Purpose

Allows corporate taxpayers, for taxable years beginning January 1, 2002, either to select the current apportionment formula or a formula weighing the sales factor more heavily.

Background

Arizona law requires corporations having income from sources both within and outside of the state to determine income attributable to the state based on an apportionment formula. Prior to 1991, Arizona employed an evenly weighted three-factor approach consisting of payroll, property and sales factors. The current Arizona apportionment formula (enacted in 1991) weighs the property and payroll factors singularly and the sales factor doubly. Consequently, the property and payroll factors each account for 25 percent of the apportionment ratio and the sales factor accounts for the remaining 50 percent.

In 1991, 11 states used a double-weighted sales approach. Presently, according to the Federation of Tax Administrators, over half of the states weigh the sales factor more heavily than the other apportionment factors. Of these states, seven have enacted a 100 percent sales factor approach and four have adopted apportionment formulas factoring sales between 60-90 percent. Weighing the sales factor more heavily favors companies with most of their employment or manufacturing within the state and sales out of state.

The strike everything amendment to S.B. 1081 allows corporate taxpayers, for taxable years beginning January 1, 2002, to elect to apportion their Arizona taxable income based on the current formula or an annually increasing sales factor that will reach 100 percent by taxable year 2005.

According to the Joint Legislative Budget Committee (JLBC), the fiscal impact of the strike everything amendment to S.B. 1081 could be $0 to $25,700,000 in FY 2002 and $0 to $38,500,000 in FY 2003. JLBC did a cost range analysis and the upper end of the range is equal to the full cost of each apportionment formula. Additionally, JLBC estimates the full cost estimate of this bill would begin in FY 2005 and could be in the range of $0 to $64.2 million.

Provisions

1. Allows corporate taxpayers, for taxable years beginning January 1, 2002, to annually elect either the current apportionment formula or an apportionment formula weighing the sales factor more heavily each year until 2004 when the sales factor reaches 100 percent for their Arizona taxable income. See table below.

Effective Dates

12/31/01 12/31/02 12/31/03 12/31/04

to to to on

12/31/02 12/31/03 12/31/04

Property

Option A 25% 25% 25% 25%

Option B 15% 10% 5% 0%

Payroll

Option A 25% 25% 25% 25%

Option B 15% 10% 5% 0%

Sales

Option A 50% 50% 50% 50%

Option B 70% 80% 90% 100%

2. Makes technical and conforming changes.

3. Contains an effective date beginning on January 1, 2002.

Amendments Adopted by Committee

Adopted the strike everything amendment.

Senate Action

FIN 2/26/01 DPA/SE 8-0-0-0

DG/jas