OVERVIEW OF ARIZONA’S SALES
TAXATION OF CONTRACTING
By: Pat Derdenger
Partner, Steptoe & Johnson LLP
www.steptoe.com
October 26, 2006
Owner
General
Contractor
Building
Materials
Vendors
Sub
Sub
Sub-Sub
Sub
Sub
Sub-Sub
2
STRUCTURE OF THE ARIZONA
CONTRACTING TAX
The “Prime Contractor”
is Taxable.
3
DEFINITION OF “CONTRACTOR”
 A.R.S. § 42-5075.G.2 defines “contractor” as being
“synonymous with the term ‘builder’ and means a
person, firm, partnership, corporation, association or
other organization, or a combination of any of them,
that undertakes to or offers to undertake to, or
purports to have the capacity to undertake to, or
submits a bid to, or does himself or by or through
others, construct, alter, repair, add to , subtract from
...
4
DEFINITION OF “CONTRACTOR”
… improve, move, wreck or demolish any building,
highway, road, railroad, excavation or other structure,
project, development or improvement, or to do any
part thereof, including the erection of scaffolding or
other structure or works in connection therewith, and
includes subcontractors and specialty contractors."
This Section also provides that the definition will
govern "without regard to whether or not the
contractor is acting in fulfillment of a contract."
5
DEFINITION OF “PRIME CONTRACTOR”
A.R.S. § 42-5075.G.6 defines "prime contractor" to
mean "the contractor who supervises, performs or
coordinates the construction, alteration, repair,
addition, subtraction, improvement, movement,
wreckage or demolition of any building, highway,
road, railroad, excavation or other structure, project,
development or improvement including the
contracting, if any, with any subcontractors or
specialty contractors and is responsible for the
completion of the contract."
6
THE SUBCONTRACTOR EXEMPTION
A.R.S. § 42-5075.D provides that a
subcontractor is not liable for the Sales Tax "if
the job was within the control of a prime
contractor . . . and that the prime contractor
. . . is liable for the tax on (its) gross income
. . . attributable to the job and from which
the subcontractors . . . were paid."
7
8
9
R15-5-602.C.1
Subcontractors are exempt provided that such
persons are not acting in the capacity of prime
contractors. A subcontractor is considered to be
a prime contractor, and therefore liable for the tax,
if:
a.
Work is performed for and payments are
received from an owner-builder.
b.
Work is performed for and payments are
received from an owner or lessee of real property.
10
PERSONS ACTING AS “AGENTS” OF
THE OWNER ARE NOT TAXABLE AS
“PRIME CONTRACTORS”
1.
2.
3.
Mackey Plumbing Co. v. Arizona Department
of Revenue
Jerry's Plumbing v. Arizona Department of
Revenue
Mountain View Development Co. v. Arizona
Department of Revenue
BUT SEE:
• Camden Development
• Ormond Builders
11
NO TAX ON PURCHASE OF MATERIALS
Tangible personal property sold to a person that is
subject to tax under this article by reason of being
engaged in business classified under the prime
contracting classification under § 42-5075, or to a
subcontractor working under the control of a
prime contractor that is subject to tax under article
1 of this chapter, if the property so sold is any of the
following:
12
NO TAX ON PURCHASE OF MATERIALS
(a) Incorporated or fabricated by the person into any real
property, structure, project, development or
improvement as part of the business.
(b) Used in environmental response or remediation
activities under § 42-5075, subsection B, paragraph 6.
13
NO TAX ON PURCHASE OF MATERIALS
(c) Incorporated or fabricated by the person into any
lake facility development in a commercial
enhancement reuse district under conditions
prescribed for the deduction allowed by § 42-5075,
subsection B, paragraph 8.
NOTE:


