
i
) A contract
right, government license or similar intangible property that authorizes the
holder to conduct a business activity in a specific geographic area is used in
this state if the geographic area includes all or part of this state.

(
ii
) Receipts
from intangible property sales that are contingent on the productivity, use or
disposition of the intangible property shall be treated as receipts from the
rental, lease or licensing of such intangible property under subdivision (
a
) of this paragraph.

(
iii
) Unless
otherwise provided in this section, all other receipts from a sale of
intangible property shall be excluded from the numerator and denominator of the
sales factor.

D. If the state or states of
assignment under subsection C of this section cannot be determined, the state
or states of assignment shall be reasonably approximated.

E. If the taxpayer is not taxable in
a state to which a receipt is assigned under subsection C or D of this section,
or if the state of assignment cannot be determined under subsection C of this
section or reasonably approximated under subsection D of this section, the
receipt shall be excluded from the denominator of the sales factor.

C.
F.
A
multistate service provider may elect to treat sales from services as being in
this state under subsection B of this section as follows:

1. The election must be made on the taxpayer's
timely filed original income tax return.� The election is:

(a) Effective retroactively for the full taxable
year of the income tax return on which the election is made.

(b) Binding on the taxpayer for at least five
consecutive taxable years, regardless of whether the taxpayer no longer meets
the percentage threshold of a multistate service provider during that time
period, except as provided by paragraph 2 of this subsection.� To continue with
the election after five consecutive taxable years, the taxpayer must meet the
qualifications to be considered a multistate service provider and renew the
election for another five consecutive taxable years.

2. During the election period, the election may be
terminated as follows:

(a) Without the permission of the department on the
acquisition or merger of the taxpayer.

(b) With the permission of the department before the
expiration of five consecutive taxable years.

D.
G.
For
a multistate service provider under subsection
E
I
, paragraph 3, subdivision (b) of this section, an
election under subsection B of this section is limited to the treatment of
sales for educational services. For a multistate service provider
under subsection
E
I
,
paragraph 3, subdivision (c) of this section, an election under subsection B of
this section is limited to the treatment of sales for support services, the
payment for which is a percentage of the sales for educational services generated
by a regionally accredited institution of higher education.

H. The department shall adopt rules
as necessary for the purposes of this section.

E.
I.
For
the purposes of this section:

1. "Income-producing activity sales" means
the total sales from services that are sales in this state under subsection A
of this section.

2. "Market sales" means the total sales
from services and sales
of
from

intangibles, as defined in paragraph 3, subdivision (a) of this subsection, for
which the purchaser received the benefit of the service or intangibles

in this state.

3. "Multistate service provider" means any
of the following:

(a) A taxpayer that derives more than eighty-five
percent of its sales from services or sales from intangibles provided to
purchasers who receive the benefit of the service or intangibles outside this
state in the taxable year of election, and includes all taxpayers required to
file a combined report pursuant to section 43-942 and all members of an
affiliated group included in a consolidated return pursuant to section 43-947. In
calculating the eighty-five percent, sales to students receiving
educational services at campuses physically located in this state shall be
excluded from the calculation. For the purposes of this subdivision,
"sales from intangibles" means sales derived from credit and charge
card receivables, including fees, merchant discounts, interchanges, interest
and related revenue.

(b) A taxpayer that is a regionally accredited
institution of higher education with at least one university campus in this
state that has more than two thousand students residing on the campus, and
includes all taxpayers required to file a combined report pursuant to section
43-942 and all members of an affiliated group included in a consolidated
return pursuant to section 43-947.

(c) A taxpayer that has more than two thousand
employees in this state and that derives more than eighty-five percent of its
sales from support services provided to a regionally accredited institution of
higher education, and includes all taxpayers required to file a combined report
pursuant to section 43-942 and all members of an affiliated group
included in a consolidated return pursuant to section 43-947.

4. "Received the benefit of the service in this
state" means the services are received by the purchaser in this state.� If
the state where the services are received cannot be readily determined, the
services are considered to be received at the home of the customer or, in the
case of a business, the office of the customer from which the services were
ordered in the regular course of the customer's trade or business.� If the
ordering location cannot be determined, the services are considered to be
received at the home or office of the customer to which the services were
billed.� In the case of a multistate service provider under paragraph 3,
subdivision (c) of this subsection, the benefit of support services shall be
deemed received at the billing address of the student to which the services
relate.

5. "Sales for educational services" means
tuition and fees required for enrollment and fees required for courses of
instruction, transcripts and graduation.
END_STATUTE