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STARTING AND OPERATING A BUSINESS IN ARIZONA Copyright © 2005, Michael D. Jenkins
CONTENTS OF THIS SECTION:
I. INTRODUCTION I. INTRODUCTION Arizona has a fairly typical tax and legal structure under which businesses must operate. Like most states, Arizona imposes an income tax, a sales and use tax (called the "transaction privilege tax"), various excise taxes, with property taxes imposed at the local level. There is no franchise tax on corporations in Arizona, unlike many states, although the state does impose a corporate income tax on all corporations other than S corporations. The state has also adopted a limited liability company (LLC) law, and a limited liability partnership (LLP) law, so that businesses operating in Arizona in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. Arizona has an extremely friendly business climate, with a moderate tax environment, a highly skilled work force, and over 55% of its manufacturing workers employed in high-tech industries. Arizona has been steadily reducing its personal income tax rates since 1989, and also reduced personal property taxes in 1995 and the corporate income tax rate in 1998 and 2000. Arizona has experienced rapid growth in its population and economy for many years. At present, the state's economy is quite robust, in terms of the level of unemployment and other economic measures. For example, in December, 2004, the state's unemployment rate was down to 4.2%, well below the national unemployment rate of 5.4% and improved considerably from the 5.0% Arizona unemployment rate recorded in December of 2003. To view the latest federal Bureau of Labor Statistics unemployment rate data for Arizona or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS (a) In General. A business that operates in Arizona can operate as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity. Arizona also provides for limited liability partnerships, in which no partner is liable for debts of the partnership, in general, as in the case of a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV. (b) Sole Proprietorships. In general, sole proprietorships in Arizona can be formed with no formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. No separate tax form filing is required, generally, for a sole proprietorship, under the Arizona income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your Arizona personal income tax return. See Section IV(c), for information on the Arizona income tax and filing requirements for individuals. (c) Partnerships. As a rule, general partnerships in Arizona can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under Arizona law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must also file a Certificate of Limited Partnership with the Arizona Secretary of State, with a filing fee of $10, plus $3 a page (plus another $10 for a limited partnership formed under the laws of another state, for the issuance of a certificate of registration). For information on limited partnership filing requirements, see the contact information for the offices of the Business Services Department of the Arizona Secretary of State, listed in Section VI(a). Limited liability partnerships (LLPs) are a relatively new form of partnership permitted under the laws of Arizona. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and Arizona state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. Arizona law now generally allows registration of any partnership with the Secretary of State, after which the partnership will become a limited liability partnership (LLP). Partners in an LLP are not liable for the debts of the partnership, under the Revised Uniform Partnership Act that went into effect on January 1, 2000. The filing fee to register a domestic or foreign partnership as an LLP, or to renew the registration each year, is only $3. All partnerships containing the word "liability" must, within 60 days after filing with the Secretary of State, file a statement of qualification and publish in a newspaper of general circulation for three consecutive publications a copy of their statement of qualification. The statement must be published in the county of the LLP's chief executive office. If the LLP's chief executive office is not located in Arizona, publish it the statement in the county of the LLP's office in Arizona, or if the LLP has no office in the state, publish in the county of the LLP's statutory agent. An affidavit evidencing publication must be filed with the Arizona Secretary of State within 90 days after the filing of the statement of qualification. The filing fee for the affidavit is $3.00. For more information on LLP registration and reporting requirements, see the contact information for the offices of the secretary of state, listed in Section VI(a). Note that one potential drawback of LLPs, if you will do business in other states besides Arizona, is that some states, like California and New York, only recognize certain types of professional partnerships as LLPs. If yours is not a professional partnership, such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
