A R I Z O N A D E PA R T M E N T O F R E V E N U E

T H E R E V E N U E I M PA C T
O F A R I Z O N A’ S TA X
EXPENDITURES
FY 2003/04
P R E PA R E D

FOR:

T H E G OV E R N O R

B Y: T H E O F F I C E

OF

AND THE

LE G I S L ATU R E

E C O N O M I C R E S E A RCH & A N A LY S I S

Janet Napolitano

J. Elliott Hibbs

Governor

Director

November 15, 2004, Preliminary

The following report on Arizona's Tax Expenditures was prepared for the Governor and the
Legislature in compliance with A.R.S. §42-1005.
The preliminary 2004 report provides a broad range of information. The report contains
sections for all taxes imposed by the state, however, the individual income tax section of this
report contains only credit data. The final report will contain additional information made
available through the 2002 Individual Income Tax Simulation Model.
If you have any questions or comments regarding this report, please contact the Arizona
Department of Revenue at (602) 716-6090.

TA B L E O F C O N T E N T S
INTRODUCTION................................................................................... Page 1
AIRCRAFT LICENSE TAX EXPENDITURES............................... Page 3
AVIATION FUEL TAX EXPENDITURES ..................................... Page 9
BINGO TAX EXPENDITURES ....................................................... Page 13
BOXING TAX EXPENDITURES .................................................... Page 19
CORPORATE INCOME TAX EXPENDITURES........................ Page 23
ESTATE TAX EXPENDITURES ..................................................... Page 35
FIDUCIARY INCOME TAX EXPENDITURES .......................... Page 39
FLIGHT PROPERTY TAX EXPENDITURES ............................. Page 49
IN LIEU PROPERTY TAX EXPENDITURES ............................. Page 53
INDIVIDUAL INCOME TAX EXPENDITURES ....................... Page 57
INSURANCE PREMIUM TAX EXPENDITURES ...................... Page 65
JET FUEL EXCISE AND USE TAX EXPENDITURES............. Page 73
LUXURY TAX EXPENDITURES .................................................... Page 77
MOTOR CARRIER FEE EXPENDITURES .................................. Page 83
MOTOR VEHICLE FUEL TAX EXPENDITURES .................... Page 89
PARI-MUTUEL TAX EXPENDITURES ........................................ Page 93
PRIVATE CAR PROPERTY TAX EXPENDITURES ................. Page 97

PROPERTY TAX EXPENDITURES ............................................... Page 101
SEVERANCE TAX EXPENDITURES............................................ Page 107
TRANSACTION PRIVILEGE AND USE TAX
EXPENDITURES .............................................................................. Page 111
UNDERGROUND STORAGE TANK TAX
EXPENDITURES .............................................................................. Page 137
UNEMPLOYMENT INSURANCE TAX EXPENDITURES..... Page 141
USE FUEL TAX EXPENDITURES ................................................. Page 145
VEHICLE LICENSE TAX EXPENDITURES............................... Page 149
WATERCRAFT LICENSE TAX EXPENDITURES .................... Page 155
WORKERS’ COMPENSATION PREMIUM LIEU TAX
EXPENDITURES .............................................................................. Page 161

T H E 2 0 0 4 A R I Z O N A TA X E X P E N D I T U R E
R E P O RT
INTRODUCTION
tax.
Any figures presented in these
sections were provided by that agency.

The Arizona Tax Expenditure Report is a
study prepared for the Governor and the
Legislature by the Arizona Department of
Revenue's Office of Economic Research
and Analysis. The report is prepared in
compliance with A.R.S. §42-1005.

ASSUMPTIONS
This report is not intended in any way to
determine the desirability of the tax
expenditures currently established in law.
The Legislature and the Governor
determine the taxation environment that
they wish to create in Arizona and
formulate law to create this taxation policy.
All tax expenditures were conscious public
policy decisions at the time of enactment.
For example, since 1990, public policy
decisions were made to relieve the
individual income tax burden on persons
age 65 and over in Arizona. To that end,
the amount of the age 65 and over
exemption was increased in 1992 to $1,750
from $1,500 and increased again for tax
year 1993 to $2,100. From tax years 1993
through 2002, the age 65 and over
exemption has remained at $2,100.

Tax expenditures are provisions within the
law (exemptions, exclusions, deductions
and credits) that are designed to encourage
certain kinds of activity or to aid taxpayers
in certain categories. Such provisions,
when enacted into law, result in a loss of
tax revenues, thereby reducing the amount
of revenues available for state (as well as
local) programs. In effect, the fiscal
impact of implementing a tax expenditure
would be similar to a direct expenditure of
state funds. This report provides a list of
tax expenditures, plus, whenever possible,
details the approximate costs of exempting
certain types of income, goods, services or
property from their respective tax statutes.
The purpose of this report is to provide a
better understanding of the costs
associated with the existing set of tax
exemptions, exclusions, deductions and
credits. There are sections on every tax
imposed in Arizona. In each section,
provisions dealing with that specific tax
type are analyzed. The analysis includes a
detailed explanation of the provision as
well as the approximate cost of that
provision, if possible. Sections pertaining
to tax types not administered by the
Arizona Department of Revenue were
reviewed by the agency administering the

The costs associated with the specific
provisions shown in this report are the
estimated impact of that provision based
upon the information available for the
stated fiscal or calendar year. There is no

consideration of decreased demand as
a result of higher taxes. For example, if

taxes on a certain type of liquor were
increased to $3 per gallon, the calculations
presented assume that the same demand
exists under the $3 per gallon tax as exists
when the tax is 84¢ per gallon. This
constant demand would not exist in the
"real" world, but the tools are not available
1

a general guide and should not be used
in isolation from the rest of the
expenditure amounts.
In fact, the

to the Department of Revenue to estimate
the elasticity of demand. Therefore, the
estimated costs should be used only as a
guide and not as an exact representation of
what would occur in later years.

expenditures for any particular tax cannot
generally be added to reach a total. The
presence or absence of one expenditure for
a tax type can directly affect the value of
another expenditure for that same tax type.

Finally, the summary page(s) at the end of
each section provides a total value of the
tax expenditure. This total value is only

Return to Table of Contents

2

AIRCRAFT LICENSE
TAX EXPENDITURES

3

4

A I RC R A F T L I C E N S E TA X
EXPENDITURES
1

A license tax is imposed on aircraft
operating in this state at the rate of 0.5%
of the average fair market value of the
particular make, model and year of the
aircraft, but not less than $20. The
proceeds from this tax are deposited into
the state aviation fund.

equates to a tax value of $67,516 for this
tax expenditure.
A.R.S. §28-8383B also exempts aircraft
owned and held by a bona fide aircraft dealer solely
for the purposes of sale, as long as these aircraft are
registered within ten days of the dealer's purchase
date. There were 149 aircraft of this type
registered by bona fide aircraft dealers in
Arizona in fiscal year 2003/04. The tax
value of these aircraft was approximately
$833,174.

AIRCRAFT LICENSE TAX
EXEMPTIONS
Certain aircraft are exempt from this
license tax, as set out in A.R.S. §28-8322.
Aircraft operated by an airline company and
regularly scheduled for the primary purpose of
carrying persons or property for hire in interstate,
intrastate, or international transportation are
exempt from this tax. Calculating the tax
value of this tax expenditure would require
knowing the average fair market value of
every aircraft carrying persons or property
for hire that stops at an airport in this state.
Therefore, the tax value of this tax
expenditure is not quantifiable.

PREFERENTIAL TAX RATES
There are preferential aircraft license tax
rates granted to certain types of aircraft in
A.R.S. §28-8336. The license tax rate for a
nonresident who bases his aircraft in Arizona for
more than 90 days but less than 210 days in a
given calendar year, provided that the aircraft is
not engaged in any intrastate commercial activity,
is equal to 0.1% of the average fair market
value of the particular make, model, and
year of aircraft (A.R.S. §28-8336). This tax
rate is 20% of the tax rate imposed on
resident-owned aircraft. In fiscal year
2003/04, there were 64 nonresident
aircraft based in Arizona. The total aircraft
license tax paid by nonresidents falling into
this category in fiscal year 2003/04 was
$27,045. The value of this expenditure can
be calculated by multiplying this figure by
four, which yields the foregone tax
collections allowed by this preferential rate,
or $108,180.

Aircraft owned and operated exclusively in the
public service by the federal government, by the
state or by any political subdivision thereof, or by
the civil air patrol is exempt from the vehicle
license tax (A.R.S. §28-8323). The average
fair market value of aircraft owned by the
federal government and operated in
Arizona is unknown. It is known that
there were 103 aircraft owned by the
Arizona Department of Transportation,
the Arizona Department of Public Safety,
various Arizona counties and cities, and
the civil air patrol in fiscal year 2003/04.
The average fair market value of each
aircraft is approximately $131,100, which

Aircraft in storage or being repaired is charged a
license tax of $20 (A.R.S. §28-8337). There
are 292 aircraft, which have been granted

1Any

figures presented for Aircraft License Tax Expenditures were provided by the Arizona Department of
Transportation.

5

this license tax rate with a fair market value
of approximately $517.9 million. The tax
value of this preferential license tax is $2.4
million which is the total fair market value
multiplied by 0.5% less $20 per aircraft.

There are 1,485 aircraft registered in
Arizona under this provision, with a total
market value of $5.9 million. The tax value
of this tax expenditure is the total market
value multiplied by 0.5% less the $20
license tax paid per aircraft, or $0.

The annual license tax for a salvage aircraft
that is in storage or that is being restored is $5
(A.R.S. §28-8338). There are 87 aircraft
registered under this provision. Assuming
no market value for salvage aircraft, the tax
value of this tax expenditure is the
difference between the $20 minimum
license tax imposed on all other aircraft
and the $5 minimum license tax imposed
on these tax, or $1,305.

Maintenance aircraft owned by a nonresident
(A.R.S. §28-8341) and manufacturer's aircraft
(A.R.S. §28-8340) are required to pay an
aircraft license tax of $20. There are 20
nonresident-owned maintenance aircraft
and 68 manufacturer's aircraft registered in
Arizona, for a total market value of $433.6
million.
The tax value of this tax
expenditure can be calculated by
multiplying the total market value by 0.5%
and subtracting the $20 per aircraft tax
paid, or $2.2 million.

A.R.S. §28-8339 allows a $20 license tax
for an antique, classic, warbird, glider,
experimental, homebuilt, or balloon aircraft.

6

S U M M A RY O F A I R C R A F T L I C E N S E T A X
EXPENDITURES
Revenue Gain
AIRCRAFT LICENSE TAX EXEMPTIONS:
Aircraft operated for the primary purpose of carrying persons or
property for hire ..................................................................................................................NIA*
Nonresident-owned aircraft in the state for less than 90 days..........................................NIA
Aircraft owned by a government or by the civil air patrol .......................................... $67,500
Aircraft owned by an aircraft dealer for sale ................................................................. 833,200
PREFERENTIAL TAX RATES
Preferential rate for nonresidents with aircraft in the state from 90
to 210 days...................................................................................................................... $108,200
Preferential rate for aircraft in storage or being repaired ......................................... 2,400,000
Preferential rate for salvage aircraft in storage or being repaired....................................1,300
Preferential rate for antique, classic, warbird, etc., aircraft......................................................0
Preferential rate for maintenance aircraft ..................................................................................0
Preferential rate for manufacturer's aircraft................................................................ 2,167,000

TOTAL QUANTIFIABLE AIRCRAFT LICENSE TAX
EXPENDITURES2
................................................................................................ $5,577,200

Return to Table of Contents

*No

Information Available.
tax expenditures represent foregone revenues to the state aviation fund.

2These

7

8

AVIATION FUEL
TAX EXPENDITURES

9

10

AV I A T I O N F U E L T A X
EXPENDITURES
3

An aviation fuel tax is imposed on every
distributor for each gallon of aviation fuel
possessed,
refined,
manufactured,
produced, blended or compounded in this
state by the distributor or imported by the
distributor, whether in the original package
or container in which it was imported or
otherwise. All suppliers are required to pay
tax on all aviation fuel. In order to qualify
for exemptions on certain types of aviation
fuel, the taxpayer must file for a refund.
The fuel tax rate is 5¢ per gallon.

aviation fuel purchased by the United
States armed forces is not reported and the
tax value is unknown.
Although not listed as an exemption, a
taxpayer may request a refund for aviation
fuel for use in applying seeds, fertilizer or pesticides
(A.R.S. §28-5611A). If such fuel were
subject to taxation in fiscal year 2003/04,
an additional $1,247 would have been
received.
Aviation fuel, which is exported from the state, is
exempt from aviation fuel tax (A.R.S. §285611A). The taxpayer must apply for a
refund. If such fuel were subject to
taxation in fiscal year 2003/04, an
additional $23,149 in aviation fuel tax
would have been received.

