Consideration and Adoption of Resolution No. 2025-25 and Ordinance No. 2025-11: a resolution of the City Council of the City of Flagstaff, declaring that certain document known as "the 2025 City Tax Code Amendments" as a public record, and providing for an effective date; and an ordinance of the City Council of the City of Flagstaff, amending the Flagstaff City Code, title 3 Business Regulations, by adopting the "2025 City Tax Code Amendments" as set forth in that public record on file wit the City Clerk relating to codification of voter approved sales tax rates and Model City Tax Code Updates, and increasing the use tax rate to match sales tax rates; providing for repeal of conflicting ordinances, severability, clerical corrections, and establishing an effective date
 

1. Adopt Resolution No. 2025-25
2. Read Ordinance No. 2025-11 by title only for the final time
3. City Clerk reads Ordinance No. 2025-11 by title only (if approved above)
4. Adopt Ordinance No. 2025-11

The City is proposing to update the City Tax Code as follows: 

• Increase the local transaction privilege tax (sales tax) rate from 2.281% to 2.486% effective July 1, 2025, as approved by a majority of the qualified electors of the City voting in the November 5, 2024 general election to fund public transit.  The tax rate for restaurant and hotel classifications (the bed, board and beverage tax) will increase from 4.281% to 4.486%.
• Increase the use tax rate from 2.281% to match the local transaction privilege tax rate of 2.486% effective July 1, 2025.  The use tax is a tax on storage or use of tangible personal property in the City for which an equivalent tax has not been paid.  A use tax is similar to the local transaction privilege tax, and is classified as “an affiliated excise tax.” 
• Comply with A.R.S. § 42-6052(H), which provides that the City must adopt changes to the City Tax Code to conform with the Model City Tax Code as adopted by the Model City Tax Code Commission and maintained by the Arizona Department of Revenue. Changes are being made to conform with state laws. 

Adopting the tax code changes related to voter approved taxes does not have a financial impact.  The adoption of the use tax rate to match the local transaction privilege tax rate will provide an approximate $90,000 to $150,000 revenues for the General Fund of the City.  The updates to conform with the Model City Tax Code does not have a financial impact. 

None.

The City voters have approved the local transaction privilege tax (sales tax) rates set forth in the proposed updates to the City Tax Code.

The City Council adopted ballot language for the proposed sales tax rates.  The City Council canvassed election results from the general elections where sales tax rates were considered by City voters. 

1. Approve changes to the local transaction privilege tax (sales tax) rates as approved by the voters; OR do not approve changes, in which case rate changes approved by the voters will not be implemented. If rate changes are not approved, this will have negative financial consequences for the General Fund and public transit.

2.  Approve an increase to the use tax rate to match the sales tax rate approved by the voters; OR do not approve the use tax rate increase.  The City Council has discretion in this regard.  Having the use tax rate match the local sales tax rate may help local businesses, as it eliminates the incentive to purchase goods (for example, a car) outside City limits in order to obtain a lower tax rate, and then use the vehicle within City limits.

3.  Approve changes to the City Tax Code required by state law; OR do not approve changes, in which case City will be in violation of state law.
 

The City Charter, Article VI, Section 2 provides that a majority of the qualified electors in the City voting in a regularly scheduled General Election shall approve any transaction privilege (sales tax) increase.  City voters approved continuation of a 1% sales tax that generates revenues for the General Fund at the November 3, 2020 election and approved a 0.205% rate increase at the November 5, 2024 election to generate additional revenues for public transit.  

The City Charter does not require voter approval of a use tax rate increase.

The City has not updated its City Tax Code in several years. As a result, the proposed changes encompass several years of changes to the Model City Tax Code and are already being implemented by the Arizona Department of Revenue. Changes to the City Tax Code include those listed below. In general, the changes add more tax exemptions, tax credits, and tax deductions; clarify existing provisions (resulting in less revenue to the City); or are otherwise required by law.

Division 3-05-001 General Conditions and Divisions
-0100 General Conditions and Definitions

• Adds definitions of "gross income", "gross proceeds of sales", and "gross receipts". All definitions exclude returned items and cash discounts.
• Amends definition of "manufacturer" so that only a person "who is principally" engaged in manufacturing products from raw or prepared materials is classified as a manufacturer.
• Amends definition of "prosthetic" (multiple revisions).
• Adds definition of "qualifying health sciences educational institution."
•  Amends definition of "sale" to include lease, rental, or licensing for use of tangible personal property, and preparation thereof for sale. 
• Adds definition of "tangible personal property" to require that it be physical and perceptible to the senses. 
• Adds section related to definition of "brokers" and when they are liable for tax.
• Adds section related to "delivery, installation, or other direct customer services" and documentation required to establish that charges are not subject to tax.
• Adds section related to "retailers" and gives the tax collector (ADOR) authority to determine when sales persons or dealers are retailers subject to tax.
• Adds section related to "out-of-city sale/out-of-state sales" to Native Americans and requires that solicitation, delivery, and payment all occur on the reservation (in order to not have been considered to occur within the City).
• Adds section related to "remediation contracting" describing activities exempt from tax.