Partnerships, as entities, are not subject to state income tax in Arizona. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners). Partnerships are required to file an annual tax information return with the state. For details on Arizona partnership tax return filing requirements, see Section IV(c). (d) Corporations. To form a corporation in Arizona, you must file articles of incorporation with the Arizona Corporation Commission (ACC) and pay filing fees of $60 to the ACC. Within 60 days after filing, the corporation must publish a copy of its articles of incorporation in three consecutive issues of a local paper in the county where it will do business. Foreign corporations -- those created under the laws of another state -- must obtain a certificate of authority to do business in Arizona, from the ACC. The application must be filed along with filing fees of $175 and an original certified copy of the corporate charter. For more information on filing articles of incorporation or applying for a certificate of authority to do business in Arizona, see the contact information for the offices of the Arizona Corporation Commission, listed in Section VI(a). All corporations in Arizona, including foreign corporations and S corporations, are required to file annual corporate reports and pay an annual $45 filing fee ($10 for nonprofit corporation). The report and fee must be sent to the ACC by the 15th day of the third month following the year end. Failure to file this report on a timely basis could result in suspension or revocation of your corporation's charter. In addition to paying federal income taxes on its income, a corporation that does business in Arizona must also file corporate income tax returns with the state. See Section IV(c), for a discussion of state corporate income tax rates and tax return filing requirements. For tax forms and more information on corporate income taxes in Arizona, see the contact information for the offices of the Arizona Department of Revenue, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal income tax purposes to be taxed somewhat like a partnership, with its income, losses, and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. Arizona recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment. No separate state S corporation election is required; if a corporation is treated as an S corporation for federal tax purposes, it will also be so treated for Arizona income tax purposes. (f) Limited Liability Companies. Arizona, like every other state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Arizona may also choose to operate in the form of an LLC. In most states, LLCs are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes. See Section IV(c) for a discussion of the income tax treatment of LLCs under Arizona tax laws. To form an LLC under the laws of Arizona, one or more persons (who need not be members of the LLC) must file articles of organization with the Secretary of State, along with a $50 filing fee. Foreign LLCs that do business in the state must register with the Secretary of State, paying a $150 fee for filing the foreign LLC registration, in order to obtain authority to do business in Arizona. Unlike some states, Arizona law permits formation of professional LLCs. Arizona state law now permits the creation of 1-member LLCs, in response to the fact that the federal tax regulations have been modified to allow 1-member LLCs to be treated as sole proprietorships for federal tax purposes. As with LLPs, LLCs formed in Arizona or foreign LLCs that register to obtain authority to do business in the state must publish a notice in local newspapers and file an affidavit with the Arizona Corporation Commission within 90 days, as proof of publication. For more information on filing articles of organization for an LLC, see the contact information for the offices of the Arizona Corporation Commission, Corporations Division, listed in Section VI(a). III. BUSINESS ACQUISITIONS (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales/use tax or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Arizona recently repealed its bulk sales law and thus you will no longer need to incur the expense of complying with the bulk sales law when you purchase assets of an existing business in Arizona. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. In Arizona, you should obtain tax releases for state unemployment tax, withholding tax, or sales tax obligations. Otherwise, you may be held liable for such obligations, unless you either obtain the appropriate tax releases from the state or withhold any unpaid taxes from the purchase price you pay to the seller. You should also take the precaution of having the seller obtain an unemployment tax release, by contacting the Collections Division of the Arizona Department of Revenue. Similarly, to avoid being held personally liable for unpaid sales tax or state income tax withholding, you will want to withhold such amounts or obtain a letter from the Arizona Department of Revenue, showing that no tax is owed, or else telling you how much tax you should withhold from the purchase price. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. To obtain the seller's favorable experience rating as a successor employer, you will need to apply on a timely basis to the Experience Rating Unit of the Arizona Department of Economic Security, requesting that you be treated as a successor employer, if you acquire only part of a business. If you acquire the entire business, you will automatically be a successor employer. One advantage of being treated as a successor employer is that you may take into account wages already paid to the acquired employees during the year of sale by the former employer, and thus will not have to pay tax on the amount of wages paid to an employee in that year by the former employer, who will have already paid unemployment tax on such wages for which you may take credit, in determining the amount of tax owed. IV. ARIZONA TAXES AND OTHER GENERAL REQUIREMENTS (a) In General.
Arizona has a reputation
of being a state that is friendly toward business, and it
has seen very rapid expansion and business growth as result
of its business climate, as well as its climate of sunshine
and year-round warm weather in the southerly parts of the
state. Tax rates are generally low, with a personal income
tax that tops out at a rate of 5.04% in 2005 on income
brackets above $150,000 (single filer) or $300,000 (married
filing jointly or head of household), and a state sales tax
rate of 5.6% and combined state and local sales tax rates
of about 7% to 8%, generally. In addition, the unemployment
tax rate for new employers has been reduced from 2.7% of
taxable wages to 2.0%, beginning in 2005.