Consumable items not incorporated into structure are
taxable
Equipment rented to contractors is taxable under the
rental classification
14
PRIMARY DEDUCTIONS
1.
2.
3.
Land Deduction (20% audit “safe harbor”)
35% Labor Deduction or 65% Inclusion.
Contractor’s Deduction for State and
Municipal Sales Taxes - Factoring: gross
amount ÷ .65 x(1 + tax rate) or taxable
amount ÷ (1+ tax rate).
Example: $1000 ÷ (1.081) = $925
(combined tax rate is 8.1%)
• DOR Automatic Factoring Worksheet!
15
OTHER DEDUCTIONS
1.
2.
Groundwater Measuring Devices.
3.
Military Re-Use Zone (Williams Air Force
Base).
Furniture, Furnishings, Fixtures and
Appliances not attached to manufactured
buildings (separately taxed under retail
classification).
16
OTHER DEDUCTIONS
4.
5.
6.
Qualified Environmental Technology
Manufacturing Facility (must have been
certified by Dept. of Commerce by June 30,
1996).
Remediation Work.
Installation of Exempt M&E - “Not
Permanently Attached.”
17
OTHER DEDUCTIONS
7. Lake Facility Development (Tempe Town Lake).
8. Exempt machinery and equipment and tangible
9.
personal property sold to “qualifying hospital”
and 501(c)(3) organization engaging in job
training, placement, etc. (Added effective
January1, 1999 and Repeals Purchase Agency
Requirement)
Construction of egg production facilities.
18
OTHER DEDUCTIONS
10.
11.
12.
Construction of Agricultural pollution
control facilities.
Installation of clean rooms (NOTE:
equipment is also exempt).
Construction of non-profit residential
apartments for low income/over age 62
(beginning July 1, 2001).
See ARS § 42-5075
19
DESIGN & ENGINEERING FEES
EXCLUDED FROM TAX
 Direct Fees Are Excluded
 Indirect Are Not
See Senate Bill 1293 (2004)
20
FOUR VARIANTS OF THE CONTRACTING
CLASSIFICATION TAXING SCHEME
1.
The Normal General Contractor
2.
The Speculative Builder
3.
4.
The Owner Builder
The Construction Manager
21
NORMAL “GENERAL CONTRACTOR”
SITUATION
Chart No. 1
Normal Prime Contractor Situation
Taxed
Owner
Taxed
Prime
Contractor
Exempt
Building
Exempt
Sub
Sub
Sub
Materials
Vendors
Sub
22
TAX COMPUTATION
Construction Contract - $1 Million
$1,000,000
Gross income from contracting
- 350,000
35% Labor Deduction
650,000
Taxable Amount (65% Tax Base)
601,295
Factored Tax Deduction ($650,000  1.081)
x
8.1%
$
48,705
Tax Rate (State, County & City)
Tax
23
SPECULATIVE BUILDER
Chart No. 2
Speculative Builder (Builds with Intent to Sell)
Building
Speculative Builder
Owner & Prime
Contractor
Exempt
Materials
Vendors
Sells $
Buyer
Taxed
Exempt
Sub
Sub
Sub
Sub
No Tax
24
TAX COMPUTATION
Land Value - $400,000
Construction Cost - $1 Million (paid to subs)
$ 2,000,000
- 400,000
$ 1,600,000
- 560,000
$ 1,040,000
962,072
x
8.1%
$
77,928
Gross Sales Proceeds
Land Value (20% “safe harbor”)
35% Labor Deduction
Taxable Amount (65% Tax Base)
Factored Tax Deduction ($1,040,000  1.081)
Tax Rate (State, County & City*)
Tax
Compare to $48,705 (Prime Contractor)
* Assume City has land deduction.
25
SPECULATIVE BUILDER
Chart No. 2A
Department of Revenue’s Unwritten Audit Position
Speculative Builder Constructs House Without Contract In Place Before
Completion
DOR’s position is that state statute does not have a speculative builder
classification as does Model City Tax Code
Ignore definition of contractor: “without regard to whether or not the
contractor is acting in fulfillment of a contract
Building
Taxed
Speculative Builder
(Owner & Prime
Contractor)
Materials
Vendors
Sells $
Buyer
No Tax
Exempt
Sub
Sub
Sub
Sub
Taxed
26
SPECULATIVE BUILDER
Chart No. 2B
Department of Revenue’s Unwritten Audit Position
Speculative Builder Constructs House Without Contract In Place Before
Completion
Gives Forms 5005 to subcontractors
Taxed
Speculative Builder
(Owner & Prime
Contractor)
Sells $
Speculative Builder
Taxed on Amounts
Paid to Subs
No Tax
Buyer
Building
Materials
Vendors
Taxed
Exempt
Sub
Sub
Sub
Sub
Exempt
27
SPECULATIVE BUILDER
Chart No. 2C
Department of Revenue’s Unwritten Audit Position
Speculative Builder Constructs House With Contract To Sell In
Place Before Completion
Exempt
Speculative Builder
(Owner & Prime
Contractor)
Building
Materials
Sells $
Buyer
Taxed
Vendors
Exempt
Exempt
Sub
Sub
Sub
Sub
28
SPECULATIVE BUILDER
So, Under DOR’s Position:
 A homebuilder (no “dual structure”)
would not be taxed on sale of home if the
house was not “presold”
 Subs would be taxable
29
OWNER-BUILDER
Chart No. 3
Owner-Builder (Builds with Intent to Hold)
Owner-Builder
(Acts as Own
Prime Contractor)
Taxed
Building
Materials
Taxed
Exempt
Sub
Sub
Sub
Vendors
Sub
30
TAX COMPUTATION
Land Value - $400,000
Construction Cost - $1 Million (paid to subs)
Subs are taxed on $1 Million.
$ 1,000,000
- 350,000
650,000
601,295
x
8.1%
$
48,705
Labor Deduction (65% Tax Base)
Taxable Amount
Factored Tax Deduction ($650,000  1.081)
Tax Rate (State, County & Phoenix)
Tax
Compare to $48,705 (Normal Prime Contractor Situation)
Note: If Owner-Builder uses a prime contractor that pays the tax on initial construction,
Owner Builder is liable for tax on value of improvements made after substantial
completion if sold within 24 months of substantial completion.
31
CONSTRUCTION MANAGER
*Is Fee
taxed?
Taxed
Building
Owner
Construction
Manager
Materials
Vendors
Exempt
Sub
Sub
Sub
Sub
Who is
taxed on $
paid to
Subs? CM
or Subs.
Taxed
* Under the Model City Tax Code, the cities’ position is that the fee is taxable.
32
CITY SALES TAXATION:
CITIES DO NOT FOLLOW THE
STATE STRUCTURE
By Pat Derdenger
www.steptoe.com
October 26, 2006
City Sales Taxation: Cities Do Not
Follow the State Structure