Exemptions from the aviation fuel tax are
set out in A.R.S. §28-5610. Aviation fuel
moving in interstate or foreign commerce, not
destined or diverted to a point within this state is
exempt from aviation fuel tax. There is no
requirement for reporting this information,
therefore, the tax value of this expenditure
is unknown.

Also not listed as an exemption, a taxpayer
may request a refund for losses of fuel due to
fire, theft or other accident (A.R.S. §28-5611A).
No requests for refunds were made in
fiscal year 2003/04.

Also exempt from aviation fuel tax is
aviation fuel sold to the United States armed forces
for use in ships or aircraft, or for use without this
state (A.R.S. §28-5610). The amount of

3Any

figures presented for Aviation Fuel Tax Expenditures were provided by the Arizona Department of
Transportation.

11

S U M M A R Y O F AV I A T I O N F U E L T A X
EXPENDITURES
Revenue Gain
Aviation fuel moving in interstate or foreign commerce .......................................
NIA*
Aviation fuel sold to the United States armed forces ........................................................NIA
Aviation fuel for use in applying seeds, fertilizer or pesticides..................................... $1,200
Exported aviation fuel ........................................................................................................ 23,100
Aviation fuel lost due to fire, theft or other accident...............................................................0

TOTAL QUANTIFIABLE AVIATION FUEL TAX EXPENDITURES4
.....................................................................................................$24,300
Return to Table of Contents

*

No Information Available.
tax expenditures represent foregone revenues to the state aviation fund.

4The

12

BINGO
TAX EXPENDITURES

13

14

B I N G O TA X E X P E N D I T U R E S
Class B and Class C licensees are taxed on
their gross receipts. Class B licensees,
whose gross receipts do not exceed
$300,000, are taxed at 1.5% of their gross
receipts. Class C licensees, whose gross
receipts exceed $300,000 annually, are
taxed at 2.0% of their gross receipts. This
is a preferential rate structure because
different tax rates are imposed on similar
taxpayers (all involved in the business of
bingo) based on criteria set in Arizona
statutes. This preferential rate structure
allows taxpayers with lower gross receipts
to be taxed at a lower tax rate.

The tax on state licensed bingo operations
is based on a multi-tiered licensing
structure. There are three classes of bingo
licenses, each of which has a different tax
rate. Each class' tax rate is based on bingo
receipts. All bingo tax collections are
deposited into the general fund.
Class A licensees, whose gross receipts do
not exceed $15,600 per year, are taxed at
2.5% of their adjusted gross receipts (A.R.S.
§5-414). Adjusted gross receipts equals
gross receipts less the amount paid for
prizes. Therefore, prize money is exempt
from taxation for this class of bingo
licensees. In fiscal year 2003/04, this
group of taxpayers subtracted $2.5 million
from gross receipts. Determination of the
tax value of this subtraction, however, is
not a simple matter. If prize money were
not allowed as a subtraction from gross
receipts, it is unlikely that this group would
have a 2.5% tax rate. However, if a 2.5%
tax rate is not used, a more appropriate tax
rate must be selected.

Measuring the tax value of allowing a
preferred tax rate for bingo is difficult
because the lowest-income taxpayers
(recipients of less than $15,600 annually)
have a tax rate higher than the highestincome taxpayers. Normally, this type of
calculation would simply involve applying
the highest tax rate to all taxpayers to find
the revenues that might have been
received. Therefore, the tax value of
allowing preferential tax rates is also
calculated in two ways.
Option 1
determines the additional tax that would be
received if all classes of licensee were taxed
at the highest rate. However, the tax rate
of 0.31% mentioned previously, is
considered to be the effective tax rate for
Class A. This would make the highest tax
rate among the three classes 2.0%. If Class
A and Class B were taxed at 2.0%,
additional general fund revenues would
total $78,700. (The calculation for Class A
involves substituting 2.0% as the effective
tax rate.) The problem with this method
of determining the tax value of preferential
tax rates is that it assumes (1) there is a
possibility of a legislative change which
would raise the bingo tax to a uniform rate
that is the highest tax rate currently being
imposed and (2) small bingo operations

The tax value of the prize money
subtraction for Class A taxpayers is
calculated in two ways. Option 1 is to
multiply the subtraction amount by 2.5%,
the Class A tax rate. This results in
potential collections of $62,179. Option 2
is to multiply the subtraction amount by
the average effective tax rate of the Class A
licensees, calculated by dividing Class A tax
collections by Class A total gross receipts.
This rate for the Class A licensees is
0.31%. (This method is based on the
premise that the Class A tax rate would not
be 2.5% if the subtraction were not
allowed.) Multiplying the prize money
subtraction amount by 0.31% results in
potential collections of $7,710.

15

would not be affected by an increase in the
tax rate (the same level of bingo activities
would occur irrespective of the tax rate).
Option 2 looks at preferential rates slightly
differently. This option assumes that if a
uniform tax rate were to be imposed to tax
all licensees identically, the new rate would
be revenue neutral, resulting instead in a
burden shift. The effective tax rate on all
bingo activities, determined by dividing
total tax collections into gross receipts, is
1.65%. If this rate is applied to all classes
of bingo licensees, total tax collections
remain the same, but, as can be seen

below, the amount of tax paid by class of
licensee shifts.
Class
A
B
C
Total

Original Tax
Collections*
$8,866
$243,700
$344,863
$597,429

New Tax
Collections
$46,469
$265,920
$285,436
$597,825

Difference
$37,603
$22,220
($59,427)
$396

*This amount reflects collections for tax
only, and does not include penalty and
interest.

16

S U M M A RY O F B I N G O T A X E X P E N D I T U R E S
Revenue Gain
Subtraction from Gross Receipts for Class A Licensees
Option 1.............................................................................................................................. $62,000
Option 2...................................................................................................................................7,700
Preferential Tax Rates for Class A and Class B Licensees
Option 1.............................................................................................................................. $78,700
Option 2..........................................................................................................................................0

TOTAL QUANTIFIABLE BINGO TAX EXPENDITURES5
RANGES FROM ..........................................................$7,700 -$140,700
Return to Table of Contents

5These

tax expenditures represent foregone revenues to the state general fund.

17

18

BOXING
TAX EXPENDITURES

19

20

B OX I N G T A X E X P E N D I T U R E S
Any person who promotes a boxing
contest in Arizona must pay to the
Department of Racing (collecting for the
state Boxing Commission) a 4% tax on the
gross receipts of such match or exhibition,
after deduction of city, state and federal
taxes (A.R.S. §5-104.02A). Gross receipts
are defined as receipts from the face value
of tickets sold.
Tickets issued as
complimentary by the promoter of a
boxing match are exempt from taxation, as

6Any

6

long as the number of complimentary
tickets does not exceed 2% of total
number of tickets issued or 75 tickets,
whichever is greater. During fiscal year
2003/04, 28 boxing contests were held. At
each event, 75 complimentary tickets were
issued with an average price of $25 each.
Had the value of these tickets been taxable,
an additional $2,100 in boxing taxes would
have been received.

figures presented for Boxing Tax Expenditures were provided by the Arizona Boxing Commission.

21

S U M M A RY O F B OX I N G T A X E X P E N D I T U R E S
Revenue Gain
Complimentary tickets issued ...........................................................................................$2,100

TOTAL QUANTIFIABLE BOXING TAX EXPENDITURES7
................................................................................................. $2,100
Return to Table of Contents

7These

tax expenditures represent foregone revenues to the state general fund.

22

CORPORATE INCOME
TAX EXPENDITURES

23

24

C O R P O R AT E I N C O M E TA X
EXPENDITURES
The Department of Revenue collected
over $471 million in net corporate income
taxes during fiscal year 2003/04. Net
corporate income tax is deposited into the
general fund. However, 15.8% of the tax
is distributed to cities and towns two years
after the year in which it was collected.
For example, 15.8% of tax collected in
fiscal year 2003/04 will be distributed to
incorporated cities and towns in fiscal year
2005/06. Therefore, only 84.2% of the tax
collected is actually available for the state’s
use. This fact should be kept in mind
when reviewing the reported tax value of
subtractions and credits. The assumption
can be made that 84.2% of the tax value is
general fund revenue, with the remaining
15.8% being distributed to cities and towns
two years after collection.

are deducted from federal taxable income
prior to apportionment of income to
Arizona.
Therefore, it cannot be
determined what percent of the
subtractions is used in the calculation of
Arizona tax. The remaining subtractions
and tax credits are only quantifiable to the
extent that data exists.
SUBTRACTIONS ALLOWED IN
THE CALCULATION OF
FEDERAL TAXABLE INCOME
The starting point for the calculation of
Arizona corporate tax liability is federal
taxable income, as calculated on the federal
corporate income tax return. The Arizona
legislature must approve legislation to
conform to the definition of federal
taxable income as of January of each year.
In conforming to the definition of federal
taxable income, Arizona accepts the
subtractions from gross income allowed by
the federal government.
These
subtractions include:

Arizona corporate taxable income is
calculated beginning with federal taxable
income.
Therefore, by conforming
Arizona law to the Internal Revenue Code,
any subtractions allowed under federal law
in the calculation of federal taxable income
are allowed under Arizona law. From
federal taxable income, certain additions
and subtractions are allowed to reach
Arizona taxable income. After calculating
tax liability, corporate taxpayers may take
advantage of a number of credits to reduce
tax liability.

•
•
•

Compensation of officers.
Salaries and wages.
Incidental repairs that do not add to the
value of the property or appreciably prolong its
life.
• Debts that became worthless in whole or in
part during the tax year.
• Expenses of renting or leasing a vehicle.
• Contributions or gifts actually paid within
the tax year to charitable and governmental
organizations and any unused contributions
carried over from prior years, except the total
amount claimed may not be more than 10% of
taxable income.
• Depreciation, plus the part of the cost that
the corporation elected to expense for certain

Most of the corporate tax expenditures are
not quantifiable. The tax value of the
federal subtractions in the calculation of
federal taxable income cannot be
determined because these are for corporate
income from all states, not just Arizona
income.
The tax value of Arizona's
subtractions from federal taxable income
cannot be calculated because subtractions
25

tangible property placed in service during the
tax year.
• Certain
percentage depletion rates
applicable to natural deposits.
• Contributions to pensions, profit sharing or
other funded deferred compensation plans.
• Contributions to employee benefit programs
not elsewhere claimed.
• Certain taxes paid or accrued during the
tax year.
• Interest paid on certain debts.
• Other deductions including amortization of
organizational
expenses,
losses
from
partnership trade or business activities, travel
and meal expenses, membership dues, etc.

which are not operated for profit [A.R.S. §431201(3)].
• Qualifying corporations organized and
operated exclusively for religious, charitable,
scientific, literary or educational purposes or for
the prevention of cruelty to children or animals
[A.R.S. §43-1201(4)].
• Nonprofit business leagues, chambers of
commerce, real estate boards or boards of trade
[A.R.S. §43-1201(5)].
• Nonprofit qualifying civic leagues or
organizations operated exclusively for the
promotion of social welfare, or local
organizations of employees [A.R.S. §431201(6)].
• Clubs organized and operated exclusively
for pleasure, recreation and other non-profit
making purposes [A.R.S. §43-1201(7)].
• Corporations organized for the exclusive
purpose of holding title to property, collecting
income therefrom and turning over the entire
amount of such income, less expenses, to an
organization which itself is exempt from the
tax imposed by this title [A.R.S. §431201(8)].
• Voluntary
employee's
beneficiary
organizations providing for the payment of life,
sick, accident or other benefits to the members
of such organizations or their dependents,
providing certain requirements are met [A.R.S.
§43-1201(9)].
• Teachers' or public employees' retirement
fund organizations of a purely local character,
provided certain requirements are met [A.R.S.
§43-1201(10)].
• Religious or apostolic organizations or
corporations, if such organizations or
corporations have a common treasury or
community treasury, even if such corporations or
organizations engage in business for the
common benefit of the members, but only if the
members thereof include, at the time of filing
their returns, in their Arizona gross income
their pro rata shares, whether distributed or
not, of the net income of the organizations or
corporations for such year [A.R.S. §431201(11)].
• Voluntary
employees'
beneficiary
organizations providing for the payment of life,
sick, accident or other benefits to the members
of such organization, their dependents or their