-0110 Income-Producing Capital Equipment

• Expands definition of "aircraft, navigational and communication instruments" in relation to whom the equipment is sold.
• Adds agricultural-related "new machinery and equipment." 
• Deletes "motion picture, multimedia or interactive video production."
• Adds equipment sold to a person engaged in "commercial production of livestock" or projects if used to prevent pollution.
• Adds "qualifying equipment" purchased between June 2004 and June 2024 for processing forest products.
• Deletes equipment "used by a contractor in the performance of a contract."

Division 3-05-004 Privilege Taxes
-0415 Construction Contracting: Construction Contractors

• Adds a "handyman exclusion" as exclusion from tax.
• Adds "maintenance, repair, replacement, or alteration of existing property" as exclusion from tax.
• Adds construction of a facility for "recyling solid waste or producing renewable energy from landfill waste" as an exclusion from tax.
• Adds section regarding "liability for MRRA amounts equal to retail transaction privilege tax due."

-0416 Construction Contracting: Speculative Builders

• Adds "the value of existing tenant leases in place at the time of the sale" as a tax exemption.
• Adds "state and county taxes" paid for a project as a deduction from the selling price.
• Adds "privilege taxes" paid to the city as a tax credit.
• Adds a section "speculative builders: homeowner's bona fide non-business sale of a family residence" as a tax exemption.
• Adds a section defining "reconstruction contracting" which is subject to tax.

-0445 Rental, Leasing, and Licensing for Use of Real Property

• Adds charges for pole usage by or to a "cable operator" as a tax exemption.
• Adds income from rental of "low income units" as a tax exemption.

-0450 Rental, Leasing, and Licensing for use of Tangible Personal Property

• Adds charges for pole usage by or to a "cable operator" as a tax exemption.

-0455 Restaurants and Bars

• Adds sales by a business that contracts with the Department of Economic Security to "elderly or homeless persons or persons with a disability" as a tax exemption.
• Adds sales by a non-profit corporation that contracts with a major league baseball team or national touring professional golfing association as a tax exemption.
• If a tax is imposed on the sale of food (the City does not tax food), then it must be uniform (City cannot impose a higher tax on junk food).

-0460  Retail Sales: Measure of Tax; Burden of Proof; Exclusions

• Adds membership fees charged "by limited access retailers" as taxable income.
• Adds consignment sales as taxable income to the principal (not the agent).
• Adds business activities related to sale or commercial use of "any livestock, agricultural or horticultural product" as subject to the retail tax classification, and lists exemptions.

-0462 Retail Sales: Food for Home Consumption

• Amends definition of "eligible grocery business" from one that is eligible to participate in the federal food stamp program to one that is eligible to participating in the federal supplemental nutrition assistance program.
• Amends definition of "food for home consumption" from food purchased with food stamps to items purchased with couples issued under the supplemental nutrition assistance program.
• Again, requires uniform tax (cities cannot impose higher tax on junk food).

-0465 Retail Sales:  Exemptions

• Adds sales in interstate commerce as a tax exemption if federal law prohibits taxation.
• Adds sales of tangible personal property sold to a person engaged in the business of "renting, leasing, or licensing for use" of such property as a tax exemption.
• Adds sales of "motor vehicle fuel and use fuel" and "repair parts" related to harvesting, processing, or transporting forest products as a tax exemption.
• Adds sales of tangible personal property "incorporated or fabricated by the person" into a real estate project or improvement as a tax exemption, if not otherwise subject to tax.
• Adds sales directly to the U.S. government, and sales for a U.S. government manufacturing contract as a tax deduction.
• Adds sales to a "manufacturer, modifier, assembler, or repairer" as exempt from tax. 
• Adds 50% of the gross income from sale made directly to the U.S. government that is not already deducted as exempt from tax.
• Defines "overhead materials."
• Defines "subcontract."
• Updates or clarifies tax deduction for a "qualifying health care organization", "qualifying community health center."
• Adds sales to a nonprofit organization "that regularly services means to the needy and indigent" as a tax deduction.
• Adds "sales after June 2001 to a nonprofit charitable organization that provides apartment housing for low-income persons over age 62 as a tax deduction.
• Adds sales to a "qualifying health sciences educational institution" as a tax deduction.
• Adds sales of tangible personal property to one of the above-listed nonprofit/charitable organizations for fabrication into a project as a tax deduction.
• Adds sales related to "livestock and poultry" business as a tax deduction, to include:
  • livestock and poultry;
  • implants used as growth promotants and injectible medicine;
  • neat animals, horses, assess, sheep, ratites, swine or goats for breeding.
• Adds sales of seeds, bulbs, cuttings, etc. for crops in Arizona as tax deduction.
• Adds sales to persons engaged in livestock or poultry business to others in same business as a tax deduction.
• Adds definition of "commercial airline" for purposes of tax deduction.
• Adds the conversion of natural gas into liquefied natural gas for fueling compressor equipment as a tax deduction.
• Adds the transfer of coal "for the purpose of refining coal" as a tax deduction.
• Adds sale of "computer data center equipment" certified by the Arizona Commerce Authority as a tax deduction.
• Adds "sale, manufacture, wholesale, or distribution" of food intended for human consumption and related containers/packaging as a tax deduction.
• Adds equipment "useful to assist a person with certain disabilities as defined by law as a tax deduction.
• Adds software to assess or test student learning or curriculum design purchased by a school district, charter school, community college, or state university as a tax deduction.
• Adds "sales of coal" as a tax deduction.

