Transaction Privilege tax vs. sales tax: what’s the difference?
by May 8, 2024
Please note: This blog was originally published in 2018. It’s since been updated for accuracy and comprehensiveness.
When we talk about the fact that forty-six U.S. states (plus Washington D.C.) have a sales tax, we are actually simplifying a hodgepodge of different forms of taxation at the point of sale. While the vast majority of U.S. states will require or allow sellers to collect tax at the point of sale, not all states have a literal “sales and use tax.”
For example, Arizona imposes a Transaction Privilege Tax (TPT) rather than a sales and use tax. Even though these two taxes work the same way at the register or online shopping cart checkout, they are actually quite different.
Let’s dig into the differences between these two types of taxes and what they mean for e-commerce sellers.
What is sales tax?
Sales tax is just what it sounds like. A tax on a sale. In most U.S. states, sales tax is a percentage of the transaction price, collected at the point of sale from the buyer by the seller.
In other words, the buyer actually pays the sales tax while the seller is merely a collection agent. The seller’s job when it comes to sales tax is to collect the sales tax from the buyer and then pass it on to state taxing authorities.
Of course, because sales tax is due on all taxable sales, if the seller fails to collect sales tax when they should have, they may be on the hook for paying the sales tax themselves, out of pocket.
What is Transaction Privilege Tax (TPT)?
While a buyer might experience it similarly, Arizona’s Transaction Privilege Tax (TPT) is different from most other states’ sales and use tax.
Rather than a tax on a sale paid by the buyer, TPT is a tax for “the privilege of doing business” in the state of Arizona and levied on the seller.
In Arizona, a seller is responsible for remitting TPT whether or not they actually collect TPT on a transaction. However, the seller is still allowed to pass the gross receipts tax onto the buyer. (Which is why Arizona’s TPT is often referred to as “sales tax” even though the two aren’t precisely the same thing.)
While this may seem nitpicky, it’s an important difference. Sellers with Arizona TPT nexus do not necessarily have to collect tax from their buyers at the point of sale. Of course, if they do not collect TPT from customers they are still liable for calculating the TPT on each transaction and remitting it from their own bottom lines.
And in short, that is why the retail experience in both states with a sales tax and in Arizona are similar. When you make a purchase in Arizona you probably still pay a small percentage of the price of the transaction. The only difference is that you are paying TPT rather than the more traditional sales tax you would pay in other states.
The difference between TPT and sales tax
To put it simply, sales tax is charged at the point of sale and paid by the buyer to the seller. The seller then remits that collected sales tax to state taxing authorities.
Arizona’s Transaction Privilege Tax (TPT) is owed to the state (and local) Arizona taxing authorities by a business. That business can choose to pass the TPT on to customers at the point of sale. But if the business does not pass the cost of TPT on to their customers, they are still responsible for paying TPT to state and local taxing authorities in Arizona.
Need help collecting and remitting TPT?
TaxJar is here to help. While TPT isn’t precisely “sales tax,” TaxJar still helps our customers collect the right amount of TPT from Arizona buyers and report TPT the way state (and local taxing authorities) wants to see it.
We’ll also AutoFile your Arizona return so that you can get back to doing what you do best – running your business.
Ready to automate sales tax? To learn more about TaxJar and get started, visit TaxJar.com/product.