It is not possible to estimate the tax value
of these subtractions.
While the
Department
of
Revenue
receives
information from the Internal Revenue
Service from federal tax returns for
corporations with an Arizona address, data
on corporations headquartered outside of
Arizona but operating within the state is
not available. Even if it were available,
multi-state corporations would include
income and deductions from all states in
which they operate in the calculation of
federal taxable income, making it useless
for Arizona tax expenditure calculation
purposes.
EXEMPT ORGANIZATIONS
Certain organizations are exempt from
corporate income tax according to Arizona
law. The organizations specifically set out
in statute as exempt are:
•

The United States, the state, counties,
municipalities, school districts or other political
subdivisions or units of this state or the federal
government [A.R.S. §43-104(23)].
• Labor, agricultural or horticultural
organizations, other than cooperative
organizations [A.R.S. §43-1201(1)].
• Qualifying fraternal beneficiary societies,
orders or organizations [A.R.S. §431201(2)].
• Cemetery companies owned and operated
exclusively for the benefit of their members or
26

designated beneficiaries, provided membership is
limited to officers or employees of the U.S.
government [A.R.S. §43-1201(12)].
• Corporations classified as diversified
management companies under §5 of the Federal
Investment Company Act of 1940 and
registered as provided in that act [A.R.S. §431201(13)].
• Insurance companies paying to the state
tax upon premium income derived from sources
within this state [A.R.S. §43-1201(14)].
• Mutual ditch, irrigation or water
companies or similar nonprofit organizations if
85% or more of the income consists of amounts
collected from members for the sole purpose of
meeting losses and expenses [A.R.S. §431201(15)].
• Workers’ compensation pools established
pursuant to §23-961.01 [A.R.S. §431201(16)].
• A small business corporation which makes
an election for a taxable year pursuant to
subtitle A, chapter 1, subchapter S of the
Internal Revenue Code is not subject to
corporate taxes for such year but only to the
extent such corporation is not subject to federal
income taxes [A.R.S. §43-1126).

ARIZONA SUBTRACTIONS FROM
FEDERAL TAXABLE INCOME
Arizona statutes set out certain items that
can be subtracted from federal taxable
income to reach adjusted income
attributable to Arizona. The tax value of
these subtractions cannot be determined
because these are subtracted from federal
taxable income prior to apportionment of
income to Arizona. It is impossible to
isolate those subtractions attributable to
Arizona only.
•

Annuity income included pursuant to §72
of the Internal Revenue Code if the first
payment with respect to such annuity was
received prior to 12/31/78 [A.R.S. §431022(8)].
• The excess of a partner's share of income
required to be included under §702(a)(8) of the
Internal Revenue Code over the income required
to be included under chapter 14, article 2 of
Title 43 [A.R.S. §43-1022(9)].
• The excess of a partner's share of
partnership losses determined pursuant to
chapter 14, article 2 of Title 43 over the losses
allowable under §702(a)(8) of the Internal
Revenue Code [§43-1022(10)].
• The amount by which the adjusted basis of
all property which is held for the production of
income and which is sold or otherwise disposed
of during the taxable year other than
depreciable property used in a trade or business,
computed pursuant to Title 43 and the income
tax act of 1954, as amended, exceeds the
adjusted basis of such property computed
pursuant to the Internal Revenue Code
[A.R.S. §43-1022(11)].
• The amount allowed by A.R.S. §431024 for amortization by a qualified defense
contractor certified by the Department of
Commerce under §41-1508, of a capital
investment for private commercial activities
[A.R.S. §43-1022(12)].
• Gain included on the sale or other
disposition of a capital investment that a
qualified defense contractor has elected to
amortize pursuant to A.R.S. §43-1024
[A.R.S. §43-1022(13)].

Three of these organizations - religious or
apostolic
organizations,
insurance
companies and Subchapter S corporations
- are exempt from corporate tax but their
income does not escape taxation. In the
case of the religious or apostolic
corporations and the Subchapter S
corporations, the income is taxed at the
individual income tax level. Insurance
companies are required to pay insurance
premium tax rather than corporate income
tax.
It is not possible to calculate the corporate
tax that would be collected if all exempt
organizations were subject to corporate
taxation. That calculation would require
completion of federal and state tax forms
by the exempt organizations.

27

•

The amount allowed by §43-1025 for
contributions during the taxable year of
agricultural crops to charitable organizations
[A.R.S. §43-1022(14)].
• The portion of any wages or salaries paid
or incurred by the taxpayer for the taxable year
that is equal to the amount of the federal work
opportunity credit, the empowerment zone
employment credit, the credit for employer paid
social security taxes on employee cash tips, and
the Indian employment credit that the taxpayer
received under §§45A, 45B, 51(a) and 1396
of the IRC [A.R.S. §43-1022(15)].
• Dividend income received from Arizona
corporations [A.R.S. §43-1122(2)].
• Arizona capital loss carryover in an
amount not to exceed $1,000 for tax years
beginning prior to 1/1/88 [A.R.S. §431122(3)].
• Expenses and interest relating to taxexempt income disallowed pursuant to §265 of
the Internal Revenue Code [A.R.S. §431122(4)].
• Dividends
received from another
corporation owned or controlled directly or
indirectly by a recipient corporation [A.R.S.
§43-1122(5)].
• Interest income received on obligations of
the U.S. [A.R.S. §43-1122(6)].
• Dividend income from foreign corporations
[A.R.S. §43-1122(7)].
• The amount of net operating loss allowed
by A.R.S. §43-1123 [A.R.S. §43-1122(8)].
• State income tax refunds received which
were included as income in computing federal
taxable income [A.R.S. §43-1122(9)].
• Expense recapture included in income
pursuant to §617 of the Internal Revenue Code
for mine exploration expenses [A.R.S. §431122(10)].
• Deferred exploration expenses allowed by
A.R.S. §43-1127 [A.R.S. §43-1122(11)].
• Exploration expenses related to the
exploration of oil, gas or geothermal resources
[A.R.S. §43-1122(12)].
• Amortization of pollution control devices
[A.R.S. §43-1122(13)].
• Amortization of the cost of child care
facilities [A.R.S. §43-1122(14)].
• Income from a domestic international sales
corporation required to be included in the

income of its shareholders pursuant to §995 of
the Internal Revenue Code [A.R.S. §431122(15)].
• The income of an insurance company that
is exempt under A.R.S. §43-1201 to the
extent that it is included in computing Arizona
gross income on a consolidated return [A.R.S.
§43-1122(16)].
• The amount of contributions by the
taxpayer during the taxable year to individual
medical savings accounts pursuant to A.R.S.
§43-1028 [A.R.S. §43-1122(17)].
• The amount by which capital loss carryover
allowable per A.R.S. §43-1130.01 F exceeds
the capital loss carryover allowable per section
13410(b)(5) of the internal revenue code
[A.R.S. §43-1122(18)].
ARIZONA NET OPERATING
LOSSES
All corporate taxpayers are allowed to
subtract from their Arizona adjusted gross
income the amount of unused net operating
losses attributable to Arizona for the last five
years (A.R.S. §43-1122.08). Corporations
claimed Arizona-based net operating losses
totaling $12.6 billion in tax year 2002. In
many cases a corporation’s reported net
operating loss exceeded its Arizona
adjusted gross income. Subtracting the net
operating loss in these cases resulted in
negative taxable income. To calculate the
tax value of the net operating losses, the
loss was multiplied by 6.968% for those
businesses with positive taxable income.
For those businesses with negative taxable
income, that portion of net operating loss
that was used to reduce taxable income to
zero was multiplied by 6.968%8. These
calculations result in a maximum tax value
of $68.2 million.

8For example, if the net operating loss was
$10,000 and the negative taxable income was
$9,000, adding back the loss results in $1,000 of
net operating loss being used to reduce taxable
income to zero. The tax rate was applied against
the $1,000 to arrive at the tax value of the
operating loss.

28

About 23.6% of the 50,681 corporations
that filed Arizona corporate income tax
returns for tax year 2002 reported net
operating losses. The table below shows
the number of corporations by size of net
2002 - Size of NOL
$1 to $99
$100 to $999
$1,000 to $9,999
$10,000 to $49,999
$50,000 to $99,999
$100,000 to $499,999
$500,000 to $999,999
$1,000,000 to $9,999,999
Over $9,999,999
Total
NOL $ Value

operating loss and by whether or not there
was enough taxable income to generate a
tax liability other than the minimum $50
tax.

# with Tax
Liability greater
than $50
63
303
933
770
174
179
40
34
3
2,499
$234,363,689

COMMERCIAL TAX CREDITS

•
•
•
•
•
•

Total

519
1,087
2,822
2,560
771
998
230
383
102
9,472
$12,326,193,972

582
1,390
3,755
3,330
945
1,177
270
417
105
11,971
$12,560,557,661

•

A tax credit reduces corporate tax liability,
as opposed to a subtraction, which reduces
taxable income. Most tax credits that
currently exist in Arizona corporate tax law
are nonrefundable; any credit amount
greater than a firm's tax liability will not be
refunded. The unused credit is then
carried forward for use in future tax years.
A corporation receives a credit for
expenditures in the following areas:
•

# with Tax Liability
less than or equal to $50

•

•
•
•

for increased employment in enterprise zones
(A.R.S. §43-1161).
for the purchase of recycling equipment
(A.R.S. §43-1164).
for employment by a qualified defense
contractor (A.R.S. §43-1165).
for property taxes paid by a qualified defense
contractor (A.R.S. §43-1166).
for increased employment in military reuse
zones (A.R.S. §43-1167).
for research and development expenses
(A.R.S. §43-1168).
for costs in constructing a qualified
environmental technology manufacturing,
producing or processing facility (A.R.S.
§43-1169).

•
•
•
•
•
•

29

for expenses to purchase property used to
control or prevent pollution (A.R.S. §431170).
for expenses incurred for tangible personal
property used to control or prevent
pollution, relating to agriculture (A.R.S.
§43-1170.01).
for construction materials incorporated into
a qualifying facility (A.R.S. §43-1171).
for an agricultural water conservation
system (A.R.S. §43-1172).
for corrective action costs for underground
storage tanks (A.R.S. §43-1173).
for employment of TANF recipients
(A.R.S. §43-1175).
for solar hot water heater plumbing stub
outs and electric vehicle recharge outlets
installed (A.R.S. §43-1176).
for the fair market value of a vehicle, up to
$1500, donated to the wheels to work
program (A.R.S. §43-1177).
for coal consumed in generating electric power
(A.R.S. §43-1178).
a refundable credit for providing
technological skills training to not more than
20 employees (A.R.S. §43-1179).
a refundable credit for conveying ownership
or development rights of agricultural property
to an agricultural preservation district
(A.R.S. §43-1180)

•
•
•

claimed without breaching confidentiality.
If less than three firms claim a credit or if
one firm claims more than 90% of the
total credit amount claimed or if providing
statistics on one credit would result in
confidential information being divulged
about other credits, then that information
cannot legally be released.

for donating real property or improvements
to a school district (A.R.S. §43-1181)
for donations made directly to the Clean
Elections Fund ( A.R.S. §16-954B)
for corporations that elected to file
consolidated returns in Arizona and
amended their 1986 through 1993 tax
returns, thus creating a credit that could be
taken over ten years.

Data for tax year 2002 is shown below,
but it is preliminary. For tax year 2001,
corporations claimed 357 commercial tax
credits and used a total of $20.0 million in
credits to offset taxes and received $0.2
million in refunds from refundable
alternative fuel vehicle credits. Twentyfive different credits were available.
Asterisks indicate instances in which
release of information would breach
confidentiality laws.