-0470 Telecommunication Services

• Adds tax credit offset for franchise fees paid. 

-0475 Transporting for Hire

• Adds tax exemptions for certain transportation activities (A.R.S. Sections 28-9552, -9551, -9503, -9501)

Division 3-05-005 Administration
-0500  Administration of this Chapter; Rulemaking

• Adds that taxpayers are subject to taxpayer bill of rights (A.R.S. Section 42-2051 et seq.)

-0530 When Tax Due; When Delinquent; Verification of Return; Extensions

• Eliminates option for annual returns.
• Requires electronic filing if business has 2 or more locations or names.
• Allows quarterly filing if annual tax liability is between $2,000 and $8,000.
• Allows annual filing if annual tax liability is less than $2,000.
• All others must remit monthly.

Division 3-05-006  Use Tax
-0660  Use Tax:  Exemptions  (In general, adds exemptions similar to those added for local transaction privilege taxes)

• Adds a purchase of tangible personal property not exceeding $200/month for personal use outside the U.S. as a tax exemption.
• Adds purchase of tangible personal property for "renting, leasing, or licensing for use" business as a tax exemption.
• Adds purchase of use fuel for a "valid single trip use fuel tax permit" as a tax exemption.
• Adds purchase of natural gas or liquid petroleum gas to propel a motor vehicle as a tax exemption.
• Adds purchase of motor vehicle fuel and use fuel or repair parts by a business engaged in harvesting, processing or transporting forest products as a tax exemption. 
• Adds purchase of tangible personal property "incorporated or fabricated by the person" into a real estate project or improvement as a tax exemption, if not otherwise subject to tax, as a tax exemption.
• Adds purchases of tangible personal property by a qualifying hospital, qualifying health care organization, qualifying community health center, nonprofit that regularly serves meals to the needy and indigent, nonprofit charitable organization that provides residential apartment housing to low-income persons over age 62, qualifying health sciences educational institutions, or any persons working on behalf of any of the above where the property is incorporated or fabricated into a project.
• Adds purchase of "livestock and poultry" business as a tax exemption, to include:
  • livestock and poultry;
  • implants used as growth promotants and injectible medicine;
  • neat animals, horses, assess, sheep, ratites, swine or goats for breeding.
• Adds purchases of seeds, bulbs, cuttings, etc. for crops in Arizona as tax exemption.
• Adds sales to persons engaged in livestock or poultry business to others in same business as a tax exemption.
• Adds the transfer of coal "for the purpose of refining coal" as a tax exemption.
• Adds the purchase of "computer data center equipment" certified by the Arizona Commerce Authority as a tax exemption.
• Adds "sale, manufacture, wholesale, or distribution" of food intended for human consumption and related containers/packaging as a tax exemption.
• Adds purchase of equipment "useful to assist a person with certain disabilities as defined by law as a tax exemption.
• Adds purchase of software to assess or test student learning or curriculum design purchased by a school district, charter school, community college, or state university as a tax exemption.

Division 3-05-007  Regulations - Privilege and Excise Taxes
-001  Regulations - Privilege and Excise Taxes  
(In general, deletes regulations which have now been revised and relocated to Division 3-05-001 General Conditions and Divisions)

• Deletes regulations related to brokers.
• Delete regulations related to retailers.
• Deletes regulations related to out-of-city/out-of-state sales to Native Americans.
• Deletes regulations related to remedia contracting. 
• Deletes regulations related to speculative builders: homeowner's bona fide non-business sale of a family residence.
• Deletes regulations related to reconstruction contracting.
• Deletes regulations related to sale of membership fees by limited access retailers.
• Deletes regulations related to consignment sales.
• Deletes regulations related to sale of aircraft for use outside the state.

Division 3-05-008 Miscellaneous Provisions

• Updates the "sunset dates" for local sales tax rates approved by City voters to match recent elections. 

High performing governance:  Maintain the organization's fiscal stability through strong financial policies and best practices.

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