OVERVIEW OF ARIZONA’S SALES TAXATION OF CONTRACTING

1
OVERVIEW OF ARIZONAS SALES TAXATION OF
CONTRACTING

• By Pat Derdenger
• Partner, Steptoe Johnson LLP

2
Building Materials Vendors
Owner
GeneralContractor
Sub
Sub
Sub
Sub
Sub-Sub
Sub-Sub
3
STRUCTURE OF THE ARIZONA CONTRACTING TAX

• The Prime Contractoris Taxable.

4
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 . . .

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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."

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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."

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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."

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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.

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PERSONS ACTING AS AGENTS OF THE OWNER ARE NOT
TAXABLE AS PRIME CONTRACTORS

• 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

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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

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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.

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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

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PRIMARY DEDUCTIONS

• Land Deduction (20 audit safe harbor)
• 35 Labor Deduction or 65 Inclusion.
• Contractors 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!

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OTHER DEDUCTIONS

• Groundwater Measuring Devices.
• Furniture, Furnishings, Fixtures and Appliances
  not attached to manufactured buildings
  (separately taxed under retail classification).
• Military Re-Use Zone (Williams Air Force Base).

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OTHER DEDUCTIONS

• Qualified Environmental Technology Manufacturing
  Facility (must have been certified by Dept. of
  Commerce by June 30, 1996).
• Remediation Work.
• Installation of Exempt ME - Not Permanently
  Attached.

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OTHER DEDUCTIONS

• Lake Facility Development (Tempe Town Lake).
• Exempt machinery and equipment and tangible
  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.

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OTHER DEDUCTIONS

• 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

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DESIGN ENGINEERING FEES EXCLUDED FROM TAX

• Direct Fees Are Excluded
• Indirect Are Not
• See Senate Bill 1293 (2004)

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FOUR VARIANTS OF THE CONTRACTING CLASSIFICATION
TAXING SCHEME

• The Normal General Contractor
• The Speculative Builder
• The Owner Builder
• The Construction Manager

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NORMAL GENERAL CONTRACTOR SITUATION
Chart No. 1 Normal Prime Contractor Situation
Building Materials Vendors
Taxed
Owner
Exempt
Taxed
Prime Contractor
Exempt
Sub
Sub
Sub
Sub
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TAX COMPUTATION
Construction Contract - 1 Million
1,000,000 - 350,000 650,000 601,295 x
8.1 48,705
Gross income from contracting 35 Labor
Deduction Taxable Amount (65 Tax Base) Factored
Tax Deduction (650,000 ? 1.081) Tax Rate (State,
County City) Tax
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SPECULATIVE BUILDER
Chart No. 2 Speculative Builder (Builds with
Intent to Sell)
Sells
Speculative Builder Owner Prime Contractor
Building Materials Vendors
Buyer
Exempt
Taxed
Exempt
No Tax
Sub
Sub
Sub
Sub
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TAX COMPUTATION
Land Value - 400,000Construction Cost - 1
Million (paid to subs)
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
2,000,000 - 400,000 1,600,000 -
560,000 1,040,000 962,072 x 8.1
77,928
Compare to 48,705 (Prime Contractor) Assume
City has land deduction.
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SPECULATIVE BUILDERChart No. 2ADepartment of
Revenues Unwritten Audit Position
Speculative Builder Constructs House Without
Contract In Place Before Completion DORs
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
Sells
Building Materials Vendors
Buyer
Taxed
Speculative Builder (Owner Prime Contractor)
No Tax
Exempt
Taxed
Sub
Sub
Sub
Sub
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SPECULATIVE BUILDERChart No. 2BDepartment of
Revenues Unwritten Audit Position
Speculative Builder Constructs House Without
Contract In Place Before Completion Gives Forms
5005 to subcontractors
Buyer
Sells
Speculative Builder (Owner Prime Contractor)
Building Materials Vendors
Taxed
Speculative Builder Taxed on Amounts Paid to Subs
No Tax
Taxed
Exempt
Exempt
Sub
Sub
Sub
Sub
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SPECULATIVE BUILDERChart No. 2CDepartment of
Revenues Unwritten Audit Position
Speculative Builder Constructs House With
Contract To Sell In Place Before Completion
Building Materials Vendors
Exempt
Sells
Speculative Builder(Owner Prime Contractor)
Buyer
Taxed
Exempt
Exempt
Sub
Sub
Sub
Sub
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SPECULATIVE BUILDER