When reviewing the credit data, it is
important to mention two points. First,
corporate tax information for a given tax
year changes over time. Late returns are
filed, corporations are audited, amended
returns are filed, retroactive legislation is
enacted, etc. Therefore, figures stated
here will change next year and figures
cited in previous years will not match what
is presented here. Second, information
cannot be revealed about certain credits
TYPE OF
CREDIT
Enterprise zone
Recycling equipment
Defense contracting
Military reuse zone
Research & development
Environmental technology facility
Pollution control device
Agricultural pollution control equip’t
Construction materials
Agricultural water conservation system
Underground storage tanks
Alternative fuel vehicles (Nonref)
Alternative fuel vehicles (Refundable)
Neighborhood electric vehicles
Vehicle refueling apparatus &
infrastructure (Nonref)
Vehicle refueling apparatus &
infrastructure (Refundable)
Alternative fuel delivery systems
(Nonref)
Alternative fuel delivery systems
(Refundable)
Employment of TANF recipients
Solar hot water plumbing stub outs &
electric vehicle recharge outlets
Donation of motor vehicle to wheels
to work program

#
126
5
3
3
119
3
37
**
4
**
0
11
182
46
4

2000
$ USED
$8,248,530
15,626
2,792,993
97,440
8,932,693
26,658
3,860,390
**
204,184
**
0
323,521
15,654,152
1,240,103
2,180

#
125
4
**
3
121
**
28
**
3
**
0
**
12
20
**

2001
$ USED
$6,434,613
21,442
**
109,373
9,301,385
**
1,889,292
**
100
**
0
**
218,560
69,701
**

12

138,940

0

0

5

1,167,282

3

184,431

5

677,992

0

0

6
**

27,598
**

6
0

0

0

0

30

#
95
4
**
**
100
**
25
**
3
**
**
7

2002
$ USED
$4,655,489
5,145
**
**
9,450,194
**
1,331,722
**
100
**
**
32,924

13
**

25,417
**

3

1,039

57,851
0

5
0

162,724
0

0

0

0

TYPE OF
CREDIT
School site donation
Agricultural preservation district
Taxes paid for coal consumed in
generating electrical power
Technology training
Clean election
Consolidated filer

2000
$ USED

#

Total

3

778,015

#
**
0
**

57
41
680

13,911
3,456,160
$47,699,171

10
123
35
516

31

2001
$ USED
**
0
**

#
**
0
**

2002
$ USED
**
0
**

40,595
1,157
3,492,320
$23,681,471

4
94
30
402

41,083
604
2,196,494
$22,498,235

S U M M A RY O F C O R P O R A T E I N C O M E T A X
EXPENDITURES
Revenue Gain
Subtractions Allowed in Calculation of Federal Taxable Income:
Compensation of Officers ................................................................................................. NIA*
Salaries and wages................................................................................................................. NIA
Incidental repairs adding no value to property ................................................................ NIA
Debts becoming worthless during the tax year................................................................ NIA
Expenses of renting or leasing a vehicle ........................................................................... NIA
Charitable or governmental organization contributions................................................. NIA
Depreciation.......................................................................................................................... NIA
Certain percentage depletion rates applicable to natural deposits................................. NIA
Pension, profit-sharing, etc. contributions ....................................................................... NIA
Contributions to employee benefit programs .................................................................. NIA
Certain taxes paid or accrued during the tax year............................................................ NIA
Interest paid on certain debts ............................................................................................. NIA
Other miscellaneous deductions ........................................................................................ NIA
Exempt Organizations:
Political subdivisions or units of the state or federal government...................................NIA
Labor, agricultural or horticultural organizations ...............................................................NIA
Qualifying fraternal beneficiary societies .............................................................................NIA
Cemetery companies not for profit ......................................................................................NIA
Qualifying religious, charitable, scientific, etc., corporations............................................NIA
Nonprofit business leagues ....................................................................................................NIA
Nonprofit qualifying civic leagues ........................................................................................NIA
Clubs organized for pleasure, recreation or other nonprofit purposes ...........................NIA
Corporations organized to hold title to property for exempt organization....................NIA
Voluntary employee's beneficiary organizations .................................................................NIA
Teachers' or public employees' retirement fund organization ..........................................NIA
Religious or apostolic organizations which pass through income....................................NIA
Voluntary employee's beneficiary organizations with a twist............................................NIA
Diversified management companies.....................................................................................NIA
Insurance companies subject to the insurance premium tax ............................................NIA
Mutual ditch, irrigation or water companies........................................................................NIA
Subchapter S corporations .....................................................................................................NIA
Arizona Subtractions from Federal Taxable Income:
Annuity income included pursuant to §72 of the IRC.......................................................NIA
Excess of a partner's share of income under §702(a)(8) of IRC.......................................NIA
Excess of a partner's share of partnership losses ..............................................................NIA
Excess of adjusted basis of property held for income production ..................................NIA
Amortization by a qualified defense contractor..................................................................NIA
*

No Information Available.

32

Gain on amortized capital investment by a qualified defense contractor .......................NIA
Dividend income received from Arizona corporations...................................................NIA*
Arizona capital loss carryover not to exceed $1,000 prior to 1/1/88 .............................NIA
Expenses/interest relating to tax-exempt income disallowed per IRC ...........................NIA
Dividends received from controlled corporation ...............................................................NIA
Interest income received on obligations of the U.S. ..........................................................NIA
Dividend income from foreign corporations ......................................................................NIA
State income tax refunds ........................................................................................................NIA
Expense recapture for mine exploration expenses.............................................................NIA
Deferred exploration expenses allowed by §43-1127.........................................................NIA
Exploration expenses related to oil, gas or geothermal exploration................................NIA
Amortization of pollution control devices ..........................................................................NIA
Amortization of the cost of child care facilities ..................................................................NIA
Income from domestic international sales corporation.....................................................NIA
Contributions to individual medical savings accounts .......................................................NIA
Excess capital loss carryover..................................................................................................NIA
Net Operating Losses ........................................................................................... $68,238,000
Commercial Tax Credits:
Enterprise zone employment...................................................................................... $4,655,000
Recycling equipment ..............................................................................................................5,000
Defense contracting ................................................................................................................NR9
Military reuse zone ....................................................................................................................NR
Research & Development ............................................................................................. 9,450,000
Environmental technology facility ..........................................................................................NR
Pollution control devices............................................................................................... 1,332,000
Agricultural pollution control equipment ..............................................................................NR
Construction materials..............................................................................................................100
Agriculture water conservation system...................................................................................NR
Underground storage tanks......................................................................................................NR
Alternative fuel vehicles...................................................................................................... 33,000
Neighborhood electric vehicles ......................................................................................... 25,000
Vehicle refueling apparatus and infrastructure......................................................................NR
Alternative fuel delivery systems ..........................................................................................1,000
Employment of TANF recipients................................................................................... 163,000
Solar hot water plumbing stub outs and electric vehicle recharge outlets ............................0
Donation of motor vehicles to wheels to work program........................................................0
Taxes paid for coal consumed in generating electrical power ............................................NR
Agricultural preservation district.................................................................................................0
Technology training ............................................................................................................ 41,000
School site donation..................................................................................................................NR
Clean election .............................................................................................................................600
Consolidated filer ........................................................................................................... 2,196,500
Total Commercial Tax Credits………………………………………….$22,498,235

*

No Information Available.
NR indicates that the information is not releasable due to Arizona confidentiality laws. Fewer than ten
license holders took advantage of this refund.
9

33

TOTAL QUANTIFIABLE CORPORATE INCOME TAX
EXPENDITURES10
.............................................................................................. $90,736,235

Return to Table of Contents

10These expenditures represent foregone revenues to the state general fund and to the urban revenue sharing fund, which
is distributed to incorporated cities and towns.

34

ESTATE
TAX EXPENDITURES

35

36

E S TAT E TA X E X P E N D I T U R E S
The Arizona estate tax is a tax on the
transfer of property or interest in property
that takes effect upon the owner's death.
The estate tax is an amount equal to the
federal credit for state death taxes. Estate
taxes are deposited into the general fund.
Estate tax collections totaled $38.8 million
in fiscal year 2003/04.

the amount of death tax paid to the other state or
the federal credit times the percentage of total real
or tangible personal property located in another
state.
The total deductions allowed from the
federal credit in fiscal year 2003/04 was
$3.8 million. This deduction is a dollarfor-dollar reduction in the estate tax
liability.

If the decedent owned realty or tangible
personal property located in another state,
the Arizona tax is reduced by the smaller of

37

S U M M A RY O F E S T A T E T A X E X P E N D I T U R E S
Revenue Gain
Deduction from federal credit for state death taxes................................................ $3,794,000

TOTAL QUANTIFIABLE ESTATE TAX EXPENDITURES11
................................................................................................ $3,794,000
Return to Table of Contents

11These

expenditures represent foregone revenues to the state general fund.

38

FIDUCIARY INCOME
TAX EXPENDITURES

39

40

F I D U C I A RY I N C O M E T A X
EXPENDITURES
SUBTRACTIONS ALLOWED IN
THE CALCULATION
OF FEDERAL TAXABLE INCOME

Arizona imposes fiduciary income tax on
trusts and estates. The taxability of the
income is determined by the residence of
the fiduciary, beneficiary or deceased
taxpayer. For estates, the tax applies to the
entire taxable income if the deceased
taxpayer was an Arizona resident. The
fiduciary or beneficiary residence is
immaterial. In contrast, for trusts, the tax
applies to the entire taxable income when
the fiduciary or beneficiary is an Arizona
resident.

The starting point for calculating Arizona
fiduciary income tax liability is federal
taxable income, as calculated on the federal
form 1041 (U.S. Fiduciary Income Tax
Return). The Arizona legislature must
approve legislation to conform to the
definition of federal taxable income by
January of each year. In conforming to the
definition of federal taxable income,
Arizona accepts the subtractions from
gross income allowed by the federal
government. These subtractions include:

Arizona taxable income is calculated
beginning with federal taxable income. By
conforming Arizona law to the Internal
Revenue Code, subtractions allowed under
federal law in calculating federal taxable
income are allowed under Arizona law.
From federal taxable income, certain
additions, subtractions and exemptions are
allowed to reach Arizona taxable income.
After calculating tax liability, fiduciary
taxpayers may reduce their tax liability by
using a credit for taxes paid to other states
or countries or a credit for clean elections.

•

Deduction for interest paid by the estate or
trust on amounts borrowed by the estate or trust
or on debt acquired by the estate or trust. This
includes any investment interest (subject to
limitations), qualified residence interest and any
interest payable on any unpaid portion of the
estate tax attributable to the value of a
reversionary or remainder interest in property.
• Deductible taxes, including state income or
real property tax and generation-skipping
transfer tax imposed on income distributions.
• Deductible fees paid to the fiduciary for
administering the estate or trust during the tax
year.
• Other deductions, such as amortizable
bond premiums, casualty and theft losses, net
operating loss deduction and fiduciary's share of
amortization, depreciation and depletion not
claimed elsewhere.
• Miscellaneous itemized deductions in
excess of 2% AGI.
• Income Distribution Deduction.
• Estate tax paid.
• $600 exemption for estates.
$300
exemption for trusts in which all income must
be distributed currently. $100 exemption for

Fiduciary income tax is deposited into the
general fund. However, 15.8% of the tax
is distributed to cities and towns two years
after the year in which it was collected.
For example, 15.8% of tax collected in
fiscal year 2003/04 will be distributed to
incorporated cities and towns in fiscal year
2005/06. Therefore, only 84.2% of the tax
collected, or of the tax value of any
expenditures, is actually available for the
state’s use. This fact should be kept in
mind when reviewing the reported tax
value of the various subtractions,
exemptions and credits.

41

all other trusts unless the trust is filing for the
final year (in which case no exemption is
allowed).

Other Subtractions
The remaining subtractions on the Arizona
fiduciary tax form are entered in aggregate
on the line "Other Subtractions from
federal taxable income." The following is a
list of "Other Subtractions":

It is not possible to calculate the tax value
of these subtractions. Information from
the Internal Revenue Service would be
required to determine the value and this
information is not readily available.