Model City Tax Code



Adopted by All Cities that Impose a Sales Tax
Program Cities vs. Non-Program Cities
Program Cities and Supplemental Audits
34
City Sales Taxation: Cities Do Not
Follow the State Structure

All “Construction Contractors” are Taxable

Subcontractors are Exempt Only if it Receives
“Written Declaration” from Another
Construction Contractor (i.e., the “general”)
35
City Sales Taxation: Cities Do Not
Follow the State Structure

Speculative Builders Who Sell Improved Real
Property Are Taxable



Commercial Property – Within 24 months of
Substantial Completion
Residential Property – No Limit
Credit for Taxes Paid by Construction
Contractors
36
City Sales Taxation: Cities Do Not
Follow the State Structure

Owner Builders Are Taxable



Upon Expiration of 24 Months of Substantial
Completion
If They Gave the Construction Contractors
Owner-Builder Certificates
Tax Based on Amounts Paid to Construction
Contractors
37
City Sales Taxation: Cities Do Not
Follow the State Structure

Construction Managers


MCTC Purports to Tax CM Fees
“Construction Contractor includes anyone
receiving fees for supervision or coordination
of the project”
38
Land Deduction




Most Cities Do Not Provide Land Deduction
Cities That Do – Mostly Smaller Cities –
2 Methods
Cost of Land, or
Fair Market Value of Land


Documented by appraisal, or
20% safe harbor
39
THANK YOU
Patrick Derdenger
Partner, Steptoe & Johnson LLP
201 E. Washington Street, 16th Floor
Phoenix, Arizona
(602) 257-5209
www.steptoe.com
October 26, 2006
SIGNIFICANT CASE LAW RELATED TO
THE TAXATION OF CONSTRUCTION
ACTIVITIES
By Pat Derdenger
www.steptoe.com
October 26, 2006
Duhame v. State Tax Commission, 65 Ariz. 268,
179 P.2d 252 (1947).

