On March 16, 2021, a Future Agenda Item Request was brought forward by Councilmember Salas to seek Council approval for discussion for Council to review the current tax code with respect to exemptions on rental, leasing, and licensing of real property.  The Future Agenda Item Request was introduced and received the support of the Council for future discussion.  

Staff will present information related to our City Codes related to rental, leasing, and licensing of real property and tangible property including what is allowed by the Model City Tax Code for exemptions within these two categories.  

Cities in Arizona are required to follow the Model City Tax Code (MCTC) for Transaction Privilege Tax (TPT) collections.  The Model City Tax Code establishes taxable business activities, exemptions, and options that cities may adopt.  The Model City Tax Code can be found at this website: https://azdor.gov/model-city-tax-code/model-city-tax-code

The City collects a transaction privilege tax for:

• Rental, leasing, and licensing for use of real property, City Code § 3-05-04-0445
• Rental, leasing, and licensing for use of tangible personal property, City Code § 3-05-04-0450

The MCTC incorporates all standard exemptions required by law. The City may adopt options within the Model City Tax Code that are not required by law.  The City exempts residential rental business from taxation, Local Option #S.  The City also exempts lodging under 30 days, under Local Option #T, as this business activity is taxed under the "hotel" category.  If the City decided it was appropriate to tax residential rental business activity in the City, voter approval would be required. Most Arizona cities tax residential rental business activity. 

Other options which the City may adopt are as follows: 

• Model Options #4, #5A, #R:  These all related to ways cities can exempt residential rental properties, however, since the City has already adopted the full exclusion of residential rental properties, these are not needed.  
• Model Option #T: Exempt from the tax imposed by this Section is the gross income derived from the rental, leasing, or licensing of real property to a corporation; provided that the lessor's aggregate holdings in the lessee corporation amount to at least eighty percent (80%) of the voting stock of the lessee corporation.
• Local Option #OO: Notwithstanding the other provisions of this Section, the tax imposed by this Section does not apply to the rental, leasing, or licensing for use of a commercial property.  This would eliminate commercial TPT

Under the tangible property TPT, the City is required to follow all standard deductions as required by law. There is only one option available in the Model City Tax Code which would remove coin-operated laundry and coin-operated car washes from the exempt list and therefore make those taxable.  The City did not adopt this option.  

Attached to the staff summary is a copy of the Model City Tax Codes being discussed.  We have highlighted the code to show what is required by state law in green, what model options the City has adopted in blue, and the model options the city has not adopted in yellow.