The State of Arizona has a corporate income tax but does not impose a corporate franchise tax.

Taxable Income

How is taxable income determined in Arizona? To what extent is the state income tax base aligned with the federal income tax base?

Arizona has an income tax on corporations, which is intended to impose on “each corporation with a business situs in this state a tax measured by taxable income which is the result of activity within or derived from sources within this state.” Arizona law imposes a tax on a corporation’s entire “Arizona taxable income,” which is defined as federal taxable income subject to adjustments (i.e. additions and subtractions) (specified in A.R.S. §§ 43-1121 to -1130.01).

How is in-state income apportioned for multi-state businesses? Does Arizona regulate transfer pricing?

If a corporation conducts a multi-state business, Arizona requires that its net income be allocated and apportioned under Arizona’s version of the Uniform Division of Income for Tax Purposes (UDITPA) (A.R.S. §§ 43-1131 to -1138). Under Arizona’s UDITPA, certain non-business income is allocated to Arizona, based on factors such as the location of property and the taxpayer’s commercial domicile. Business income is generally apportioned between the states in which the corporation does business using a formula defined in the statutes.

In Arizona a taxpayer may elect one of two formulae. The first formula employs three factors—property, payroll, and two times the sales factor—by which a taxpayer’s Arizona sales, property, and payroll are compared to the taxpayer’s operations in all states. The second formula multiplies the income by the sales factor. If neither of these formulae fairly represent the extent of the taxpayer’s business activity, the taxpayer may petition for, or the department may require, the use of alternative methods to allocate and apportion a business’s income in respect to all or any part of the taxpayer’s business activity.

Arizona does not have a separate I.R.C. 482-like authority but incorporates I.R.C. 482 for mandatory combined filings (A.R.S. § 43-942).

Nexus

How is nexus determined for corporate income tax purposes?

All corporations are considered to be “doing business” in Arizona for corporate income tax purposes if the minimum nexus standards in Public Law 86-272 (15 U.S.C. § 381-384) are exceeded. For the in-state activity to be a protected activity under P.L. 86-272, it must be limited solely to solicitation (except for de minimis activities and those activities conducted by independent contractors). ‘Solicitation’ means:

• speech or conduct that explicitly or implicitly invites an order; or
• activities that neither explicitly nor implicitly invite an order but are entirely ancillary to requests for an order.

Is affiliate nexus recognized in Arizona? If so, to what extent? Has there been any notable case law in this area?

Yes. See Arizona Dept. of Revenue v. Central Newspapers, Inc., (222 Ariz. 626, 218 P.3d 1083 (App. 2009)).

Rates

What are the applicable corporate income tax rates?

Arizona’s applicable corporate income tax rate is currently 4.9% of taxable income or $50, whichever is greater (A.R.S. § 43-1111).

Exemptions, Deductions and Credits

What exemptions, deductions, and credits are available?

A list of deductions to taxable income can be found in A.R.S. § 43-1122. Arizona has several tax credits for corporations that can be found in A.R.S. § 43-1161 to -1184.

Filing Requirements

What filing requirements and procedures apply? Are there special filing requirements for groups of company?

Every corporation subject to corporate tax must file a return to the Arizona Department of Revenue, even if the corporation has no federal taxable income or a federal return is not required. A wholly owned corporation that only has income from business activity that is taxable entirely in Arizona must use Arizona Form 120A. A corporation that has income from business activity in more than one state must complete Form 120.

Affiliated corporations have the following filing methods for corporate income tax returns in Arizona: separate, combined, and consolidated.

A corporation files on a combined basis when it is part of a unitary group of companies whose parts and component functions are integrated and interdependent at the basic operational level. The entities compromising the unitary business must be owned or controlled directly or indirectly by the same interest that collectively owns more than 50% of the voting stock.

The common parent of an affiliated group of corporations that files a federal consolidated return may elect to file an Arizona consolidated return. The consolidated return includes all members of the group filing a federal consolidate return, regardless of whether each member is subject to Arizona income tax.