Landlords in Arizona are used to their obligation to collect taxes on the rent that they collect.  However, they may not realize that any revenue that they collect, is taxable as well.  Such charges should be passed through to the tenant and to do so, it is important to properly address such charges in the lease.  Further, leases should provide that if the local municipality increases the tax rate, that increase may also be reflected in the monthly amounted owed by the tenant.

Almost all municipalities in Arizona have a rental tax on residential landlords. If rentals are for more than 30 days the state sales tax does not apply. But municipal rental taxes do. These are called “Transaction Privilege Taxes” or TPT’s.  There is a uniform ordinance that most municipalities have adopted. The relevant provision is usually the same from municipality to municipality except for the tax rate that varies between 1% to more than 3% depending on the location.  If a property is in a county island, on the other hand, where no municipal ordinance is involved, it is possible that no rental taxes have to be remitted.  It is, therefore, important that you know what laws apply to your properties.  This is especially true for managers who may be paying the taxes for different cities on behalf of the owners.  They need to make sure they are remitting the proper amounts.  It is just as important that landlords do not collect rental tax in county islands where the government doesn’t charge a tax.

Under these city ordinances, it has generally been understood that all landlord revenues are taxable.  However, many people don’t realize what this actually encompasses – many landlords think that they only have to account for tax on the rent itself and do not consider additional revenue that they are receiving.  For example, things that should be consider revenue for tax purposes includes base rent, late fees, pet fees and guest fees.  These are all amounts that the landlord “makes” from the property as part of the rental business, and therefore they are taxed.  Even if the landlord doesn’t charge the tenant these amounts, the landlord is still liable to the government.  Therefore, it is important that your lease address such matters.

The Arizona Residential Landlord and Tenant Act, A.R.S. § 33-1314, provides, “if a municipality that levies a transaction privilege tax on residential rent changes the percentage of that tax, the landlord on thirty days’ written notice to the tenant may adjust the amount of rent due to equal the difference caused by the new percentage amount of the tax.”  Therefore, the law allows a landlord to change the tax being charged to the tenant, if the municipal changes the rate.  If the lease does not address the issue, even if the tax increases, the landlord has to pay that amount out-of-pocket.  This is simply another reason to review your lease on a regular basis.

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