Arizona also exempts intangible property and business
inventories from property taxes, and it has a right-to-work
law and no state minimum wage law.
The corporate income tax rate is fairly high, though it
has been reduced in recent years from 9% as recently as 1997
to 6.968% in 2001 and subsequent years, and can decrease
to as low as 6.8% for years after 2001 when and if certain
statutory revenue requirements are met. Thus, many small
businesses in Arizona will want to consider operating as S
corporations or in unincorporated form (sole proprietorship,
partnership or LLC), in order to avoid having to pay the
higher corporate tax on income of the business.
(b) State and Local Licensing. Nearly any
business, operated anywhere in the United States, will have
to have at least one government license of some kind. In
most cases, this will be a local license, issued by your city
or county. Before you open your business, contact your local
city or county hall and find out if your particular business
needs one or more local licenses. Most kinds of local business
licenses are granted upon payment of a fee, with no further
requirements, except possibly for annual or other periodic
renewal fees.
However, if you are engaging in any kind of food business,
you will usually need to also obtain a health department
permit and show that you are in compliance with health
department food-handling requirements. In addition, be
sure to check with an attorney or local government zoning
or planning department officials to determine if your
business will be in compliance with all local zoning
and planning restrictions. If you own or rent any type
of facility, you will generally need fire department
permits, showing that you meet fire safety codes and any
construction or improvements to an existing structure will
usually require a building permit. If you intend to simply
operate your business from your home, you may be in
violation of local zoning requirements, but this is less
likely to be a concern if you don't have clients, customers,
suppliers, or employees coming to your house on business,
on a regular basis.
State governments have also traditionally required special
licenses for many kinds of professionals, such as physicians,
dentists, lawyers, and accountants. To further protect
consumers, Arizona has expanded the list of occupations
that must be licensed by the state to include many other
occupations. Most state licenses not only require payment
of fees, but are only issued for a given profession or
occupation upon showing that you have completed certain
educational or experience requirements, or passed certain
tests, or some combination of the foregoing.
Many businesses, professions and occupations require a
separate occupational license from the state of Arizona,
ranging from occupations such as accountants to midwives
to the operation of zoos. City, but not county, governments in Arizona may also
impose duplicate license fees or taxes on many occupations
that require state licenses.
For information on state licensing and business registration
requirements in Arizona, see the contact information for
the offices of the License and Registration Section of the
Arizona Department of Revenue, listed in Section VI(a).
(c) Income and Franchise Taxes. Arizona has
both an individual income tax and a corporate income tax, but
does not impose a franchise tax on corporations.
The Arizona individual income tax is imposed at a maximum
tax rate of 5.04% in 2005. Individual taxpayers generally
pay state income tax on their business earnings from a sole
proprietorship, or on their share of the earnings of a
pass-through entity, such as a partnership or S corporation
or LLC. The Arizona personal income tax return is Form
140, which must be filed with the Arizona Department
of Revenue.
Partnerships, or entities taxable as partnerships, such as
LLCs, are not subject to state income taxation in Arizona,
but must file an information return with the Department of
Revenue each year, showing each partner's share of taxable
income, losses, and credits, on Form 165.
Individual taxpayers doing business as sole proprietors,
or who are partners in partnerships, or members of LLCs, are
generally required to make payments of estimated Arizona
individual income taxes, on Form 140-ES, if their
net tax liability is not covered by withholding. No estimated
tax filing is required unless your gross Arizona income
exceeds $75,000 in the current year and was greater than
$75,000 during the preceding year (or in excess of $150,000
each year for couples filing joint returns). No estimated
tax payment is required if the tax due with the Arizona
income tax return is less than $1,000.
Estimated tax payments are due in four installments, on
the 15th day of the 4th, 6th, and 9th months of the taxable
year, and the 15th day of the first month of the following
year.
To avoid penalties for underpayment of estimated tax
(if you are required to make estimated tax payments) you
must either pay in 90% of the current year's tax, or 100%
of the previous year's tax.