Construction contracting income is distinct
from retail sales, and taxation of contractors
as a separate class is not discriminatory.
42
Moore v. Smotkin, 79 Ariz. 77, 283 P.2d 1029
(1955).

Landowners subdividing and developing tracts
of land are not taxable contractors.
43
Arizona State Tax Commission v. Staggs Realty
Corp., 85 Ariz. 294, 337 P.2d 281 (1959).


Speculative builder was not engaged in
taxable contracting.
Definition of a contractor changed.

“This definition shall govern without regard
to whether or not such contractor is acting in
fulfillment of a contract.”
44
Combustion Engineering, Inc. v. Arizona State
Tax Commission, 91 Ariz. 253, 371 P.2d 879
(1962).

Comparatively insignificant local supervision
and labor required to install boiler for APS
where boiler was constructed outside the
state constitutes interstate commerce and
thus not taxable in Arizona.
45
State Tax Commission v. Parsons-Jurden Corp.,
9 Ariz. App. 92, 449 P.2d 626 (1969).

Procurement, consulting, and design and
engineering fees are not taxable under the
contracting classification.
46
Ebasco Services Inc. v. Arizona State Tax
Commission, 105 Ariz. 94, 459 P.2d 719 (1969).

Design and engineering fees received by a
contractor and funds a contractor spends as a
purchasing agent are not taxable contracting.
47
State Tax Commission v. Howard P. Foley Co.,
13 Ariz. App. 85, 474 P.2d 444 (1970).

Interstate commerce exemption did not apply
to foreign corporation’s’ joint venture to
perform one construction contract in the state
using materials procured outside the state.
48
Lusk Corp. v. Arizona State Tax Commission,
462 F.2d 187 (9th Cir. 1972).

Construction of “off-site” improvements to
residential lots is taxable contracting.
49
State Tax Commission v. Holmes & Narver, Inc.,
113 Ariz. 165, 548 P.2d 1162 (1976).

As in Ebasco, design and engineering services
are not taxable even where those services
were not separately stated in the contract; a
three part test was used to determine
whether otherwise nontaxable services must
be included in a construction contract.
50
Department of Revenue v. Hane Construction
Co., 115 Ariz. 243, 564 P.2d 932 (Ct. App.
1977).

Out-of-state contractor was taxable under
contracting classification on construction
contract with BIA for work done on Indian
reservation; contracting activity was not
barred by federal exemption from state tax,
federal preemption, or insufficient contacts
with the state.
51
Dennis Development Co. v. Department of
Revenue, 122 Ariz. 465, 595 P.2d 1010 (Ct.
App. 1979).

Gross income from the sale of land separately
priced in a construction contract is not
taxable contracting.
52
Knoell Brothers Construction, Inc. v. State,
Department of Revenue, 132 Ariz. 169, 644
P.2d 905 (Ct. App. 1982).

Standard 35% labor deduction computed
after land value is deducted from gross
income.
53
Kitchell Contractors, Inc. v. City of Phoenix, 151
Ariz. 139, 726 P.2d 236 (Ct. App. 1986).

Exemption for retail sales of tangible personal
property to non-profit hospital applies to
contractors retail sales of building materials
to hospital; and the standard deduction is
computed on income net of the deduction
allowable for building materials.
54
Gosnell Development Corp.. v. Arizona
Department of Revenue, 154 Ariz. 539, 744
P.2d 451 (Ct. App. 1987).

