Contrary to the hysterical charges of racism being leveled at the statute, it does not permit a no-holds-barred inquisition of Hispanic people. Indeed, the state law demands more of police than federal law. To begin with, there is to be no inquiry about a person's immigration status unless the "contact" between the police officer and the person is "lawful" in the first instance.
There are three relevant gradations of contact between a police officer and a person: non-custodial, brief detention, and arrest. The non-custodial context refers generally to any incidental interaction between a police officer and an individual — including those initiated by the individual. A police officer does not need suspicion in order to ask a person a question, but the person is not required to answer and the officer has no lawful authority to detain a person, even fleetingly, absent "reasonable suspicion."
Brief detentions are known in the law as "Terry stops" — thanks to the famous Supreme Court case of Terry v. Ohio, 392 U.S. 1 (1968). Under Terry, a police officer may only detain a person if the officer has reasonable, articulable suspicion of criminal activity. This standard is not met by a hunch or a generalized suspicion — a cop who says to himself, "Those look like Mexicans, they must be up to no good," does not make the grade. Instead, the officer must be able to articulate specific facts which, together with the logical inference to be drawn from those facts, reasonably suggest that criminal activity has occurred or is imminent. Courts are deferential to the judgment of police officers — the standard is not what any person would think of the facts observed but what an experienced cop acting reasonably and responsibly would think. But there must be specific, describable indicia of criminal activity.
The permissible duration of a Terry stop depends on the circumstances. The Supreme Court has not set in stone some magic moment where a brief detention evolves into an arrest. But arrest happens when the detention has become police custody. At that point, the officer must have probable cause that a crime has been or is being committed.
So the Arizona immigration law does not allow the police officer to have contact with the person unless the contact is lawful. This means if even the briefest detention is involved, the police officer must have reasonable suspicion that some crime has been or is being committed. Absent that, the officer is not permitted to stop the person.