• So, Under DORs Position
• A homebuilder (no dual structure) would not be
  taxed on sale of home if the house was not
  presold
• Subs would be taxable

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OWNER-BUILDERChart No. 3Owner-Builder (Builds
with Intent to Hold)
Owner-Builder (Acts as OwnPrime Contractor)
Building Materials Vendors
Taxed
Taxed
Exempt
Sub
Sub
Sub
Sub
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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.
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CONSTRUCTION MANAGER
Is Fee taxed?
Building Materials Vendors
Taxed
Construction Manager
Owner
Who is taxed on paid to Subs? CM or Subs.
Exempt
Sub
Sub
Sub
Sub
Taxed
Under the Model City Tax Code, the cities
position is that the fee is taxable.
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CITY SALES TAXATION CITIES DO NOT FOLLOW THE
STATE STRUCTURE

• By Pat Derdenger

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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

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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)

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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

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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

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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

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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

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THANK YOU

• Patrick Derdenger
• Partner, Steptoe Johnson LLP
• 201 E. Washington Street, 16th Floor
• Phoenix, Arizona
• [phone]

41
SIGNIFICANT CASE LAW RELATED TO THE TAXATION OF
CONSTRUCTION ACTIVITIES

• By Pat Derdenger

42
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.

43
Moore v. Smotkin, 79 Ariz. 77, 283 P.2d 1029
(1955).

• Landowners subdividing and developing tracts of
  land are not taxable contractors.

44
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.

45
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.

46
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.

47
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.

48
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 corporations joint venture to perform
  one construction contract in the state using
  materials procured outside the state.

49
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.

50
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.

51
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.

52
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.

53
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.

54
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.

55
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..

56
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.

57
RDB Thomas Road Partnership v. City of Phoenix,
180 Ariz. 194, 883 P.2d 431 (Ct. App. 1994).

• Owner-builder selling project within
  twenty-four months of substantial completion is
  subject to municipal sales tax.

58
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.

59
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.

60
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.

61
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.

62
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.
  

63
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).

64
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?

65
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 Departments prior positions.

66
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.

67
Thank you.Patrick DerdengerSteptoe Johnson
LLP
68
THE UTILITIES CLASSIFICATIONByPatrick
Derdenger
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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. 42-5063.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.

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CASES

• In Tucson Elec. Power C. v. Arizona Dept 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.

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CASES

• In Winterhaven Water Dev. Co. v. Arizona Dept
  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 non-profit 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.

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SECURITY DEPOSITS

• Security deposits are not subject to the sales
  tax until recognized by the utility as earned
  income. R15-5-2210.

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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).

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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 districts 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.

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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.

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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.

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EXCLUSIONS AND DEDUCTIONS

• Deductions
• 5. CIAC Received by a municipal utility.
• 6. CIAC Received by a Privately Owned
  utility.

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EXCLUSIONS AND DEDUCTIONS

• 7. Sales to
• (a) Qualifying hospitals as defined in
  42- 5001.
• (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.

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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.

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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.

81
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.

82
Thank you.Patrick DerdengerSteptoe Johnson
LLP
83
THE AMUSEMENTS CLASSIFICATIONByPatrick
Derdenger
84
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.

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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.

86
EXCLUSIONS

• Activities or projects of bona fide religious or
  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.

87
EXCLUSIONS

• Baseball Spring Training
• 6. Rodeos
• 7. The Super Bowl
• 8. Homeowner associations

88
EXCLUSIONS

• 501(c)(6) organizations (business leagues,
  chamber or commerce) that produce, organize or
  promote cultural or civic related festivals or
  events.
• Arranging an amusement activity as a service to a
  persons customers if that person is not
  otherwise engaged in the business of operating or
  conducting an amusement themselves or through
  others.

89
DEDUCTIONS

• Health and fitness club memberships (including
  monthly initiation fees) must be for 28 days
  or more.
• Certain pari-mutuel wagering proceeds.

90
DEDUCTIONS

• Hotel golf and tennis memberships (including
  monthly and initiation fees) must be for 28 days
  or more.

91
DEDUCTIONS

• Sales of amusements to hotels if
• 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.

92
DEDUCTIONS

• Sale of amusements by hotel if the amusement
  provider pays the tax (converse of the above
  exemption).

93
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.

94
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
  persons 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.

95
CASES

• (Wilderness World, Inc. v. Arizona Dept 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.

96
CASES

• In McElhaney v. Arizona Dept 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 shops 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.

97

• 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.

98
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

99
Thank you.Patrick DerdengerSteptoe Johnson
LLP