Contractors in same class must be treated
equally; prior court of appeals decision must
be applied so as to treat taxpayers the same.-those that paid the tax must get refund and
those that did not would not be assessed..
55
Tucson Mechanical Contracting, Inc. v. Arizona
Department of Revenue, 175 Ariz. 176, 854
P.2d 1162 (Ct. App. 1992).

Prime contractor not exempt on work done
for federal government; discrimination
against Arizona-based contractors not shown.
56
RDB Thomas Road Partnership v. City of
Phoenix, 180 Ariz. 194, 883 P.2d 431 (Ct. App.
1994).

“Owner-builder” selling project within twentyfour months of substantial completion is
subject to municipal sales tax.
57
Arizona Department of Revenue v. M.
Greenberg Construction, 182 Ariz. 397, 897 P.2d
699 (Ct. App. 1995).

Construction contracts with Arizona school
districts for work performed on Indian
reservations are taxable.
58
Irby Construction Company v. Arizona
Department of Revenue, 184 Ariz. 105, 907
P.2d 74 (Ct. App. 1995).

Arizona Department of Revenue collaterally
estopped from imposing transaction privilege
tax on a builder who constructed electrical
power transmission lines.
59
Brink Electric Construction Co. v. Arizona
Department of Revenue, 184 Ariz. 354, 909 P.2d
421 (Ct. App. 1995).

Materials and supplies provided in performing
construction do not qualify for retail sales tax
exemptions; permitting such exemptions for
contractors acting as purchase agents did not
violate equal protection; and taxable
contracting does not require permanent
attachment to real property.
60
Centric-Jones Co. v. Town of Marana, 188 Ariz.
464, 937 P.2d 654 (Ct. App. 1996).

Arizona town had authority to impose
transaction privilege tax on a Colorado prime
contractor working on a one-time
construction project.
61
Estancia Development Associates LLC v. City of
Scottsdale, 196 Ariz. 87, 993 P.2d 1051 (1999).

The speculative builder provision of the Model
City Tax Code does not apply to sale of real
property that is unimproved at the time of
sale, even though the sales contract requires
subsequent improvements to be made by the
seller.
62
Arizona Department of Revenue v. Blaze
Construction Co., 526 U.S. 32 (1999).

State may tax a contractor performing
services for the federal government on Indian
reservations for the benefit of an Indian tribe
(see Hane Construction).
63
Arizona Department of Revenue v. Arizona
Outdoor Advertisers, Inc., 202 Ariz. 93, 41 P.3d
631 (Ct. App. 2002).

Reasonable person test governs
determination of real versus personal
property for tax purposes--does it apply to
the contracting classification?
64
Arizona Joint Venture v. Arizona Department of
Revenue, 205 Ariz. 50, 66 P.3d 771 (Ct. App.
2003).

Department not estopped because the
taxpayer could not show any detriment to its
reliance on the Department’s prior positions.
65
Luther Construction Co. v. Arizona Department
of Revenue, 205 Ariz. 602, 74 P.3d 276 (Ct.
App. 2003).