The Arizona corporate income tax rate, on corporations
other than S corporations, is imposed at a flat tax rate
of 6.968% of taxable income, and may be set as low as 6.8%
in some years if the state meets certain revenue
goals. There is a minimum annual tax of $50, even if the
corporation has no taxable income. The Arizona corporation
income tax return, Form 120, is due by the
15th day of the fourth month following year end.
Corporations are required to make estimated tax payments
of their state corporate income tax in advance, if their tax
liability for the year equals or exceeds $1,000. Estimated
tax payments are due in advance, in four equal installments,
on the 15th day of the 4th, 6th, 9th, and 12th months of
the taxable year, paid with Form 120-ES.
The total estimated tax that must be paid in is usually
equal to 90% of the actual tax liability for the year.
However, if the preceding year was a full year of 12 months,
the current year payments need only be equal to 100% of the
prior year's tax liability, if less. However, the prior
year's tax liability exception is not allowed in the case
of certain "large corporations" that had $1 million or
more of federal taxable income, before loss carryovers or
carrybacks, in any of the three preceding years.
Penalties will be imposed for failure to make the
required estimated tax payments on a timely basis.
Any corporation that is an S corporation for federal
income tax purposes is also treated as an S corporation (and
is not taxable, generally) for Arizona corporation income
tax purposes. No separate Arizona S corporation election
is required or permitted.
In Arizona, a limited liability company (LLC) is taxed
in the same manner as a partnership, thus avoiding the
possible double taxation of income that can occur with a
corporation. Note that under IRS regulations, effective
since 1997, an LLC is now able to elect to be treated as
a partnership if it has more than one owner, or as a sole
proprietorship if it does not, for federal tax purposes.
Arizona law was amended in 1997 to permit the formation
of a one-owner LLC.
Note that it is not always entirely clear whether an LLC is a
"single-member LLC" LLC or not, in a community property state like
Arizona, where the "single owner" is a married person and the LLC
is owned as community property. Fortunately, the federal Internal
Revenue Service (IRS) has taken a very lenient position in Rev. Proc.
2002-69, stating that the IRS will accept whatever choice the couple
make, either to disregard the LLC as an entity (treating it as a
"single-member LLC") or to treat it as a partnership between the
husband and wife. Presumably, the couple's choice of federal tax
treatment will also apply for state tax purposes, since Arizona
follows the federal tax treatment of LLCs, generally.
However, where the LLC is owned by a husband and wife as joint
tenants, or tenants in common, or as tenants by the entirety, it
is unclear whether the IRS treatment would be as lenient as for
community property owners, since the IRS has not issued any
published rulings on whether an LLC can be a disregarded entity
if held in one of the various forms of tenancy by a married
couple, rather than being held as community property. Thus, it
is also unclear, where an LLC is owned by a husband and wife as
co-tenants, whether Arizona would treat the LLC as a single-member
LLC or as a partnership.
(d) Sales and Use Tax. If your business
is involved in retail sales or rentals of tangible personal
property, you are required to collect Arizona sales tax. In
Arizona, this tax is called the "transaction privilege tax."
The gross receipts from a wide variety of other business
activities, such as commercial realty leases, transportation,
printing, publishing, utilities, and communications, are
also subject to tax, at varying rates.
The state sales and use tax rate is 5.6%, effective since
January 1, 2001, and ranges up to 9% or more when combined
with the county rate, in some counties. Cities and towns
also may impose and collect their own local transaction
privilege taxes on some or all of the above types of
activities. Most such cities allow the state to collect
their city sales taxes, but the larger cities, such as
Phoenix and Tucson, collect such taxes directly, so you
will need to contact such cities to register for their
transaction privilege taxes, where it is collected directly.
The city of Phoenix increased its sales tax rate from 1.4%
to a tax rate of 1.8% on retail sales and most other
classifications, on June 1, 2000.
There is also a state tax rate of 5.5% on transient
accommodations.
There are numerous exemptions from the sales tax, the most
important of which is the resale exemption. If you are a
wholesaler or retailer who purchases goods that you will
resell, your purchase of such goods may qualify as an exempt
sale for resale. Similarly, if you sell goods to wholesalers
or retailers for resale by them, your sale may also qualify
as an exempt sale for resale. In any such transaction, the
exemption is ordinarily available only if the purchaser gives
the seller a valid resale certificate, certifying that the
items are being purchased for resale, and not for use or
consumption by the buyer.
