United States: 2021 Arizona Tax Year In Review

TRANSACTION PRIVILEGE TAX UPDATES

LEGISLATION

Senate Bill 1110, Chapter 443. Tribal Exemptions. This bill codified the following exemptions applicable to Indian tribes and tribal members at A.R.S. § 42-5121 et seq.: (1) business activities performed by an Indian tribe, a tribally owned business, a tribal entity or an affiliated Indian if the business activity takes place on an Indian reservation; (2) business activities performed by a nonaffiliated Indian or non-Indian vendor on an Indian reservation for an Indian tribe, a tribal entity or an affiliated Indian; (3) contracting activities performed on an Indian reservation by an Indian tribe, a tribally owned business, a tribal entity or an affiliated Indian; (4) contracting activities performed for an Indian tribe, a tribally owned business, a tribal entity or an affiliated Indian on an Indian reservation by a nonaffiliated Indian or non-Indian contractor; (5) retail sales of tangible personal property to an Indian tribe, a tribally owned business, a tribal entity or an affiliated Indian if the sale of tangible personal property takes place on an Indian reservation; and (6) the sale of a motor vehicle to an enrolled member of an Indian tribe who resides on the Indian reservation established for that Indian tribe. These exemptions were previously recognized by the Arizona Department of Revenue in Arizona Transaction Privilege Tax Ruling 95-11.

Senate Bill 1720, Chapter 220. Peer-to-Peer Car Sharing. Under this bill, vehicles rented in a peerto-peer sharing transaction are subject to tax under the personal property rental classification; however, the individual owners of such vehicles are exempt if the transaction was facilitated by a peer-to-peer car sharing platform that collected and remitted the tax. The bill also exempts such transactions from rental vehicle surcharges, including those levied by the Arizona Sports and Tourism Authority and stadium districts.

Senate Bill 1828, Chapter 412. Machinery and Equipment for Pollution Control. This bill expands the exemption for machinery and equipment used to meet or exceed pollution control rules and regulations to include containment structures.

House Bill 2153, Chapter 417. Renewable Energy Storage Equipment. This bill added a new exemption applicable to machinery and equipment used for utility-scale storage of energy for future use.

House Bill 2649, Chapter 266. Computer Data Centers. This bill moved the exemption for computer data center equipment sold to the owner, operator or qualified colocation tenant of a computer data center that is certified by the Arizona Commerce Authority from subsection (A) of A.R.S. § 42-5061 to subsection (B) of the same statute. Moving the exemption means the installation of such equipment may be exempt from tax under the prime contracting classification.

TRANSACTION PRIVILEGE TAX UPDATES

LEGISLATION CONT.

House Bill 2879, Chapter 342. Administrative Ruling Procedures. This bill requires the Department of Revenue to accept public comments on draft rulings, procedures, notices, and administrative announcements. Rulings will become effective thirty days following the announcement for public comment is issued, unless the Department withdraws the ruling. The Department is allowed to amend the draft ruling during the 30-day comment period. If the Department choose not to incorporate a comment in the final ruling, the Department must respond to the comment explaining its reasons. The bill also establishes the information the Department must include in a ruling before it becomes final. Finally, the bill requires that courts must decide all questions of law without deference to any determination made by the Department.

2021 COURT DECISIONS

VHS Acquisition Subsidiary Number 1 Inc. v. Ariz. Dep't of Revenue, No. 1 CA-TX 20-0007 (May 4, 2021). Scope of retail and use tax exemption for prosthetic devices. Affirming the Arizona Tax Court, the Court of Appeals held that adhesive skin closures, liquid skin adhesives, "AbsorbaTacks," bone wax, surgical clips, ligature loops, staples, and sutures are exempt prosthetic appliances within the plain meaning of A.R.S. §§ 42-5159(A)(17) and 23-501(7) because they support a part of the body. The Court of Appeals also held that preloaded mesh fixation, clip appliers, staplers, suture devices, pens, and ampules are prosthetic appliances because they are parts of the same integrated processes as other prosthetic appliances under the rule established in RenalWest L.C. v. Ariz. Dep't of Revenue, 189 Ariz. 409 (Ct. App. 1997). The court noted that while the items were not by themselves prosthetic appliances, they were necessary to the safe application of the appliances.

SWAT Training Facilities LLC v. Ariz. Dep't of Revenue, No. 1 CA-TX 20-0002 (Apr. 27, 2021). Indoor shooting range taxable under the amusements classification. The Court of Appeals held that an indoor shooing range was taxable under the amusements classification because it was a "business charging admission or user fees for exhibition, amusement or entertainment" under A.R.S. § 42-5073(A), rejecting the taxpayer's argument that the business was sufficiently different from other types of taxable amusements because use of the shooting range required constant supervision and instruction. The court also found that the taxpayer's receipts from sales of memberships were taxable under the retail classification because the taxpayer did not separately account for its revenues that otherwise would have been taxable as amusements.

Rebel Empire, LLC v. Ariz. Dep't of Revenue, No. 1 CA-TX 20-0010 (Aug. 19, 2021). Taxpayer failed to meet burden of proof when disputing luxury tax assessment. The taxpayer had reported luxury tax classifying certain tobacco products as cavendish. Following an audit, the Department of Revenue reclassified the tobacco as smoking tobacco, which bears a higher tax rate. The Court of Appeals upheld the assessment of additional luxury tax because the taxpayer failed to meet its burden of proof when asserting a lower tax rate applied. Specifically, the taxpayer failed to show based on a preponderance of evidence that there was a reasonable dispute of fact over the classification of the tobacco, which would have shifted the burden of proof to the Department.

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