Retail Sales: Exemptions
*This information is for Model City Tax Code purposes only.
Model City Tax Code Section 465 is amended effective October 1, 2019.
Income derived from the following sources is exempt from the tax imposed by Section ___-460:
(a) sales of tangible personal property to a person regularly engaged in the business of selling such property.
(b) out-of-City sales or out-of-State sales, including tangible personal property sold in interstate or foreign commerce if prohibited from being so taxed by the constitution of the United States or the constitution of this state.
(c) charges for delivery, installation, or other direct customer services as prescribed in Section ___-100.2.
(d) charges for repair services as prescribed by Regulation, when separately charged and separately maintained in the books and records of the taxpayer.
(e) sales of warranty, maintenance, and service contracts, when separately charged and separately maintained in the books and records of the taxpayer.
(f) sales of prosthetics.
(g) sales of income-producing capital equipment.
(h) tangible personal property sold to a person engaged in the business of renting, leasing or licensing for use such property under the rental, leasing, and licensing for use of tangible personal property classification if such property is to be rented, leased or licensed for use by such person.
(i) sales of mining and metallurgical supplies.
(j) sales of:
(1) motor vehicle fuel and use fuel which are subject to a tax imposed under the provisions of Article I or II, Chapter 16, Title 28, Arizona Revised Statutes.
(2) use fuel to a holder of a valid single trip use fuel tax permit issued under A.R.S. Section 28-5739.
(3) natural gas or liquefied petroleum gas used to propel a motor vehicle.
(4) motor vehicle fuel and use fuel to a qualified business under A.R.S. Section 41-1516 for off-road use in harvesting, processing or transporting qualifying forest products removed from qualifying projects as defined in A.R.S. Section 41-1516.
(5) repair parts installed in equipment used directly by a qualified business under A.R.S. Section 41-1516 in harvesting, processing or transporting qualifying forest products removed from qualifying projects as defined in A.R.S. Section 41-1516.
(k) sales of tangible personal property to:
(1) a construction contractor who holds a valid Privilege Tax License for engaging or continuing in the business of construction contracting where the tangible personal property sold is incorporated into any structure or improvement to real property as part of construction contracting activity.
(2) a person that is not subject to tax under Section 415(b)(12) and that has been provided a copy of a certificate under A.R.S. Section 42-5009, Subsection L, if the property so sold is incorporated or fabricated by the person into the real property, structure, project, development or improvement described in the certificate.
(l) sales of motor vehicles to nonresidents of this State for use outside this State if the motor vehicle dealer ships or delivers the motor vehicle to a destination outside this State.
(m) sales of tangible personal property which directly enters into and becomes an ingredient or component part of a product sold in the regular course of the business of job printing, manufacturing, or publication of newspapers, magazines, or other periodicals. Tangible personal property which is consumed or used up in a manufacturing, job printing, publishing, or production process is not an ingredient nor component part of a product.
(n) the following shall be deducted from the tax base for the retail classification:
(1) the gross proceeds of sales or gross income derived from sales made directly to the United States government or its departments or agencies by a manufacturer, modifier, assembler or repairer.
(2) the gross proceeds of sales or gross income derived from sales made directly to a manufacturer, modifier, assembler or repairer if such sales are of any ingredient or component part of products sold directly to the United States government or its departments or agencies by the manufacturer, modifier, assembler or repairer.
(3) the gross proceeds of sales or gross income derived from overhead materials or other tangible personal property that is used in performing a contract between the United States government and a manufacturer, modifier, assembler or repairer, including property used in performing a subcontract with a government contractor who is a manufacturer, modifier, assembler or repairer, to which title passes to the government under the terms of the contract or subcontract.
(4) the gross proceeds of sales or gross income derived from sales of overhead materials or other tangible personal property to a manufacturer, modifier, assembler or repairer if the gross proceeds of sales or gross income derived from the property by the manufacturer, modifier, assembler or repairer will be exempt under paragraph (3) of this Subsection.
(5) fifty percent of the gross proceeds or gross income from any sale of tangible personal property made directly to the United States government or its departments or agencies that is not deducted under paragraphs (1) through (4) of this Subsection.
(6) for the purposes of this Subsection:
(A) "overhead materials" means tangible personal property, the gross proceeds of sales or gross income derived from that would otherwise be included in the retail classification, and that are used or consumed in the performance of a contract, the cost of which is charged to an overhead expense account and allocated to various contracts based on generally accepted accounting principles and consistent with government contract accounting standards.