Use tax applies to the use of all taxable property purchased
outside the state, where no Arizona transaction privilege tax
has been collected, when the property is used or consumed in
Arizona. It also applies to items bought tax-free for resale
by a retailer, but actually used rather than resold by the
retailer.
Vendors are required to apply for a transaction privilege
tax license from the Arizona Department of Revenue, in order
to be able to collect sales tax and resell merchandise.
There is a $12 one-time fee for a license, which is needed
for each place of business. You must also pay a license fee to each city for
each place of business in that city, at fees ranging from $1
to $25 per location.
Make your application on the Arizona Joint Tax Application,
Form JT-1/UC-001, which serves as an application for the
transaction privilege tax (state and local), use tax, and for
registration as an employer for withholding and unemployment tax
purposes. For information on registration contact the License and
Registration Section of the Arizona Department of Revenue, at the
address listed in Section VI(a).
As a vendor collecting the transaction privilege tax, you
are entitled to keep a 1% collection fee (maximum of $10,000
a year for all locations) on the tax you collect.
Transaction privilege and use taxes are due on or before the
20th day of each month for the preceding calendar month, if
you collect over $500 tax for the year. Smaller retailers,
who collect under $1250 of tax annually, may file quarterly,
or annually for those who collect under $500 a year. A
prepayment of estimated tax is required for certain large
retailers who collect $100,000 or more of tax. To report transaction privilege
and use taxes, use Form TPT-1.
For more information on Arizona sales and use tax registration
and compliance, see contact information for the offices of the
Arizona Department of Revenue in Section VI(a).
(e) Real and Personal Property Taxes. In
Arizona, as in every other state, any business real estate you
own will be subject to real property taxes. Generally, you
will receive a notice from the county assessor each year by
February 1, informing you of valuation of your real property
for tax purposes. In addition, businesses must report
their personal property (other than intangible property,
such as stocks, bonds, promissory notes, and other such
paper assets) as of December 31 of each year, listing all
business personal property on a form sent out by the county
assessor. Property statements are due on or before the
following April 1.
New businesses started after January 1 are not required to
report personal property until the following year. Real
and personal property taxes are collected by your County
Treasurer or assessor.
Like many business-friendly states, Arizona exempts
business inventories from the business personal property
tax, including raw materials and merchandise held for
resale.
For more information on property taxes, contact your county
tax assessor. A Personal Property Tax Manual
is available from the Department of Revenue, Property Tax
Division.
(g) Trade Names. A trade name, also known as a fictitious or assumed name, is a name used by a business that does not include the full legal name of all the owners of the business. Also, a name that suggests the existence of additional owners, such as "company," "group," or "associates" may also be a fictitious name. Any business in Arizona that operates under an assumed or fictitious name is required to file a certificate with the county recorder, except for law partnerships and certain commercial or banking partnerships established and doing business outside the state under a fictitious name. In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. This is not legally required in Arizona, but you may want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. While registering a fictitious name may be helpful in establishing that you were first to use that name in Arizona, you may want to seek additional protection by registering the name. For information and registration forms, contact the Arizona Corporation Commission at the address listed for that agency in Section VI(a). You may also register a trade name or trademark or service mark with the state for five years, for only $10 for a trade name or $15 for a trademark or service mark, and may renew it for additional five-year periods. For forms and instructions, contact the Business Services Department of the Arizona Secretary of State, at the address listed for that agency in Section VI(a). V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. Since Arizona imposes a state income tax on the income of individuals, you will need to also withhold Arizona income tax from the wages of your employees. Before you begin to pay wages, you must apply for an income tax withholding number by completing and submitting an Arizona Joint Tax Application form to the Department of Revenue. This can also serve as your sales tax and state unemployment tax application. Employers are generally required to file Form A1-WP monthly and Form A1-QRT quarterly with the Department of Revenue, plus an annual reconciliation by February 28 of the following year. For more information on Arizona income tax withholding and a withholding tax registration certificate you must obtain as an employer, see the contact information for the offices of the License and Registration Section of the Arizona Department of Revenue, listed in Section VI(a). (b) Unemployment and Other State Payroll Taxes. If you employ one or more individuals at any time during 20 weeks of the calendar year or if your payroll is $1,500 or more in any calendar quarter, you must pay state unemployment tax. Unemployment contribution reports and taxes are due each quarter, by the end of the