On April 13, Arizona Governor Brewer vetoed legislation (S.B. 1552) that would have allowed specified taxpayers to elect to use market sourcing for corporate income tax purposes. Taxpayers would have continued to apportion income to Arizona using the standard three-factor formula with a heavily weighted sales factor. The binding 5-year election would have been available to taxpayers with more than 85% of their sales sourced outside of Arizona via the proposed new market sourcing rules.

Opponents criticized the legislation as a special tax break for certain Arizona-headquartered companies. However, proponents of the bill argued that the legislation would have remedied constitutional issues stemming from the double taxation of in-state companies’ income. Currently, multistate service providers with employees predominantly in Arizona are required to source 100% of their revenues to Arizona under Arizona’s majority costs-of-performance rule, while also being subject to other states’ market-sourcing rules. Governor Brewer acknowledged the need to reform Arizona’s apportionment rules in her veto letter but nevertheless stated that “[g]iven our current fiscal situation, we cannot afford this.”

While the Arizona Department of Revenue could offer taxpayers relief from multiple taxation under Arizona’s alternative apportionment authority, attaining alternative apportionment relief has proven difficult for taxpayers in most states.