(B) “subcontract” means an agreement between a contractor and any person who is not an employee of the contractor for furnishing of supplies or services that, in whole or in part, are necessary to the performance of one or more government contracts, or under which any portion of the contractor's obligation under one or more government contracts is performed, undertaken or assumed and that includes provisions causing title to overhead materials or other tangible personal property used in the performance of the subcontract to pass to the government or that includes provisions incorporating such title passing clauses in a government contract into the subcontract.
(o) sales to hotels, bars, restaurants, dining cars, lunchrooms, boarding houses, or similar establishments of articles consumed as food, drink, or condiment, whether simple, mixed, or compounded, where such articles are customarily prepared or served to patrons for consumption on or off the premises, where the purchaser is properly licensed and paying a tax under Section ___-455 or the equivalent excise tax upon such income.
(p) tangible personal property sold to:
(1) a qualifying hospital;
(2) a qualifying health care organization if the tangible personal property is used by the organization solely to provide health and medical related educational and charitable services;
(3) a qualifying health care organization if the organization is dedicated to providing educational, therapeutic, rehabilitative and family medical education training for blind and visually impaired children and children with multiple disabilities from the time of birth to age twenty-one;
(4) a qualifying community health center;
(5) a nonprofit charitable organization that has qualified under Section 6 501(c)(3) of the internal revenue code and that regularly serves meals to the needy and indigent on a continuing basis at no cost;
(6) for taxable periods beginning from and after June 30, 2001, a nonprofit charitable organization that has qualified under Section 501(c)(3) of the internal revenue code and that provides residential apartment housing for low income persons over sixty-two years of age in a facility that qualifies for a federal housing subsidy, if the tangible personal property is used by the organization solely to provide residential apartment housing for low income persons over sixty-two years of age in a facility that qualifies for a federal housing subsidy;
(7) a qualifying health sciences educational institution;
(8) any person representing or working on behalf of another person described in subdivisions (1) through (7) of this paragraph if the tangible personal property is incorporated or fabricated into a project described in A.R.S. Section 42-5075, Subsection O.
(q) (Reserved) (see Mesa city page).
(r) sales of:
(1) livestock and poultry to persons engaging in the businesses of farming, ranching or producing livestock or poultry.
(2) livestock and poultry feed, salts, vitamins and other additives for livestock or poultry consumption that are sold to persons for use or consumption by their own livestock or poultry, for use or consumption in the businesses of farming, ranching and producing or feeding livestock, poultry, or livestock or poultry products or for use or consumption in noncommercial boarding of livestock. For the purposes of this paragraph, "poultry" includes ratites.
(3) implants used as growth promotants and injectable medicines, not already exempt under the definition of “prosthetic”, for livestock or poultry owned by or in possession of persons who are engaged in producing livestock, poultry, or livestock or poultry products or who are engaged in feeding livestock or poultry commercially. For the purposes of this paragraph, "poultry" includes ratites.
(4) neat animals, horses, asses, sheep, ratites, swine or goats used or to be used as breeding or production stock, including sales of breedings or ownership shares in such animals used for breeding or production.
(s) sales of groundwater measuring devices required by A.R.S. Section 45-604.
++(Local Option #X:
(t) sales of paintings, sculptures or similar works of fine art, provided that such works of fine art are sold by the original artist; and provided further that sales of "art creations", such as jewelry, macramé, glasswork, pottery, woodwork, metalwork, furniture, and clothing, when such "art creations" have a dual purpose, both aesthetic and utilitarian, are not exempt, whether sold by the artist or by another.)++
(u) seeds, seedlings, roots, bulbs, cuttings and other propagative material to persons who use those items to commercially produce agricultural, horticultural, viticultural or floricultural crops in this state.
(v) sales of food products by producers as provided for by A.R.S. Sections 3-561, 3-562 and 3-563. This includes sales made directly by owners, proprietors or tenants of agricultural lands or farms who sell livestock or poultry feed that is grown or raised on their lands to any of the following:
(1) persons who feed their own livestock or poultry.
(2) persons who are engaged in the business of producing livestock or poultry commercially.
(3) persons who are engaged in the business of feeding livestock or poultry commercially or who board livestock noncommercially.
