Arizona has a 5.6 percent state-wide sales tax that applies to clothing, but most cities and counties in the state have higher sales tax rates based on local laws. The highest rates are in Mammoth and Superior where additional local sales tax increases the rate to 11.2 percent as of 2021.
There are a total of 101 tax jurisdictions in the state, so it’s important for brick-and-mortar retail clothing businesses to stay up to date on the sales tax rates for the area in which they’re located.
For example, Phoenix has a tax rate of 2.3 percent while Maricopa County has a tax rate of 0.7 percent. That means retail businesses of any kind in Phoenix need to charge 5.6 + 2.3 + 0.7 percent – or 8.6 percent sales tax.
A 2018 case over ecommerce sales tax brought by South Dakota against online retailer Wayfair went all the way to the U.S. Supreme Court. The court decided that remote sellers – which today mostly means ecommerce businesses – create an “economic nexus” when they sell products to consumers. This economic nexus, depending on how the state wants to define it, justifies the e-retailer’s collection of state and local sales tax.
Whether or not a business has a nexus in a state is up to the state to determine. Up until the Wayfair ruling, most businesses were only considered to have an economic nexus in a state if they had a physical presence there, whether that was a storefront, warehouse, distribution center or even contract workers delivering packages. Since the ruling, the vast majority of states, minus a few holdouts, consider online retailers to have a nexus in their state as soon as they sell products to someone living there, regardless of physical presence.
One of the biggest challenges for retailers, at least those that operate online, is utilizing a system that enables them to do business everywhere and charge the right amount of sales tax. Then they need to pay that sales tax to the appropriate governing bodies.
A lot of states, including Arizona, have certain sales thresholds for remote sellers in their areas to be subject to the nexus rules. In 2021, Arizona considers online retailer with gross retail sales in the state of more than $100,000 to have an economic nexus here.
The one benefit of working with affiliate platforms like Etsy or Amazon is they can automatically handle sales tax collection and remittance (paying the state). However, those platforms do take a cut of what you sell, which is why many e-retailers prefer not to operate through that system. Platforms like Square can automatically calculate taxes as well as billing solution providers like Avalara and Vertex.
If your Arizona clothing business is expanding into digital sales, you should strongly consider speaking with a business tax preparer and business consultant about your options for minimizing the per-purchase cost of remaining in tax compliance with every jurisdiction in which your customers may reside.
Business tax deductions are a valuable way to minimize your commercial tax burden, but what a retailer can and can’t safely deduct isn’t always obvious.
You may benefit from deductions for the cost of goods sold, tax-deductible rent payments, employee salaries, paid sick and vacation time and employee retirement plan contributions. You will also likely be able to write off equipment, either by depreciating it for a yearly discount or by using Section 179 to get an immediate lump-sum write off on the purchase of depreciable assets.
Clothing retailers may also be able to use charitable donations to collect some compensation for inventory that’s simply not moving. You may be able to write of the fair market value of the inventory you donate to charity.
Some businesses can also take a write off for selling retail items they can’t move at a loss. This can also offer significant ax benefits for sellers of damaged or out-of-date goods.
Not every clothing retailer in Arizona will be eligible to receive every potential tax write off. The only way to know for sure how you can minimize your business’s tax burden is to speak with a knowledgeable business tax preparation professional.
At H&H Accounting Services we help many local Arizona businesses minimize their yearly state and federal tax burden. Contact us at (480) 561-5805 to find out how we can help you. Initial consultations are free, and we’d be happy to come to your place of business.
