Ariz. Admin. Code § 15-2D-702
The denominator of the payroll factor is the total compensation paid by the taxpayer everywhere during the tax period. Therefore, compensation paid to employees whose services are performed entirely in a state where the taxpayer is immune from taxation is included in the denominator of the payroll factor.
Example: A taxpayer has employees in its state of legal domicile (State A) and is taxable in State B. In addition, the taxpayer has other employees whose services are performed entirely in State C where the taxpayer is immune from taxation under the provisions of Public Law 86-272. The compensation paid to the employees in State C is assigned to State C where the services are performed (included in the denominator but not the numerator of the payroll factor) even though the taxpayer is not taxable in State C.
Ariz. Admin. Code § R15-2D-702