Benefits, annuities and pensions.
Benefits, annuities and pensions totaling
not more than $2,500 received from any
of the following: U.S. government
service retirement and disability fund;
retired or retainer pay of the U.S.
uniformed services; the U.S. foreign
service retirement and disability system;
any other retirement system or plan
established by federal law; the state
retirement system or plan; the
corrections officer retirement plan; the
public safety personnel retirement
system; the elected officials' retirement
plan; an optional retirement program
established by the AZ board of regents;
an optional retirement program
established by a community college
district board; or a retirement plan
established for employees of a county,
city or town in Arizona. [A.R.S. §431022(2)]
• Distributions from individual retirement
accounts.
The amount of any
distributions from an individual
retirement account as provided for in
§408 of the IRC or from a qualified
retirement plan of a self-employed
individual as provided for in §401 of the
IRC to the extent that total adjustments
made pursuant to this paragraph in all
tax years do not exceed the total of all
contributions made by the taxpayer to
such plans prior to 12/31/75, which
were included in computing Arizona
taxable income. [A.R.S. §43-1022(4)]
• Installment income. The amount of
income on an installment receivable
which is recognized pursuant to the IRC
and which has already been recognized
on the death of the taxpayer for
•

ARIZONA SUBTRACTIONS FROM
FEDERAL TAXABLE INCOME
The Arizona fiduciary income tax return
lists the following specific items that can
be subtracted from federal taxable income
to reach adjusted gross income attributable
to Arizona:
Interest received on U.S. obligations.
Interest income received on obligations
of the United States (less any interest on
indebtedness, or other related expenses,
and deducted in arriving at Arizona
gross income) which were incurred or
continued to purchase or carry such
obligation can be subtracted [A.R.S.
§43-1022(6)].
• Federal income from other fiduciaries.
When the estate or trust is the
beneficiary of another estate or trust,
the beneficiary's share of the trust or
estate income recognized under the
Internal Revenue Code may be
subtracted [A.R.S. §43-1022(3)].
• Arizona estate tax deduction.
The
apportionate share of the Arizona estate
tax that related to the income of the
estate and which was included in federal
taxable income may be subtracted from
federal taxable income [A.R.S. §431332(5)].
• Arizona distribution to beneficiaries. The
income of the estate or trust which is to
be distributed or credited during the
year to any legatee, heir or beneficiary is
allowed as a subtraction from federal
taxable income [A.R.S. §§43-1341 & 431342].
•

42

exceeds the adjusted basis of such
property computed pursuant to the
IRC. [A.R.S. §43-1022(11)]
• Amortization of capital investment. The
amount allowed by §43-1024 for
amortization, by a qualified defense
contractor certified by the department
of commerce under §41-1508, of a
capital
investment
for
private
commercial activities.
[A.R.S. §431022(12)]
• Gain on capital investment.
The
amount of gain included on the sale or
other disposition of a capital investment
that a qualified defense contractor has
elected to amortize pursuant to §431024. [§43-1022(13)]
• Contribution of agricultural crops. The
amount allowed by A.R.S. §43-1025 for
contributions of agricultural crops to
charitable organizations [A.R.S. §431022(14)].
• Federal credits. The portion of any
wages or salaries paid or incurred by the
taxpayer equal to the amount of the
federal work opportunity credit, the
empowerment zone employment credit,
the credit for employer paid social
security taxes on employee cash tips and
the Indian employment credit that the
taxpayer received under §§45A, 45B,
51(a) and 1396 of the IRC. [A.R.S. §431022(15)]
• State lottery winnings. The amount of
winnings less than $5000 in a taxable
year from any of the state lotteries,
except that all such winnings before
3/22/83,
including
periodic
distributions from such winnings made
after 3/2/83, may be subtracted.
[A.R.S. §43-1022(16)]
• Mining exploration expenses.
The
amount of mining exploration expenses
determined pursuant to §617 of the IRC
which have been deferred in a taxable
year ending before 1/1/90 and for
which a subtraction has not been
previously made. [A.R.S. §43-1022(17)]

purposes of this title for tax years
ending before 1/1/90. [A.R.S. §431022(5)]
• Interest income on U.S. obligations.
Interest income received on U.S.
obligations, less any interest on
indebtedness, or other related expenses,
and deducted in arriving at Arizona
gross income, which were incurred or
continued to purchase or carry such
obligations. [A.R.S. §43-1022(6)]
• Medical savings accounts. In the case of
a trust that is established as a medical
savings account pursuant to A.R.S. §431028, income earned by the trust, to the
extent that the income is included in the
trust's Arizona gross income. [A.R.S.
§43-1332(6)]
• Refunds from other states. The amount
of any income tax refunds received
from states other than Arizona and
included as income.
[A.R.S. §431022(7)]
• Annuity income.
Annuity income
included pursuant to §72 of the IRC if
the first payment with respect to such
annuity was received prior to 12/31/78.
[A.R.S. §43-1022(8)]
• Partner’s share of income. The excess
of a partner's share of income required
to be included under §702(a)(8) of the
IRC over the income required to be
included under chapter 14, article 2 of
title 43. [A.R.S. §43-1022(9)]
• Partner’s share of losses. The excess of
a partner's share of partnership losses
determined pursuant to chapter 14,
article 2 of title 43 over the losses
allowable under §702(a)(8) of the IRC.
[A.R.S. §43-1022(10)]
• Sale of income producing property. The
amount by which the adjusted basis of
all property which is held for the
production of income and which is sold
or otherwise disposed of during the
taxable year other than depreciable
property used in a trade or business,
computed pursuant to title 43 and the
income tax act of 1954, as amended,
43

Social security benefits. The amount
included pursuant to §86 of the IRC,
relating to taxation of social security and
railroad retirement benefits. [A.R.S.
§43-1022(18)]
• Compensation for armed forces active
service.
To the extent not already
excluded, compensation received for
active service as a member of the armed
forces of the U.S. for any month during
any part of which the member served in
a combat zone. [A.R.S. §43-1022(19)
• Adoption costs.
The amount of
unreimbursed medical and hospital
costs, adoption counseling, legal and
agency fees and other nonrecurring
costs of adoption not to exceed three
thousand dollars. [A.R.S. §43-1022(20)]
• Wood stoves and fireplaces.
The
amount authorized by A.R.S. §43-1027
for the purchases of qualified wood
stoves, wood fireplaces or gas fired
fireplaces. [A.R.S. §43-1022(21)]
• Individual medical savings accounts.
With respect to individual medical
savings accounts established pursuant to
A.R.S. §43-1028, the account holder
may subtract the amount of
contributions made by the employer, to
the extent that these contributions are
included in the taxpayer's federal
adjusted gross income, and the amount
deposited by the taxpayer in the account
during the year. [A.R.S. §43-1022(22)]
• Operating loss carryover. The amount
by which an operating loss carryover or
capital loss carryover, allowable
pursuant to A.R.S. §43-1029 F, exceeds
the net operating loss carryover or
capital loss carryover allowable pursuant
to section 1341(b)(5) of the internal
revenue code. [A.R.S. §43-1022(23)]
• Qualified educational expenses.
Any
amount of qualified educational
expenses distributed from a qualified
state tuition program determined
pursuant to §529 of the Internal
Revenue Code and that is included in
income. [A.R.S. §43-1022(24)]

Installment sale subject to tax in another
state. Any item of income resulting
from an installment sale that has been
properly subject to tax in another state
in a previous year and is included in
Arizona gross income in the current
taxable year. [A.R.S. §43-1022(25, 26)].
• Holocaust survivors.
The amount
authorized by A.R.S. §43-1030 relating
to holocaust survivors. [A.R.S. §431022(27)]
• Energy efficient residence. The amount
authorized by A.R.S. §43-1031 for
constructing an energy efficient
residence. [A.R.S. §43-1022(28)]

•

•

In tax year 2002, fiduciary tax returns
reported total subtractions of $884.1
million, with estates reporting $68.6 million
in subtractions, and trusts reporting $815.6
million. The tax value of the subtractions
is calculated by applying the average
effective tax rate on gross income (federal
taxable income plus additions to federal
taxable income) to the total subtractions
claimed. The effective tax rate on gross
income in tax year 2002 equals 1.38%.
The tax value of the total subtractions,
using the effective tax rate of 1.38%,
calculates to $12.2 million. The calculated
tax value is the amount of additional
income tax that would have been collected
if estates and trusts took no subtractions.
EXEMPTIONS FROM ARIZONA
ADJUSTED GROSS INCOME
A.R.S. §43-1332(2) allows estates to claim a
$1000 exemption and trusts to claim a
$100 exemption from Arizona adjusted
gross income.
The total amount of
exemptions claimed by estates and trusts in
2002 was $7.1 million. The tax value of
these exemptions can be calculated using
an average effective tax rate of 4.38% (total
tax liability divided by total taxable income)
of Arizona taxable income. Using an
effective tax rate of 4.38%, these
exemptions had a tax value of $309,000.
44

PREFERENTIAL TAX RATES
Fiduciary income tax is calculated according to a graduated tax rate schedule as shown below:
at least
$0
10,000
25,000
50,000
150,000

but less than
$10,000
25,000
50,000
150,000
and over

2.87% of taxable income
3.20% of taxable income, minus $33
3.74% of taxable income, minus $168
4.72% of taxable income, minus $658
5.04% of taxable income, minus $1,138

As can be seen from the table, lower
taxable incomes are taxed at a lower rate.
If all taxpayers were treated identically, the
same tax rate would be applied regardless
of the amount of taxable income. A
question arises, however, as to what tax
rate should be applied to determine the
revenue impact of treating all taxpayers
identically. One argument may be that since the
highest tax rate is 5.04%, determining the impact
of taxing all income at 5.04% would seem
appropriate. However, no taxpayer currently
pays 5.04% tax on all taxable income. If a
flat tax rate of 5.04% was applied
regardless of income level, all taxpayers
would experience a tax increase.

the tax will shift. Taxpayers with lower
Federal Adjusted Gross Income would pay
more tax and taxpayers with higher Federal
Adjusted Gross Income would pay less tax.
CREDITS
After fiduciary income tax liability is
calculated, two credits can be subtracted
from the tax liability. If the estate or trust
is considered to be a resident of Arizona
and also a resident of another state or
country, the estate or trust will be allowed
a tax credit against the Arizona income tax
liability for taxes paid to the other state or
country. In 2002, $2.3 million was claimed
as credit for taxes paid to other states or
countries. Additionally, if the trust or
estate makes a contribution to the Clean
Elections Fund, a credit may be claimed
for those contributions. The total clean
elections credit claimed in 2002 by estates
and trusts was $60. Both credits are a
direct reduction to tax liability.

A more reasonable approach to a flat tax
rate would be to apply the effective tax rate
on taxable income for all fiduciary
taxpayers. Applying this effective tax rate
to all fiduciary taxpayers will result in the
same tax collections as with the graduated
tax rate structure; however, the burden of

45

S U M M A RY O F F I D U C I A RY I N C O M E T A X
EXPENDITURES
Revenue Gain
SUBTRACTIONS IN CALCULATION OF FEDERAL TAXABLE INCOME:
Deduction for interest paid..................................................................................................NIA*
Deductible taxes ......................................................................................................................NIA
Deductible fiduciary fees ........................................................................................................NIA
Other miscellaneous deductions ...........................................................................................NIA
Miscellaneous itemized deductions in excess of 2% AGI.................................................NIA
Income distribution deduction ..............................................................................................NIA
Estate tax paid..........................................................................................................................NIA
$600/$300/$100 estate/trust exemption.............................................................................NIA
SUBTRACTIONS FROM FEDERAL TAXABLE INCOME:
Interest received on U.S. obligation
Federal income from other fiduciaries
Arizona estate tax deduction
Arizona distribution to beneficiaries
Agricultural crops donated to charitable organizations
Alternative fuel vehicles and refueling equipment
Other subtractions:
U.S./state pensions not over $2,500
Certain IRA distributions or 401Ks
Installment income recognized pursuant to IRC
Income tax refunds from other states
Annuity income included pursuant to §72 of the IRC
Excess of a partner's share of income
Excess of a partner's share of losses
Excess of adjusted basis of property held for income production
Amortization by a qualified defense contractor
Gain on sale of capital investment by qualified defense contractor
Lottery winnings, up to $5,000
Mining exploration expenses
Social security and railroad retirement benefits
Active military pay
Medical savings accounts
Qualified wood stoves and fireplaces
Excess operating cost carryover
Certain federal credits
Qualified educational expenses

*

No Information Available.

