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A recent opinion of the Arizona Court of Appeals affirmed the Tax Court’s decision that out-of-state printing services are not subject to use tax. A taxpayer in the business of publishing telephone directories contracted with out-of-state printers for printing services and supplied the printers with paper purchased from out-of-state milling companies. While Arizona’s transaction privilege tax is based on gross receipts and would include printing for an in-state printer, the state’s use tax provisions impose no specific tax on printing services. The decision in this case supports the conclusion that printing services are not subject to use tax by applying both the “dominant purpose” and “common understanding” tests. In this case, it is clear the printer is in the business of providing a service and the paper mill is in the business of selling taxable tangible personal property (Qwest Dex, Inc. v. Arizona Department of Revenue, Arizona Court of Appeals, No. 1 CA-TX 03-0017, April 5, 2005).


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.)



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