month following the end of each quarter. New employers are required to pay tax at a rate of 2.0% in 2005 on the first $7,000 of wages paid to each employee. After you have had employees for a minimum of two calendar years, you will develop an unemployment tax experience rating. This rating is based on several factors, including the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, the size of your taxable payroll, and the overall solvency of the state's unemployment trust fund, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. All state unemployment taxes are imposed upon you as the employer, and, under Arizona law, cannot be charged to your employees or withheld from their wages. For helpful brochures and other information about your responsibilities under the state unemployment tax laws, see the contact information for the offices of the Arizona Department of Economic Security, listed in Section VI(a). (c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In Arizona, virtually all businesses with one or more employees are required by law to have workers' compensation insurance, except those able to self-insure. Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. Thus, if you fail to obtain required workers' compensation insurance, and an employee is injured on the job, you will have opened yourself to unlimited liability and severe legal consequences, so it is very important to obtain workers' compensation insurance for your employees. While the workers' compensation law does not require sole proprietors or partners to be covered, sole proprietors or working members of a partnership may apply for optional coverage if the insurance company providing workers' compensation insurance is willing to offer such coverage. Be aware that neither general liability nor health and accident insurance can properly substitute for workers' compensation insurance. As an employer, you must notify injured employees of their benefits and post a notice in the workplace informing your employees of their workers' compensation coverage. For more detailed information regarding your obligations as an employer under the Arizona workers' compensation laws, including free booklets, contact your insurance carrier or see the contact information for the offices of the Industrial Commission of Arizona, listed in Section VI(a). (d) State Wage and Hour Laws. Unlike most states, Arizona does not have a minimum wage law governing the hourly wage that you must pay to your employees, except for a "fair wage" requirement for employment of minors. However, in most cases, your business will be subject to the federal minimum wage and overtime laws, and thus are required to pay at least $5.15 an hour to employees. In addition, you must pay time-and-a-half for overtime hours, for any non-exempt employee who works more than 40 hours in a week. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar state child labor laws, in Arizona. As under federal laws, the employment of children under the age of 18 is strictly regulated by the state of Arizona. The Arizona child labor laws closely mirror federal laws, but the state defines some activities as hazardous to the employment of minors that may not be covered under federal child labor laws. Unlike many states, Arizona does not require work permits for children under the age of 18 to be employed. (e) State Occupational Safety and Health Laws. Approximately half of the states have their own OSHA-like agency, charged with administering the state's own occupational safety and health laws. The remaining states have no such enforcement agency, and thus rely instead on the federal Occupational Safety and Health Administration (OSHA) to administer the federal job safety rules within such states. Arizona is one of the states that has its own OSHA-type agency. To determine if your workplace is in compliance with federal and Arizona job safety requirements, you may wish to contact the Arizona Division of Occupational Safety and Health (ADOSH) and request a free on-site safety consultation. You will not be cited for any violations that are detected, provided that you promptly correct the unsafe conditions. This differs from the rules for consultations by federal OSHA inspectors, who are required to cite you for any violations they find. ADOSH provides free consultation to new businesses on how to comply with its health and safety regulations, and on-site safety training for areas such as operating heavy equipment and dealing with hazardous substances. For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the Industrial Commission of Arizona, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Arizona labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to terminated employees. State law in Arizona generally requires an employer to designate at least two regular paydays every month, no more than 16 days apart. However, certain employers whose principal place of business is outside the state, and whose payroll system is centralized outside Arizona, may designate one or more days a month as paydays, for certain professional, administrative, executive or supervisory employees, or outside salespersons. Arizona law requires an employer to pay final wages to an employee who is discharged within three days or by the next regularly scheduled payday, whichever is sooner, and to mail the final payment if requested. For an employee who voluntarily quits, the final paycheck is due not later than the next regular payday. For guidance and information regarding wage-hour, child labor and other state labor laws, contact the Arizona State Labor Department, at the address listed for that agency, in Section VI(a). (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. Arizona has a right-to-work law, which prohibits job discrimination