46

TOTAL TAX VALUE OF SUBTRACTIONS FROM FEDERAL
TAXABLE INCOME........................................................................................... $12,201,000
TAX VALUE OF $1,000/$100 EXEMPTIONS FOR
ESTATES/TRUSTS ...................................................................................................$309,000
CREDIT FOR TAXES PAID TO OTHER STATES/COUNTRIES......$2,333,000
CREDIT FOR CONTRIBUTIONS TO THE CLEAN ELECTION
FUND .................................................................................................................. $60

TOTAL QUANTIFIABLE FIDUCIARY INCOME TAX
EXPENDITURES12
............................................................................................. $14,843,060
Return to Table of Contents

12These

expenditures represent foregone revenues to the state general fund and to the urban revenue sharing
fund, which is distributed to incorporated cities and towns.

47

48

FLIGHT PROPERTY
TAX EXPENDITURES

49

50

F L I G H T P RO P E RT Y TA X
EXPENDITURES
The airline companies in Arizona pay a tax
on the flight property within the state. The
taxable value, or net assessed value, of the
flight property is determined by
multiplying the full cash value of the
property by an assessment ratio. The tax
rate that is applied to the net assessed value
is equal to the statewide average tax rate,
which was $12.18 in tax year 2003.

PREFERENTIAL ASSESSMENT
RATIO
Arizona statutes set out the assessment
ratios to be used in determining the net
assessed values of the various classes of
property. These assessment ratios range
from 25% to 5%. For flight property, the
assessment ratio is equal to the ratio which the
total net assessed valuation of all taxable property
in class 1, class 6 paragraph 3 and personal
property in class 2 bears to the total full cash value
of such property (A.R.S. §42-14255). For tax
year 2003, the assessment ratio used for
flight property was 20%.
This is
considered to be a preferential assessment
ratio because it is an average of the
assessment ratios in several other classes of
property.
If flight property had an
assessment ratio equal to the highest
assessment ratio imposed, 25%, tax
collections would have increased by $5.0
million.

EXEMPTIONS
If an airline is operating in Arizona with a
maximum passenger capacity of less than 56 seats
and a maximum pay load capacity of less than
18,000 pounds (A.R.S. §42-14251.10), this
small flight property shall be valued at 30% of its
original cost less depreciation multiplied by the
assessment ratio (A.R.S. §42-14254C).
Had the taxable value been 100%, the state
would have raised $1.5 million more in
fiscal year 2003/04.

51

S U M M A RY O F F L I G H T P R O P E R T Y T A X
EXPENDITURES
Revenue Gain
EXEMPTION
Tax value at 30% for small airplanes .................................................................. $1,465,900
PREFERENTIAL ASSESSMENT RATIOS:
Preferential assessment ratio at 25% .................................................................. $4,992,100

................................................................................................. TOTAL
QUANTIFIABLE FLIGHT PROPERTY TAX EXPENDITURES13
................................................................................................. $6,457,000
Return to Table of Contents

13These

expenditures represent foregone revenues to the state aviation fund.

52

IN LIEU PROPERTY
TAX EXPENDITURES

53

54

I N L I E U P RO P E RT Y TA X
EXPENDITURES
Irrigation districts, power districts,
electrical
districts
or
agricultural
improvement districts directly engaged in
the sale of electric power or energy other
than for irrigation purposes may elect to
make voluntary contributions to Arizona
and the political subdivisions thereof for
property taxes. These districts are not
legally liable for property taxes imposed by
the state and the political subdivisions, so
these voluntary contributions are known as
in lieu property taxes.
(However,
according to A.R.S. §9-432B, water may
not be transported from remote municipal
property by a city, town or political
subdivision, unless voluntary contributions
have been paid.)

(A.R.S. §48-242C1).
A deduction of
$10,000 is allowed from the gross
contribution (A.R.S. §48-242C2). Certain
taxes or assessments paid to any political
subdivision during the preceding calendar
year may be deducted from the gross
contribution (A.R.S. §48-242C3). The
annual average of the total water costs
devoted to municipal use during the last
three calendar years is also deductible from
the gross contribution (A.R.S. §48-242C4).
The effect of these deductions from the
gross contribution amount is that the
district in question pays a certain
percentage of the gross contribution. The
primary contributor, Salt River Project,
paid approximately 80.8% of the tax that
would have been levied in fiscal year
2003/04 had they been legally bound to
pay property tax. Given the repeal of the
state rate, the dollar expenditure that
previously appeared in this report is no
longer applicable. However, because the
exemptions filter through to the tax base at
the local level, descriptions of the
exemptions remain.

The Department of Revenue determines
the full cash value of the district electing to
make in lieu property tax payments. The
county assessor of each county where
district electric facilities are located
computes the gross contribution to be
made. The district may subtract certain
amounts from this gross contribution
figure. A subtraction is allowed for the
contribution related to that portion of the
electric system related to pumping water

Return to Table of Contents

55

56

INDIVIDUAL INCOME
TAX EXPENDITURES

57

58

I N D I V I D UA L I N C O M E T A X
EXPENDITURES
Clean Elections Credit
A credit is allowed for donations made directly
to the Clean Elections Fund or a clean election
donation made on the individual income tax
return. The credit is not to exceed 20% of
the tax liability or $530 for single filers
($1,060 for married filing jointly)
whichever is greater. The maximum credit
is adjusted biennially (A.R.S. §16-954B).

No information is available on individual
income tax expenditures at this time. At
the final printing of this publication, data
will be included. The individual income tax
information included in the final report
will be made available through the 2002
Individual Income Tax Simulation Model.
CREDITS
A tax credit differs from an exemption,
subtraction or deduction in that it directly
reduces tax liability, not taxable income. A
$100 deduction, for example, would reduce
tax liability by, at most, $5.04 ($100 times
the maximum tax rate of 5.04%). On the
other hand a $100 credit reduces tax
liability by the full $100.

Credit for Increased Excise Taxes Paid
A refundable credit is allowed against
income tax to mitigate the increase in transaction
privilege tax rates for education (A.R.S. §431072.01). To qualify, claimants must have
federal adjusted gross income of $25,000
or less for married filing jointly or $12,500
or less for single filers. The credit shall not
exceed $25 for each person who is a
resident and for whom a personal or
dependent exemption is allowed with a
maximum credit of $100 per household.

Family Tax Credit
Single and married filing separately filers
with a federal adjusted gross income of
$10,000 or less, and married filing jointly
filers with a federal adjusted gross income
of $31,000 or less with dependents, may
claim the family tax credit (A.R.S. §431073). The amount of the credit is set at
$40 per person in the household, and is
capped at $240 for married filing jointly
and unmarried head of household filers,
and $120 for single and married filing
separately filers.

Other Credits
Other credits are filed on a separate
Schedule CR. In many instances, the credit
claimed exceeds the tax liability on the
return.
Since these credits are nonrefundable, the unused portion of the
credit is superfluous. For this reason, in
order to generate the true expenditure
associated with credits, each credit claim
must be reviewed.

Property Tax Credit
The property tax credit program provides
tax relief to the state's low-income elderly. Under
this program, full-year residents age 65 or
older with a household income of less than
$5,500 are eligible for credits ranging from
$56 to $502 (A.R.S. §43-1072). The
property tax credit is refundable, meaning
that those eligible for the credit receive
money even if they had no income tax
liability.

Credit for Taxes Paid to Other States or
Countries
In the past, the majority of the credits
claimed on the Schedule CR, in terms of
dollars and volume, were for taxes paid to
other states or countries (A.R.S. §43-1071).
Enterprise Zone Credits
Enterprise zone credits are income tax
credits provided for non-retail businesses located in
59

an enterprise zone established under Arizona law
who have a net increase in employment of qualified
employees (A.R.S. §43-1074). A maximum
of $500 per each net new employee can be
claimed in the first or partial year of
employment.
In the second year of
continuous employment, a maximum of
$1,000 per net new employee can be
claimed. The limit in the third year of
continuous employment is $1,500 per net
new employee.

amount of the credit is determined by a
dollar amount allowed for net new
employee positions other than dislocated
military base employees and by a dollar
amount allowed for net new dislocated
military base employee positions.
Environmental Technology Credit
An income tax credit is provided for
expenses incurred in constructing a qualified
environmental technology manufacturing, producing
or processing facility (A.R.S. §43-1080). The
amount of the credit is equal to 10% of the
amount spent during the taxable year to
construct the facility.

Research and Development Credit
A.R.S. §43-1074.01 provides a tax credit
for research and development expenses. The
amount of credit is computed based on the
excess of the qualified research expenses
for the taxable year over the base amount.

Pollution Control Device Credit
The pollution control device credit is a tax
credit for expenses incurred to purchase real or
personal property that is used in Arizona in the
taxpayer's trade or business to control or prevent
pollution (A.R.S. §43-1081). The amount of
the credit is equal to the lesser of 10% of
the purchase price or $500,000.

Recycling Equipment Credit
The recycling equipment credit is an
income tax credit for businesses or individuals
that acquire and place in service recycling
equipment in the state (A.R.S. §43-1076). This
credit is equal to 10% of the installed cost
of the recycling equipment but not to
exceed the lessor of 25% of the tax liability
for that tax year or $5,000.

Agricultural Pollution Control
Equipment Credit
A credit is allowed for expenses that a
taxpayer (involved in the commercial production of
livestock, livestock products or agricultural,
horticultural, viticultural or floricultural corps or
products) incurs to purchase tangible personal
property that is primarily used in the taxpayer’s
trade or business in the state to control or prevent
pollution (A.R.S. §43-1081.01).

Defense Contracting Credit
Defense contracting credits are provided to
qualified defense contractors for net increases in
full-time employment positions under the United
States Department of Defense contracts and for net
increases in private commercial full-time
employment within Arizona by a qualified defense
contractor (A.R.S. §43-1077). An income tax
credit is also allowed equal to a portion of the
amount paid as property taxes during the taxable
year by a qualified defense contractor on property
that is classified as Class 3 (A.R.S. §43-1078).

Construction Materials Credit
A.R.S. §43-1082 provides a tax credit of
5% of the purchase price of new construction
materials incorporated into a qualifying facility
located in Arizona if the facility has a total cost of
$5 million.

Military Reuse Zone Credit
The military reuse zone credit is a tax
credit for net increases in employment by the
taxpayer of full-time employees working in a
military reuse zone who are primarily engaged in
manufacturing, assembling or fabricating aviation
or aerospace products (A.R.S. §43-1079). The

Solar Energy Device Credit
A solar energy credit is provided for an
individual who installs a solar energy device in
his or her residence in Arizona. The credit for
buying or installing such a device is 25% of

60

the cost, including installation, or $1,000,
whichever is less (A.R.S. §43-1083).

(A.R.S. §43-1086.02). This credit is now
only available to the extent that the
taxpayer had unused carry forward from
prior years.

Agricultural Water Conservation
System Credit
A credit is allowed for expenses incurred
by a taxpayer to purchase and install an
agricultural water conservation system (A.R.S.
§43-1084).
The agricultural water
conservation system must be primarily
designed to substantially conserve water on
land that is used to produce agricultural
products, raise, harvest or grow trees, or
sustain livestock. The amount of the credit
is 75% of the qualifying expenses.

Employment of TANF Recipients
Credit
A.R.S. §43-1087 provides for an income
tax credit for net increases in qualified
employment of recipients of temporary assistance for
needy families who are Arizona residents. A
maximum of $500 per each net new
employee can be claimed in the first year
of employment, $1,000 in second year of
employment and $1,500 in the third year.

Underground Storage Tanks Credit
Taxpayers that incur expenses for corrective
actions taken with respect to the release of a
regulated substance from an underground storage
tank are allowed an income tax credit. The
credit is 10% of the amount spent for
corrective actions during the taxable year,
if certified by the Department of
Environmental Quality. (A.R.S. §43-1085)

Contributions to Charities that Provide
Assistance to the Working Poor Credit
Up to $200 in voluntary cash contributions to a
charitable organization that spends at least 50%
of its budget on services to Arizona residents who
receive TANF benefits or low income Arizona
residents (income of less than 150% of the
federal poverty level) can be taken as an
income tax credit (A.R.S. §43-1088).

Alternative Fuel Vehicles Credit
An income tax credit was provided for the
purchase of one or more new alternative fuel
vehicles for use in this state or for expense incurred
for converting one or more conventional vehicles to
operate on alternative fuel (A.R.S. §43-1086).
This credit is now only available to the
extent that the taxpayer had unused carry
forward from prior years.

