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In a ruling issued by the Arizona State Board of Tax Appeals it was found that equipment leased to a telephone directory assistance provider was subject to transaction privilege and use tax. The Board ruled that the definition of exempt telecommunications equipment in the statute was not intended to be broad in scope. The equipment in question for the refund did not fall under the literal interpretation of the law as it was written and was not eligible for the exemption. (Excell Agent Services, LC v. Arizona Department of Revenue, Arizona State Board of Tax Appeals, No 1900 03-S/U(4), September 3, 2004)


A taxpayer who provided web-based training to its customers via the internet was subject to transaction privilege tax on its gross income derived from the lease of such software. The taxpayer offered its customers the ability to install, deploy, and use the course materials as well as make copies of the course materials on multiple local area networks, wide area networks, intranet servers, and standalone computers at one or more sites. The taxpayer also provided extranet hosting services where it would maintain the course materials on its servers for customer access through the internet. The Arizona Department of Revenue stated that the software was considered canned or prewritten software as it was not specific to a customer’s needs, therefore tangible personal property. Since the agreement between the taxpayer and its customer states that upon termination of the agreement, the customer must destroy all copies, return the originals, and certify in writing that this has all been done; the Department of Revenue considered the software transaction with Arizona customers to be subject to the transaction privilege tax as leases or rentals of tangible personal property. Also, any gross income derived from the extranet hosting service to Arizona customers is subject to the transaction privilege tax if such services relate to the software lease or rental. (Private Taxpayer Ruling LR04-010, Arizona Department of Revenue, November 15, 2004)


The Arizona Legislature has passed a bill exempting engineering and architectural services that are incorporated into a design-build construction contract. These services, charged for separately have always been exempt; however, they were taxable when included in a single contract. Now these services are exempt, even when incorporated into a prime contracting contract. This legislation retroactive to Oct 17, 1969. Refund claims must be submitted to the Department of Revenue by December 31, 2004. The aggregate total of a refund cannot exceed $100,000. (S.B. 1293 of 2004)


Two new Arizona transaction privilege (sales) and use tax incentives have been enacted and are available from July 1, 2004 until June 30, 2014 that aim to assist businesses primarily engaged in the maintenance and health of forest zones. The first is an exemption allowed for any qualifying equipment that is purchased, installed or used for harvesting, transporting, or initially processing forest products or biomass. The second is an exemption for the construction of any building, development, or improvement that harvests, transports or initially processes forest products or biomass, pending that the construction begins prior to 2010. (H.B. 2549, Laws 2004, effective as noted above.)


The Arizona Supreme Court held that the silica sand, chemical binders, exothermic sleeves, mold cores, mold wash, and hot topping were exempt from use tax because they "were used directly in and were an integral part of a qualifying process." According to statute, exempt processes include manufacturing, processing, fabricating, job printing, refining or metallurgical operations. Two tests have been adopted by case law to determine whether items are machinery or equipment "used directly" in qualifying operations: (1) the ultimate function and (2) the integrated rule. The items noted as exempt were considered items that were essential or necessary to the completion of the finished product because they were in close proximity to the process and directly touched the raw materials to help convert them into the finished product. Items including lime and cement were instead considered taxable because they seemed to have served an "ancillary purpose of pollution control" which was not integral to the processing. (Arizona Department of Revenue v Capitol Castings, Inc., Arizona Supreme Court, No CV-03-0250-PR, April 21, 2004)



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