based on nonmembership in a labor union. (3) State anti-discrimination laws. Arizona has its own anti-discrimination and civil rights laws. These include laws regarding equal pay, regardless of gender, and fair employment laws that generally follow the federal fair employment statutes. In addition, Arizona has a Time-Off-to-Vote law, and state law prohibits employers from firing an employee for garnishment, or for filing complaints with or testifying before ADOSH or other state agencies concerning water quality or pesticides. The Arizona civil rights laws require employers to display a poster in the workplace, informing workers of their rights under the state's anti-discrimination provisions. You can obtain this poster from the Civil Rights Division of the Arizona Attorney General's Office, at the address listed in Section VI(a). (4) Reporting new hires. Under federal welfare reform laws, employers in all states are required to report all newly-hired (or rehired) employees to a designated state agency (the Arizona New Hire Reporting Center for Arizona employers) within 20 days after the date of hire. New hire reports may be filed online, or see the address and fax number of the New Hire Reporting Center in Section VI(a), if you choose to file reports by mail or fax. VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Arizona, as many states have done in recent years, has established a "one-stop" center to help your new or existing businesses to obtain all necessary state licenses and permits from a single office, without your having to go from agency to agency to meet all the legal and regulatory licensing requirements. The Arizona Business Connection (ABC) is the office that has been set up for the purpose of helping businesses in every stage of development. This office draws on the experience of business leaders from both the private and public government sectors, and provides information on licenses, permits, as well as a customized packet of forms needed to start your business in Arizona. ABC not only provides most state documents, forms and publications you may need, but can refer you to various resources for counseling and for financing your business. STARTUP ASSISTANCE. For more information about ABC, or to obtain their publication entitled "Entrepreneur's Edge 2004," contact the Phoenix office at:
In the Phoenix area, the Phoenix Small Business Assistance Program provides a wide range of business information, referral to counseling services, and assistance on complying with Phoenix taxes and licensing requirements. Addresses and other contact information for other key state government agencies mentioned in Sections I through V of the Arizona chapter are listed below for your convenience. SECRETARY OF STATE. Contact the office of the secretary of state for information on:
Contact this agency at:
STATE LABOR LAWS. Contact the following agency about your obligations as an employer under various state labor laws, including:
STATE SALES TAX. Obtain your sales and use tax license or permit and information on the Arizona sales and use tax law, from the Department of Revenue. See the contact information listed above for that agency. You may also have to contact some of the larger cities which directly administer their own sales and use (transaction privilege) taxes. EMPLOYER WITHHOLDING. Contact the License and Registration Section of the Arizona Department of Revenue to obtain information on employer withholding and tax payment obligations and a withholding registration certificate, at the address listed above for that agency. STATE UNEMPLOYMENT TAX. Contact the following state agency to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer if you are subject. Contact them at the following address to obtain the required notice of unemployment insurance poster:
(b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Arizona to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you.
(c) Internet Sites. If you have access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Arizona. Since new sites are appearing constantly, you might also want to search for other Arizona government Web sites by using one of the popular Internet search engines, such as Excite! or Yahoo. To start your Internet search for Arizona government information, you may want to begin with the following Internet sites: State of Arizona Web page: State of Arizona Web page listing of state agencies: Arizona Corporation Commission, Corporations Division (filings, information and forms for corporations and limited liability companies): Arizona Secretary of State, Department of Business Services (for limited partnership and LLP information and forms): Arizona Department of Revenue tax information and tax forms site: Department of Revenue License and Registration on-line Guide to Licensing Requirements (listing of all state licensing agencies): Arizona New Hire Reporting Center (for filing new hire reports online): City of Phoenix Small Business Assistance Program Web page:(d) Financing Sources. For information and help on locating financing for your small business, a number of public and private loan sources are available that can provide financial assistance or funding to your business. For information on economic development and financial assistance programs in Arizona, the Business Development Division of the Arizona Department of Commerce offers assistance in finding financing to businesses locating or expanding within the state. Contact:
If you are interested in seeking federally guaranteed loans through the U.S. Small Business Administration (SBA), contact the SBA state office at the following address:
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Copyright © 2005 Michael D. Jenkins
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