Private School Tuition Organization
Credit
The private school tuition organization
credit is allowed for cash contributions to a
school tuition organization, up to $500 for
single/married filing separate and $625 for
married filing joint/unmarried head of
household filers. (A.R.S. §43-1089).

Vehicle Refueling Apparatus Credit
A.R.S. §43-1086.01 provided a credit for
the purchase of a vehicle refueling apparatus
including storage tanks, for installation on one or
more properties in Arizona. This credit is now
only available to the extent that the
taxpayer had unused carry forward from
prior years.

Public School Extra Curricular Activity
Fee Credit
A.R.S. §43-1089.01 allows an income tax
credit for the amount of fees paid to a public
school located in Arizona for the support of extra
curricular activities, up to $200 for
single/married filing separate and $250 for
married filing joint/unmarried head of
household filers.

Alternative Fuel Delivery System Credit
A credit was allowed for construction costs or
operating costs for constructing or operating an
alternative fuel delivery system in Arizona

School Site Donation Credit
A.R.S. §43-1089.02 provides a credit for
donation of real property and improvements to a
school district or charter school for use as a school
61

or a site for the construction of a school. The
amount of the credit is 30% of the value of
real property and improvements donated.

Agricultural
Preservation
District
Credit
A refundable credit is allowed for a taxpayer
who conveys ownership or development rights of
Class Two property to an agricultural preservation
district (A.R.S. §43-1081.02). The amount
of the credit is either the appraised value of
the property or the difference between the
appraised value of the undeveloped land
and the appraised value of the land for
development purposes. The credit cannot
exceed $33,000 in a calendar year.

Solar Hot Water Heater Plumbing Stub
Outs and Electric Vehicle Recharge
Outlets Credit
A credit is allowed for costs incurred of
installing an electric vehicle recharge outlet and for
including solar hot water heater plumbing stub outs
in one or more houses in Arizona constructed by
the taxpayer. (A.R.S. §43-1090)
Donation of Motor Vehicles to Wheels
to Work Program Credit
A credit is allowed for the fair market value
of any vehicle that is donated to the wheels to work
program with a maximum credit of $1,500
per vehicle (A.R.S. §43-1090.01).

Technology Training Credit
A refundable credit is allowed for providing
technological skills training to employees (A.R.S.
§43-1088.01). The credit is equal to 50%
of the cost of training in taxable year, not
to exceed $1,500 per employee, for a
maximum of 20 employees.

TYPE OF CREDIT
Family tax credit
Property tax credit
Clean elections credit
Credit for increased excise taxes paid
Credit for taxes paid to other states
Enterprise zone credit
Research and development credit
Recycling equipment credit
Defense contracting credit
Military reuse zone credit
Environmental technology credit
Pollution control device credit
Agricultural pollution control equipment credit
Construction materials credit
Solar energy device credit
Agricultural water conservation system credit
Underground storage tanks credit
Alternative fuel vehicles credit (nonrefundable)
Alternative fuel vehicle credit – neighborhood electric
vehicle portion
Vehicle refueling apparatus credit (nonrefundable)
14

# of
claimants
427,798
14,991
33,470
527,552
24,827
129
DNA
5
0
0
0
DNA
DNA
0
DNA
DNA
0
71
1,709

2002
(Millions)
$7.38
5.11
0.69
28.30
52.72
1.25
DNA14
0.003
0.00
0.00
0.00
DNA
DNA
0.00
DNA
DNA
0.00
0.11
2.45

NR15

NR

Data was not available for this credit at the time of publication.
Too few taxpayers have claimed this credit to allow for a release of data without violating confidentiality
laws.
15

62

TYPE OF CREDIT

# of
claimants

Alternative fuel delivery system credit (nonrefundable)
Employment of TANF recipients credit
Contributions to charities that provide assistance to the
working poor credit
Private school tuition organization credit
Public school extra curricular activity credit
School site donation credit
Solar hot water heater plumbing stub outs and electric
vehicle recharge outlets credit
Donation of motor vehicles to wheels to work program
credit
Agricultural preservation district credit (refundable)
Technology training credit (refundable)
TOTAL VALUE OF ALL CREDITS (credit used and
refunded) 16

0
0

2002
(Millions)
0.00
0.00

DNA
52,161
143,697
25

DNA
26.17
22.46
0.53

DNA
DNA

DNA
DNA

0
NR
1,226,441

0.00
NR
$147.17

Return to Table of Contents

16

Figures for all credits shown here are subject to change due to the verification process.

63

64

INSURANCE PREMIUM
TAX EXPENDITURES

65

66

I N S U R A N C E P R E M I U M TA X
EXPENDITURES
17

Each admitted insurer doing business in
the state is required to annually report its
total direct premium income to the
Arizona Department of Insurance (A.R.S.
§ 20-224). Total direct premium income
excludes “...applicable cancellations, returned
premiums, the amount of reduction in or refund of
premiums allowed to industrial life policyholders
for payment of premiums direct to an office of the
insurer, all policy dividends, refunds, savings
coupons and other similar returns paid or credited
to policyholders within this state and not reapplied
as premiums for new, additional or extended
insurance.” Direct premium income also
excludes “considerations received on annuity
contracts,” as well as the “unabsorbed portion
of any premium deposit.” No information is
available on the value of these exclusions
from direct premium income because
insurers are not required to report this
information to the Department of
Insurance.
However, there is data
available for “considerations received on annuity
contracts.” Insurance companies reported
$3,440.6 million in these considerations
(of which $42.6 million were reported by
fraternal benefit societies) which, if taxed
at a two-percent rate, would have resulted
in $68.8 million in revenues to the state in
fiscal year 2004.

A.R.S. §§ 20-224.03 and 20-224.04, added
by Laws 1999, Chapter 185, and amended
by Laws 2002, Chapter 237, provide
credits to insurers that increase their
employment of individuals who reside in
enterprise zones if the insurers meet a
series of requirements, and provide credits
to insurers that have offices established in
military reuse zones as established in Title
41, Chapter 10, Article 3 and that meet
other requirements.
To date, three
insurers have been certified by the
Department of Commerce as being
eligible to use these credits, and the
insurers are permitted to adjust prior-year
tax returns to the extent the insurers are
eligible for credits in the prior years. Only
one insurer reported credits relating to
calendar year 2003, totaling $100,000,
which offset the insurer’s fiscal year 2004
insurance premium tax obligations.
Additionally, the Department received
amended tax returns for two insurers for
calendar years 1999 through 2001, for
which, in total, the two insurers obtained
the application of $130,700 in tax credits
during fiscal year 2004. A.R.S. § 20224.03(H) prevents the enterprise zone
credit from causing a foreign insurer to
have to pay a corresponding increase in
retaliatory taxes required under A.R.S. §
20-230 (described earlier).

Insurers subject to Guaranty Fund
assessments may offset their premium tax
liabilities “in the amount of 20% of the
assessment for the year of assessment and 20% of
the assessment in each of the succeeding four
years.” [A.R.S. §§ 20-674(B) and 20692(B)]. Insurers offset their calendar
year 2003 insurance tax liabilities (and
thus, fiscal year 2004 tax revenues) by an
aggregate of $2.5 million.

Domestic life and disability insurers that
pay their certificate of authority renewal
fees are eligible for credits against their
insurance premium taxes. A.R.S. §§ 20167(D). The sum of these credits reduced
fiscal year 2004 premium tax revenues by
$13,100.

17Any

figures presented for Insurance Premium Tax Expenditures were provided by the Department of
Insurance.

67

municipalities for the retirement plans of
firefighters [A.R.S. §§ 20-224(C), 9-951, 9952, 9-972]. The remaining 15% of fire
insurance premium taxes are deposited
with the General Fund (A.R.S. § 20-227).
In calendar year 2003, insurers wrote
$35.3 million of taxable fire insurance
premium for risks in qualified locations
resulting in $232,900 in insurance
premium tax paid during fiscal year 2004
for those risks. If risks in qualified
locations were subject to the 2.2% tax
rate applied to other fire insurance
premiums, insurers would have paid
$776,200 in fiscal year 2004, a difference
of $543,300.
The portion of the
difference allocable to the General Fund
(15%) would have been $81,500 although
for the purposes of this report, we suggest
the tax expenditure is $543,300 (i.e. to
include the amounts transferred for
firefighter retirement plans). The effect of
the tax rate difference may be mitigated by
retaliatory tax, described later.

Surplus lines insurers do not remit
ordinary premium tax. Instead, surplus
lines brokers are responsible for remitting
premium taxes collected from insureds
when coverage is placed in the surplus
lines market. The tax rate is 3% of gross
premiums less certain prescribed statutory
reductions. [A.R.S. § 20-416.] Surplus
lines brokers are not required to collect
and remit insurance premium tax on
“...reinsurance, ocean marine and foreign trade
insurance, insurance on subjects located, resident
or to be performed wholly outside this state,
insurance on vehicles or aircraft owned and
principally garaged outside this state, or insurance
on property or operations of railroads engaged in
interstate commerce.” [A.R.S. § 20-420(A)].
Surplus lines tax is not imposed on
coverage provided to federally recognized
Native American governments in
accordance with Attorney General
Opinion I95-13 (R95-11). Surplus lines
tax is not imposed on coverage provided
to the State of Arizona pursuant to A.R.S.
§ 41-621(F), which exempts the
Department of Administration from the
provisions of Title 20, Chapter 2, Article 5
-- the Article that, in part, imposes the
surplus lines tax. In total, surplus line
brokers reported $7.75 million in
premiums exempted from calendar year
2003 premium tax. The tax on these
premiums would have been $232,400 if
they were taxed at the three-percent rate at
which non-exempt surplus lines premiums
are taxed.

Title 20, Chapter 4, Article 14, added by
Laws 2001, Chapter 327, requires the
Department of Insurance, effective July 1,
2002, to license "captive insurers." All
other states that license captive insurers
impose upon them an insurance premium
tax. Arizona law does not provide for a
premium tax for captive insurers.
However, the Director of Insurance has
discretion over the license fees and
renewal fees imposed upon captive
insurers, and those fees are higher than
the fees for other types of insurers
licensed in Arizona, and are also higher
than the fees captive insurers pay in some
other states.
Non-Arizona captive
insurer’s premiums are typically taxed at a
lower tax rate (often on a sliding scale
based on premium volume) than other
types of insurers’ premiums, and all the
premiums from a non-Arizona captive’s
nationwide program may be taxed by the
domiciliary state (whereas for other types
of insurers, only premiums relating to

Insurers are required to pay a 2.2% tax on
fire insurance premiums “... except that the
tax on fire insurance premiums on property
located in [qualified locations including]
incorporated cities or towns that procure the
services of private fire companies....” is 0.66%
[A.R.S. § 20-224(B)]. Eighty-five percent
of fire insurance premium taxes are
deposited into the Insurance Premium
Tax Clearing Account Fund for
apportionment to fire districts and

68

risks underwritten in that state are
taxable). In total, Arizona captive insurers
reported $4.1 million in premiums
exempted from calendar year 2003
premium tax.
If Arizona applied
Vermont’s captive insurance tax structure
(which is a sliding rate structure
depending upon premium volume), the
premiums would have been taxed at a
0.40% rate, and Arizona would have
collected $16,600 in captive insurance
premium tax. However, were a premium
tax imposed upon captive insurers, the
Director would likely establish lower
license and renewal fees so Arizona could
remain competitive at attracting and
retaining captive insurers.
With the
current population of captive insurers, the
fee reduction would eliminate most of the
benefit realized by imposing a tax. As
Arizona's captive insurance industry
develops, we expect that the amount
captives would pay in insurance premium
taxes would exceed the amount by which
our captive insurance license and renewal
fees exceed other license and renewal fee
amounts.

by the states [5 U.S.C. §§ 8714 and
8909(f)]. In calendar year 2003, FEHB
premiums collected for life and health
coverage procured by the FEHB Fund to
provide life and health coverage for
Federal employees in Arizona totaled
$337.1 million. If Arizona were able to
tax those premiums at a 2% rate, the state
would have collected $6.7 million in fiscal
year 2004.

Non-profit hospital, medical, dental and
optometric service corporations, are
subject to insurance premium taxes “...on
premiums received to effect or maintain its
subscription contract, except that the tax shall not
apply with respect to any coverage concerning
which the corporation’s relationship is as
administrative or fiscal agent for national, state or
municipal government or any political subdivision
body thereof....”, or any premiums received
therefrom (A.R.S. § 20-837). The total of
exempted net premiums in calendar year
2003 was $13.8 million and if the State
were able to apply the 2% tax rate, the
State would have collected $2.8 million in
additional premium taxes in fiscal year
2004.