++(Local Option #Z:
(w) sales of textbooks by any bookstore that are required by any State university or community college.)++
(x) sales of food and drink to a person who is engaged in business that is classified under the restaurant classification and that provides such food and drink without monetary charge to its employees for their own consumption on the premises during such employees' hours of employment.
(y) sales of tangible personal property by a nonprofit organization that is exempt from taxation under Section 501(c)(3), 501(c)(4) or 42 501(c)(6) of the Internal Revenue Code if the organization is associated with a major league baseball team or a national touring professional golfing association and no part of the organization's net earnings inures to the benefit of any private shareholder or individual. This paragraph does not apply to an organization that is owned, managed or controlled, in whole or in part, by a major league baseball team, or its owners, officers, employees or agents, or by a major league baseball association or professional golfing association, or its owners, officers, employees or agents, unless the organization conducted or operated exhibition events in this state before January 1, 2018 that were exempt from taxation under A.R.S. Section 42-5073.
++(Local Option #CC:
(z) gross income received for tangible personal property consisting of manufactured items destroyed by being subjected to destructive stress, strain or similar testing, for the purpose of developing engineering information or for the purpose of quality control, but only to the extent that a sale of said property would otherwise be exempt by the provisions of this Chapter.)++
(aa) the sale of tangible personal property used in remediation contracting as defined in Section ____-100 and Section ____-100.5.
(bb) sales of materials that are purchased by or for publicly funded libraries including school district libraries, charter school libraries, community college libraries, state university libraries or federal, state, county or municipal libraries for use by the public as follows:
(1) printed or photographic materials.
(2) electronic or digital media materials.
(cc) tangible personal property sold to a commercial airline and consisting of food, beverages and condiments and accessories used for serving the food and beverages, if those items are to be provided without additional charge to passengers for consumption in flight. For the purposes of this paragraph, "commercial airline" means a person holding a federal certificate of public convenience and necessity or foreign air carrier permit for air transportation to transport persons, property or United States mail in intrastate, interstate or foreign commerce.
(dd) in computing the tax base in the case of the sale or transfer of wireless telecommunication equipment as an inducement to a customer to enter into or continue a contract for telecommunication services that are taxable under Section ____-470, gross proceeds of sales or gross income does not include any sales commissions or other compensation received by the retailer as a result of the customer entering into or continuing a contract for the telecommunications services.
(ee) for the purposes of this Section, a sale of wireless telecommunication equipment to a person who holds the equipment for sale or transfer to a customer as an inducement to enter into or continue a contract for telecommunication services that are taxable under Section ___-470 is considered to be a sale for resale in the regular course of business.
(ff) sales of alternative fuel as defined in A.R.S. Section 1-215, to a used oil fuel burner who has received a Department of Environmental Quality permit to burn used oil or used oil fuel under A.R.S. Section 49-426 or A.R.S. Section 49-480.
(gg) sales of food, beverages, condiments and accessories to a public educational entity pursuant to any of the provisions of Title 15, Arizona Revised Statutes, including a regularly organized private or parochial school that offers an educational program for grade twelve (12) or under which may be attended in substitution for a public school pursuant to A.R.S. Section 15-802; to the extent such items are to be prepared or served to individuals for consumption on the premises of a public educational entity during school hours. For the purposes of this Subsection, "accessories" means paper plates, plastic eating utensils, napkins, paper cups, drinking straws, paper sacks or other disposable containers, or other items which facilitate the consumption of the food.
(hh) sales of personal hygiene items to a person engaged in the business of and subject to tax under Section ____-444 of this code if the tangible personal property is furnished without additional charge to and intended to be consumed by the person during his occupancy.
(ii) for the purposes of this Section, the diversion of gas from a pipeline by a person engaged in the business of:
(1) operating a natural or artificial gas pipeline, for the sole purpose of fueling compressor equipment to pressurize the pipeline, is not a sale of the gas to the operator of the pipeline.
(2) converting natural gas into liquefied natural gas, for the sole purpose of fueling compressor equipment used in the conversion process, is not a sale of gas to the operator of the compressor equipment.
(jj) sales of food, beverages, condiments and accessories to a nonprofit charitable organization that has qualified as an exempt organization under 26 U.S.C Section 501(c)(3) and regularly serves meals to the needy and indigent on a continuing basis at no cost. For the purposes of this Subsection, "accessories" means paper plates, plastic eating utensils, napkins, paper cups, drinking straws, paper sacks or other disposable containers, or other items which facilitate the consumption of the food.
