State lawmakers, who have to close a major budget gap, are considering a bill that would give University of Phoenix’s parent company as well as other companies a tax break worth millions, according to some estimates.
The change will help make Arizona a more attractive place for similar companies to put their corporate headquarters, say business leaders and the state lawmaker who proposed the law. It will also make Arizona more competitive with states that already have similar laws on the books, they say.
Arizona Department of Revenue estimates that the new bill could cost Arizona $33.2 million annually in tax revenue, but Apollo Group Inc., which includes the University of Phoenix, disputes that figure.
The company projects the change will cost the state "less than $4 million."
State Sen. Rick Murphy said that he could not recall exactly how much the Apollo Group Inc. and Grand Canyon Education could save, but the amount was about "$20 million" total for the two companies.
Grand Canyon Education’s chief financial officer estimated that the school, which has 41,500 students, would save about $500,000 a year. But Apollo Group, the largest education company in the U.S. with 438,100 students, would see much bigger tax savings because of its size.
In an interview, Brad Wright, Apollo’s vice president of government affairs, said he did not know how much the company would save. Apollo lobbied for the legislation.
The news comes as state leaders struggle with a tough balancing act: They must create jobs in a state that has a 9.6 percent unemployment rate and they must also find cash to close a $1 billion budget gap for fiscal 2012.
For Murphy, a Glendale Republican who proposed the tax law change, it’s a prudent move.
"I don’t think we can afford not to" change the tax rule, Murphy said.
The state has already made a similar change for Arizona businesses that sell tangible goods to out-of-state customers, he said. Soon after that 2005 change, Intel made large investments in Arizona that have culminated with the recently announced $5 billion factory that is scheduled to open in 2013.
"It’s pretty safe to say that there is historical basis to believe that this is a worthwhile investment and even in the relatively short term, it will pay off," Murphy added.
Senate Bill 1552 will reduce how much state income tax certain businesses pay when they sell services to out-of-state customers.
Under the current system, since Apollo Group Inc. and Grand Canyon Education are headquartered here, they pay Arizona income taxes based on the full amount of revenue that they generate selling services to students, whether those students take online classes in California, Michigan, New York or Alabama.
The system is unfair, the businesses argue, because they are "double taxed" in 11 states. After they pay taxes on all of their customer sales in Arizona, 11 states tax the businesses based on services they sold to students in each of those states.
Under the bill, Apollo and Grand Canyon’s can chose a "market" option, which means their income-tax bill would reflect only the students they serve in Arizona – not other states. The proposed legislation applies to businesses that sell 85 percent of their services out of state.
It may also apply to businesses that operate call centers, process credit-card transactions or process insurance claims for out-of-state customers, according to the state Department of Revenue report.
The Arizona Senate passed the bill on March 3. It goes to the House Ways and Means Committee at 2 p.m. Monday.
A change in the tax law would be an incentive for companies such as Apollo to continue to invest in Arizona, Wright said.
"We mean that this will incentivize us to continue to invest in jobs and to continue to hire more people in Arizona," Wright said. Wright stopped short of saying that the tax change would prompt more immediate hiring, but the saving would give the company more money to expand.
Apollo is Arizona’s fourth-largest employer with 12,000 workers.
The law is also supported by the Greater Phoenix Chamber of Commerce, the Arizona Chamber of Commerce and Industry and Arizona Technology Council, Wright said.
The tax savings would give Grand Canyon Education more money to expand its Grand Canyon University campus in Phoenix, said Dan Bachus, the company’s chief financial officer.
"Although the passage of SB 1552 would not have a material impact on Grand Canyon University’s tax situation, we are in complete support of the bill," he said.