Return Deductions

Transaction Privilege (Sales) Tax Collected Deduction (State Deduction Code 551/City Deduction Code 64)

What is it?

Tax should never be paid on tax. When transaction privilege (sales) tax is included in the gross income value indicated on the tax return, this amount may be reported as a deduction under State Business Code 551 (City Business Code 64) on the tax return form.

How do I report it?

A business may or may not separately charge transaction privilege tax.

• When tax is separately charged, the formula below is followed:
  • Transaction Privilege Tax Collected Deduction (State Code 551/City Code 64) = Net Taxable * Combined Tax Rate
    • Example: $1,500.00 gross Retail Sales, $500.00 resale deduction, Combined Tax Rate = 0.086 or 8.6%
    • Transaction Privilege Tax Collected: $1,000 * 0.086 = $86.00
• When tax is not separately charged, use one of the two factoring methods below:

Division Method

Step 1.) Base Sales: Gross Sales - Itemized Deductions

Step 2.) Net Taxable: Base Sales / (1 + Combined Tax Rate)

Step 3.) Factored Transaction Privilege Tax Deduction (State Code 551/City Code 64): Base Sales – Net Taxable

Example: $1,500.00 gross Retail Sales, $500.00 resale deduction, Combined Tax Rate = 0.086 or 8.6%

• Base Sales: $1,500 - $500 = $1,000
• Net Taxable: $1,000/1.086 = $920.81
• Factored Transaction Privilege Tax Deduction (State Code 551/City Code 64): $1,000 - $920.81 = $79.19

Multiplication Method

Step 1.) Factor: Combined​ Tax Rate / (1 + Combined Tax Rate)

Example: Retail Sales Combined Tax Rate = 0.086 or 8.6%

• 0.086 / (1 + 0.086) = 0.079190

Step 2.) Factored Transaction Privilege Tax Deduction (State Code 551/City Code 64): Net Taxable * Factor

Example: $1,500.00 gross Retail Sales, $500.00 resale deduction, Combined Tax Rate = 0.086 or 8.6%

• Factor: 0.086 / (1 + 0.086) = 0.079190
• Factored Sales Tax Deduction (Code 64): $1,000 * 0.079190 = $79.19

Common Factors

Excess Tax Collected

What is excess tax?

When a deduction for transaction privilege tax collected is claimed in excess of the amount of tax due, it indicates that a business has overcharged tax to their customers. A business may not keep the excess tax but must report and pay Phoenix the City portion of excess tax collected.

How is excess tax determined?

When a taxpayer reports a value for State Deduction Code 551/ City Deduction Code 64, the Phoenix tax system determines if excess tax was collected.

System review process:

Step 1.) The system calculates the allowable tax collected deduction amount: Net Taxable * Combined Tax Rate

Example: Retail Sales = $1,000.00

• System Calculated Tax = $1,000 * 0.086 = $86.00

Step 2.) The system calculates the difference between the tax collected deduction (State Deduction Code 551/City Deduction Code 64) claimed by the taxpayer to the system calculated allowable deduction. When the claimed deduction (State Deduction Code 551/City Deduction Code 64) exceeds the allowable deduction, excess tax applies. Excess tax is calculated by subtracting the allowable tax deduction from the claimed tax deduction.

Example: Claimed $100.00 on State Deduction Code 551/City Deduction Code 64

• Excess Tax = $100.00 - $86.00 = $14.00

Step 3.) City portion of excess tax = (Excess tax collected / Combined Tax Rate) * City of Phoenix tax rate. The Phoenix portion of excess tax should be reported on Schedule C by business activity.

Example: Excess tax = $14.00

• Phoenix portion of Excess Tax = ($14.00/0.086) * 2.3% = $3.74