A taxpayer claiming equitable estoppel
against the Department may rely upon a
written letter from the department, formal
action taken on a refund claim, and an audit
assessment.
66
Thank you.
Patrick Derdenger
Steptoe & Johnson LLP
67
THE
UTILITIES CLASSIFICATION
By
Patrick Derdenger
68
THE UTILITIES CLASSIFICATION – A.R.S. § 42-5063.
The utilities classification is comprised of:
1. Gas and water. Producing and furnishing or furnishing to
consumers natural or artificial gas and water. See A.R.S. § 425063.A.1.
2. Electricity. Providing to retail electric customers ancillary
services, electric distribution services, electric generation
services, electric transmission services and other services
related to providing electricity.
A.R.S. § 42-5063.A.2.
69
CASES
In Tucson Elec. Power C. v. Arizona Dep’t of Revenue,
170 Ariz. 145, 822 P.2d 498 (App. 1991), the Court
broadly interpreted what constituted the business of
producing and furnishing electricity and held that
Tucson Electric Power Co. was liable for tax on
payments that did not result from actually furnishing
electricity– “stand by” or “minimum demand”
charges.
70
CASES
In Winterhaven Water & Dev. Co. v. Arizona Dep’t of
Revenue, Arizona Board of Tax Appeals, Division 2,
No. 638-88-5 (July 17, 1989), the Board held that a
cooperative water company incorporated as a nonprofit corporation for the mutual benefit of owners
and residents of property in a subdivision is liable for
the sales tax on the monthly charges paid by the
members to whom it furnishes water.
71
SECURITY DEPOSITS
Security deposits are not subject to the sales tax until
recognized by the utility as “earned income.” R15-52210.
72
IRRIGATION DISTRICTS
Electricity or gas furnished to an irrigation district for
the purpose of producing water for irrigation of farm
lands is subject to the sales tax. R15-5-2107; see
also Arizona Public Serv. Co. v. Department of
Revenue, Arizona Board of Tax Appeals, No. 306-83-S
(April 10, 1995).
73
IRRIGATION DISTRICTS
In Flowing Wells Irrigation Dist. v. City of Tucson, 176
Ariz. 623, 863 P.2d 915 (Tax Ct. 1993), the Arizona
Tax Court held that the City of Tucson may assess its
sales tax on an irrigation district’s income from the
sale of water to residential customers because
supplying water to such customers is a proprietary
function, which is taxable, and not an exempt
governmental function.
74
EXCLUSIONS AND DEDUCTIONS
Exclusions
1. Resales. Sales of ancillary services, electric
distribution services, electric generation services,
electric transmission services and other services
related to providing electricity, gas or water to a
person who resells the services.
2. Alternative Fuel For Motor Vehicles. Sales of
natural gas or liquefied petroleum gas used to propel
a motor vehicle.
75
EXCLUSIONS AND DEDUCTIONS
3. Sales To Used Oil Fuel Burner. Sales of alternative
fuel to a used oil fuel burner.
4. Out Of State Sales. Sales of ancillary services,
electric distribution services, electric generation
services, electric transmission services and other
services that are related to providing electricity to a
retail electric customer who is located outside this
state for use outside this state if the electricity is
delivered to a point of sale outside this state.
76
EXCLUSIONS AND DEDUCTIONS
Deductions
5. “CIAC” Received by a municipal utility.
6. “CIAC” Received by a Privately Owned utility.
77
EXCLUSIONS AND DEDUCTIONS
7. Sales to:
(a) Qualifying hospitals as defined in § 425001.
(b) A qualifying health care organization as
defined in § 42-5001 if the tangible personal
property is used by the organization solely to
provide health and medical related
educational and charitable services.
78
EXCLUSIONS AND DEDUCTIONS
8. Sales to an environmental technology manufacturer,
producer or processor of a utility product and that is used
directly in environmental technology manufacturing,
producing or processing.
79
USE TAX ON ELECTRICITY OR NATURAL GAS PURCHASED FROM
OUT-OF-STATE PROVIDER.
The use tax is imposed on the consumer of electricity
or natural gas which has been purchased from an
out-of-state seller of those items who has no nexus
with Arizona. See A.R.S. § 42-5155.A.
80
CIAC
In Arizona Public Service Co. v. Arizona
Department of Revenue (Ariz. App. 2006),
the Court of Appeals ruled that CIAC is NOT
included in the property tax valuation base.
81
Thank you.
Patrick Derdenger
Steptoe & Johnson LLP
82
THE
AMUSEMENTS CLASSIFICATION
By
Patrick Derdenger
83
THE AMUSEMENTS CLASSIFICATION – A.R.S. § 42-5073
The amusements classification is comprised of the business