(kk) sales of alternative fuel vehicles if the vehicle was manufactured as a diesel fuel vehicle and converted to operate on alternative fuel and sales of equipment that is installed in a conventional diesel fuel motor vehicle to convert the vehicle to operate on an alternative fuel, as defined in A.R.S. Section 1-215.
(ll) sales of solar energy devices. The retailer shall register with the Department of Revenue as a solar energy retailer. By registering, the retailer acknowledges that it will make its books and records relating to sales of solar energy devices available to the Department for examination.
(mm) sales or other transfers of renewable energy credits or any other unit created to track energy derived from renewable energy resources. For the purposes of this paragraph, "renewable energy credit" means a unit created administratively by the corporation commission or governing body of a public power utility to track kilowatt hours of electricity derived from a renewable energy resource or the kilowatt hour equivalent of conventional energy resources displaced by distributed renewable energy resources.
(nn) sales of magazines or other periodicals or other publications by this state to encourage tourist travel.
(oo) sales of paper machine clothing, such as forming fabrics and dryer felts, sold to a paper manufacturer and directly used or consumed in paper manufacturing.
(pp) sales of petroleum, coke, natural gas, virgin fuel oil and electricity sold to a qualified environmental technology manufacturer, producer or processor as defined in A.R.S. Section 41-1514.02 and directly used or consumed in the generation or provision of on-site power or energy solely for environmental technology manufacturing, producing or processing or environmental protection. This paragraph shall apply for twenty full consecutive calendar or fiscal years from the date the first paper manufacturing machine is placed in service. In the case of an environmental technology manufacturer, producer or processor who does not manufacture paper, the time period shall begin with the date the first manufacturing, processing or production equipment is placed in service.
(qq) sales or gross income derived from sales of machinery, equipment, materials and other tangible personal property used directly and predominantly to construct a qualified environmental technology manufacturing, producing or processing facility as described in A.R.S. Section 41-1514.02. This Subsection applies for ten full consecutive calendar or fiscal years after the start of initial construction.
(rr) the transfer of title or possession of coal back and forth between an owner or operator of a power plant and a person who is responsible for refining coal if both of the following apply:
(1) the transfer of title or possession of the coal is for the purpose of refining the coal; and
(2) the title or possession of the coal is transferred back to the owner or operator of the power plant after completion of the coal refining process. For the purposes of this subdivision, "coal refining process" means the application of a coal additive system that aids the reduction of power plant emissions during the combustion of coal and the treatment of flue gas.
++(Local Option #QQ:
(ss) sales of works of fine art, as defined in A.R.S. Section 44-1771, at an art auction or gallery in this state to nonresidents of this state for use outside this state if the vendor ships or delivers the work of fine art to a destination outside this state.)++
(tt) 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 under A.R.S. Section 41-1519 or an authorized agent of the owner, operator or qualified colocation tenant during the qualification period for use in the qualified computer data center. For the purposes of this paragraph, "computer data center", "computer data center equipment", "qualification period" and "qualified colocation tenant" have the same meanings prescribed in A.R.S. Section 41-1519.
(uu) the sale, manufacture, wholesale or distribution to or among any wholesalers, distributors or retailers, of food items intended for human consumption as defined by rule adopted pursuant to A.R.S. Section 42-5106 or items prescribed by A.R.S. Section 42-5106, subsection D for home consumption or for consumption on the premises.
(vv) the sale of any container or packaging used exclusively for transporting, protecting or consuming food items intended for human consumption as defined by rule adopted pursuant to A.R.S. Section 42-5106 or items prescribed by A.R.S. Section 42-5106, subsection D for home consumption or for consumption on the premises.
(ww) machinery, equipment, technology or related supplies that are only useful to assist a person with a physical disability as defined in A.R.S. Section 46-191 or a person who has a developmental disability as defined in A.R.S. Section 36-551 or has a head injury as defined in A.R.S. Section 41-3201 to be more independent and functional.
(xx) application services that are designed to assess or test student learning or to promote curriculum design or enhancement purchased by or for any school district, charter school, community college or state university. For the purposes of this paragraph:
(1) "application services" means software applications provided remotely using hypertext transfer protocol or another network protocol.
(2) "curriculum design or enhancement" means planning, implementing or reporting on courses of study, lessons, assignments or other learning activities.
(yy) sales of coal.