of operating or conducting theaters, movies, operas, shows,
exhibitions, concerts, carnivals, circuses, amusement parks,
menageries, fairs, races, contests, games, billiard or pool
parlors, bowling alleys, public dances, dance halls, boxing
and wrestling matches, skating rinks, certain tennis courts,
video games, pinball machines, sports events.
Or any other business charging admission or user fees for
exhibition, amusement or entertainment.
84
THE AMUSEMENTS CLASSIFICATION – A.R.S. § 42-5073
Includes the operation or sponsorship of events by a
tourism and sports authority (“TSA”--Cardinals
Stadium).
“Sky Boxes.” “Admission or user fees include any
revenues derived from any form of contractual
agreement for rights to or use of premium or special
seating facilities or arrangements.”
85
EXCLUSIONS
1. Activities or projects of bona fide religious or
2.
3.
4.
educational institutions.
Private or group instructional activities such as
performing arts, martial arts, gymnastics and
aerobic instruction.
State fair and county fairs.
Musical, dramatic or dance group or a botanical
garden, museum or zoo that are 501(c)(3)
organizations.
86
EXCLUSIONS
5.
Baseball Spring Training
6. Rodeos
7. The Super Bowl
8. Homeowner associations
87
EXCLUSIONS
9. 501(c)(6) organizations (business leagues,
chamber or commerce) that produce, organize or
promote cultural or civic related festivals or events.
10. Arranging an amusement activity as a service to a
person’s customers if that person is not otherwise
engaged in the business of operating or conducting
an amusement themselves or through others.
88
DEDUCTIONS
1.
2.
Health and fitness club memberships
(including monthly & initiation fees); must
be for 28 days or more.
Certain pari-mutuel wagering proceeds.
89
DEDUCTIONS
3.
Hotel golf and tennis memberships
(including monthly and initiation fees); must
be for 28 days or more.
90
DEDUCTIONS
4.
Sales of amusements to hotels if:
a)
b)
c)
The hotel resells the amusement to
another person (guest).
The consideration received by the hotel
is equal to or greater than the amount
deducted.
The hotel has provided a resale
exemption certificate to the amusement
business.
91
DEDUCTIONS
5.Sale of amusements by hotel if the
amusement provider pays the tax (converse
of the above exemption).
92
HAYRIDES
Until December 31, 1998, revenues from
hayrides and other animal-drawn amusement
rides, from horseback riding and riding
instruction and from recreational tours using
motor vehicles designed to operate on and off
public highways (“Pink Jeep” Tours) are
exempt.
93
BOOKS AND RECORDS
If a person is engaged in the business of
offering both exhibition, amusement or
entertainment (taxable) and private group
instructional activities (not taxable), the
person’s books shall be kept to show
separately the gross income from each. If
the books do not provide separate
accounting, the tax is imposed on the total
gross income. A.R.S. § 42-5073.E.
94
CASES
(Wilderness World, Inc. v. Arizona Dep’t of
Revenue, 182 Ariz. 196, 895 P.2d 108
(1995). The sales tax under the
amusements classification does not apply
to river rafting trips down the Colorado
River.
95
CASES
In McElhaney v. Arizona Dep’t of Revenue, Arizona Board of
Tax Appeals, Division Two, No. 704-89-S (May 15, 1990), the
Board dealt with the issue of the application of the
transaction privilege tax to golf lessons given by professional
golfers at the golf and pro shop’s driving range. The court
held that because the instructional fee for golf lessons does
not provide access or admission to nonpublic portions of the
golf course, the instruction fee is not an admission fee for
instruction, and thus, is not subject to the transaction
privilege tax.
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In Rowe International, Inc. v. Arizona Department of
Revenue, 165 Ariz., 122, 796 P2d 924 (Ariz. App. 1990),
the Court of Appeals held that sales of coin operated
video games was taxable as a retail sale and was not an
exempt sale for resale.
Taxpayer argued it was paying tax under amusements
classification of revenue from video games and thus
sale for resale exemption applied or tax on sale of
games constituted double taxation.
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LEGISLATION
 2006 Legislation Developments
House Bill 2132, chapter 171. Cities are
precluded from taxing the Arizona State
Fair on ride ticket sales at the annual
state fair.
See New A.R.S. § 42-6004.A.10
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Thank you.
Patrick Derdenger
Steptoe & Johnson LLP
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