Premiums for farmowners multiperil
coverage reinsured by the Federal Crop
Insurance Corporation (FCIC) (7 U.S.C. §
1508) are exempt from state insurance
premium taxation (7 U.S.C § 1511). In
calendar year 2003, insurers collected $5.5
million in premiums reinsured by the
FCIC which, if taxable at a 2% rate, would
have resulted in an additional $110,300
being collected by the state in fiscal year
2004.

“Payments received by health care services
organizations from the United States secretary
of health and human services pursuant to a
contract issued pursuant to 40 United States
Code § 1395mm(g) are not taxable.” [A.R.S. §
20-1060(C)]. The payments exempted
under this section represent capitation
payments that the Federal Government
pays to Medicare+Choice providers who
provide health care services to Medicare
recipients.
For calendar year 2003,
exempt premiums totaled $1,089.0
million, which, if taxed at a 2% rate,
would have yielded $21.8 million in
additional premium taxes in fiscal year
2004.

In 1993, the Legislature enacted Laws
1993, Chapter 231 (A.R.S. §§ 20-2301 et
seq.) to ensure the availability of small
group health insurance in Arizona. Part
of this legislation [A.R.S. § 20-2304(J)]
eliminated premium taxes on premiums
paid for small group health insurance
policies written by accountable health
plans.

Life and health insurance premiums paid
by the federal employee health benefits
(“FEHB”) Fund are exempt from taxation

69

. . . [B]eginning July 1, 1996,
accountable health plans shall pay a
premium tax of one per cent of the net
premiums received for health benefits plans
issued to small employers. Beginning July
1, 1997, accountable health plans are
exempt from the premium taxes that are
required by § 20-224, subsection B, §§
20-837, 20-1010 and 20-1060, for the
net premiums received for health benefits
plans issued to small employers. . . .

A.R.S. § 20-230 allows the Department of
Insurance to charge foreign and alien
insurers the same taxes, fees, fines,
penalties, licenses, deposit and other
obligations that the laws of their state or
country impose on Arizona insurers doing
business in their state or country. This
retaliatory tax, as it is commonly known,
guarantees that insurers incorporated in
state “X,” pay the same rates of taxes and
fees in Arizona as Arizona-based insurers
pay in state “X.”
Therefore, while
domestic insurers pay the tax rates
mentioned above, foreign or alien insurers
will pay the tax rates above plus the
retaliatory tax if the combination of taxes
and fees paid in the home state would be
greater than the taxes and fees levied by
Arizona. This is common practice among
most states. Because the amount of
retaliatory tax paid by foreign and alien
insurers relies on the tax rates, fees and
assessments charged by the insurer’s states
of domicile, it is impossible to calculate
the exact effect Arizona would realize if
the above-described qualifications and
exemptions of insurance premium taxes
were not in place.
Therefore, the
estimates provided do not include
consideration for the possible effect of
retaliation. It is fair to say, however, that
retaliatory tax would be diminished to
some degree if tax expenditures were
reduced.

During calendar year 2003, aggregate net
premiums received for health benefits
plans issued to small employers were
$486.9 million. Had the tax rate on these
premiums remained at 2%, an additional
$9.7 million would have been deposited to
the General Fund in fiscal year 2004.
A.R.S. § 20-883 provides exemptions
from insurance premium taxes (and other
state, county, district, municipal and
school taxes) to fraternal benefit societies
that are qualify under A.R.S. § 20-893.
Fraternal benefit society premiums
exempted from tax totaled $78.0 million
for calendar year 2003. This amount
includes $42.6 million in annuity
considerations reflected earlier in this
report.
Were the $35.4 million in
insurance premiums (excluding annuities)
taxed at a 2% rate for calendar year 2003,
$708,100 in fiscal year 2004 premium
taxes would have been generated.

70

S U M M A RY O F I N S U R A N C E P R E M I U M T A X
EXPENDITURES
Revenue Gain
SUBTRACTIONS FROM TOTAL PREMIUM INCOME:
Applicable cancellations .......................................................................................................NIA*
Returned premiums.................................................................................................................NIA
Reduction or refund for direct payment of industrial life insurance ...............................NIA
Policy dividends .......................................................................................................................NIA
Refunds .....................................................................................................................................NIA
Savings coupons ......................................................................................................................NIA
Other similar returns paid or credited to policyholders not reapplied
as premiums.......................................................................................................................NIA
Considerations received on annuity contracts (includes $898,900 of
tax expenditures relating to considerations received by fraternal
benefit societies)...................................................................................................$68,800,000
Unabsorbed portion of any premium deposit.....................................................................NIA
TOTAL QUANTIFIABLE SUBTRACTIONS FROM PREMIUM
INCOME .................................................................................................................. $68,800,000
INSURANCE GUARANTY FUND CREDITS..............................................$2,500,000
CREDIT FOR INCREASING EMPLOYMENT IN ENTERPRISE
ZONES ........................................................................................................ $230,700
DOMESTIC INSURER AND REINSURER TAX CREDITS ........................$13,100
EXEMPTIONS FOR SURPLUS LINE INSURANCE:
Reinsurance ..............................................................................................................................NIA
Ocean marine and foreign trade insurance..........................................................................NIA
Insurance on subjects located, resident or to be wholly performed outside
the state ..............................................................................................................................NIA
Insurance on vehicles or aircraft owned and principally garaged
outside the state ................................................................................................................NIA
Insurance on property or operations of railroads engaged in
interstate commerce .........................................................................................................NIA
Insurance on federally reorganized Native American governments................................NIA
Insurance on the State of Arizona ........................................................................................NIA
TOTAL EXEMPTIONS FOR SURPLUS LINE INSURANCE..................$232,400
PREFERENTIAL RATE ON QUALIFIED FIRE INSURANCE .............$543,300
ABSENCE OF CAPTIVE INSURANCE PREMIUM TAX ......................................$0

*No

Information Available.

71

GOVERNMENT PROGRAM EXEMPTIONS:
Hospital, medical, dental and optometric service corporation premiums
paid by federal, state and municipal governments............................................ $2,800,000
Life and health insurance premiums paid by the Federal Employee
Health Benefits Fund .............................................................................................. 6,700,000
Health care services organization premiums received from the U.S.
Secretary of Health and Human Services........................................................... 21,800,000
Premiums written by the Federal Crop Insurance Corporation................................. 110,300
Accountable health plan group health insurance to small employers..................... 9,700,000
Exempt fraternal benefit societies (other than annuity considerations
reported earlier)........................................................................................................... 708,100
TOTAL GOVERNMENT PROGRAM EXEMPTIONS ...................... $41,818,400

TOTAL QUANTIFIABLE INSURANCE PREMIUM TAX
EXPENDITURES18
.............................................................................................$155,956,300

Return to Table of Contents

18These

expenditures represent foregone revenues to the state general fund.

72

JET FUEL EXCISE AND
U S E TA X E X P E N D I T U R E S

73

74

J E T F U E L E XC I S E A N D U S E TA X
EXPENDITURES
Arizona imposes a tax of 3.05¢ per gallon
on the first ten million gallons of jet fuel
sold. Jet fuel is defined as being expressly
manufactured and blended for operating
jet or turbine powered aircraft. The jet
fuel use tax rate is also 3.05¢ per gallon and
is levied on the first ten million gallons of
jet fuel stored, used or consumed. The use
tax applies to purchasers who originally
purchased jet fuel for resale but instead
used or consumed the jet fuel and on
which excise tax has not been paid. The
excise tax does not apply to the sale or use
of jet fuel that has already been taxed by
another state unless the tax imposed by
another state is less than Arizona's tax rate.
The difference between Arizona's rate and
the rate of the other state is what will be
levied and collected.

use tax. Fiscal year 1993/94 was the last
year that amounts over ten million gallons
were taxed. In that year, 179,413,000
gallons were taxed at the over ten million
gallon tax rate of 1.05¢ per gallon. Using
the same growth rate that has been
experienced with jet fuel of less than ten
million gallons, an additional $8.5 million
could have been generated in fiscal year
2003/04 if sales of jet fuel over ten million
gallons were taxed at 3.05¢ per gallon.
JET FUEL TAX EXEMPTIONS
Jet fuel sold to commercial airlines and used on
flights that originate in Arizona and whose first
outbound destination is outside of the United
States is exempt from the jet fuel excise tax
(A.R.S. §42-5354). Information is not
available on this tax exemption.

PREFERENTIAL JET FUEL TAX
RATES
Amounts of jet fuel sold over ten million
gallons are not subject to the excise or

75

S U M M A RY O F J E T F U E L E X C I S E A N D U S E T A X
EXPENDITURES
Revenue Gain
PREFERENTIAL TAX RATES:
Jet fuel over 10 million gallons ............................................................................$8,503,000
EXEMPTIONS:
International flights which originated within the state..............................................NIA*

TOTAL QUANTIFIABLE JET FUEL EXCISE AND USE TAX
EXPENDITURES19
................................................................................................ $8,503,000
Return to Table of Contents

*

No Information Available.
expenditures represent foregone revenues to the state general fund, counties and incorporated cities
and towns.
19These

76

LUXURY
TAX EXPENDITURES

77

78

L U X U RY T A X E X P E N D I T U R E S
Luxury tax collected by the Arizona
Department of Revenue totaled $330.7
million for fiscal year 2003/04. This is a
24.1% increase from fiscal year 2002/03
collections. The reason for the rise in
collections is due to a voter approved tax
tobacco tax increase, effective November
2002. The potential for additional luxury
tax collections would have been $432.6
million with the elimination of exemptions
currently allowed, and with the adoption of
a standard liquor tax rate. Repeal of
exemptions currently in place would have
resulted in an additional $13.3 million.
The remaining $419.2 million would be the
result of standardizing the liquor tax rate to
$3.00 per gallon in exchange for the
current rates.

Malt
At $3/gallon
Actual
Difference
Total

This analysis ignores any decrease in
demand due to increased prices, a probable
result of raising all liquor taxes to $3.00 per
gallon.
An alternative to equalizing liquor prices
but not raising all liquor taxes to the
highest rate would be to determine the
effective tax rate for all liquor and use this
rate for taxation. This is accomplished by
determining gallons sold for each type of
liquor and dividing the total tax collections
by this figure. The result is the effective
tax rate, $0.35 per gallon. Applying this tax
rate to all types of liquor will result in the
same amount of tax collections; however,
there will be a tax burden shift. Spirituous
and vinous liquor are taxed at a lower rate
under this scenario, and malt liquor is
taxed at a higher rate. Therefore, the
proportion of total taxes paid by each type
of liquor shifts away from spirituous and
vinous and towards malt.

ITEMS TAXED AT A
PREFERENTIAL RATE
Current Arizona law (A.R.S. §42-3052)
provides for liquor to be taxed at four
different rates: (1) spirituous liquor at the rate
of $3.00 per gallon; (2) on each container of
vinous liquor, except cider, of which the alcoholic
content is not greater than 24% by volume, at the
rate of $0.84 per gallon (3) on each container of
vinous liquor of which the alcoholic content is
greater than 24% by volume20, containing eight
ounces or less, $0.25; and (4) on each gallon of
malt liquor or cider, $0.16. By applying the
standard $3.00 per gallon rate across all
liquor types, the resulting revenues would
have been:

Original
New Tax
Tax
Collections Collections
Type
Spirituous $23,457,743
$2,763,243
Vinous
$10,410,881
$4,379,881
Malt
$22,111,190 $48,836,690
Total
$55,979,814 $55,979,814

Difference
($20,694,500)
($6,031,000)
$26,725,500
$0

EXEMPTIONS FOR TOBACCO
PRODUCTS

FY 2003/04
Vinous
At $3/gallon
Actual
Difference

$414,584,815
$22,111,190
$392,473,625
$419,244,460

$37,181,716
$10,410,881
$26,770,836

Several exemptions from luxury tax on
tobacco products are allowed. Tobacco
powder or tobacco products used exclusively for
agricultural or horticultural purposes and unfit for
human consumption are exempt from taxation
according to A.R.S. §42-3052.06. Since

20The

department has received no tax collections
for this liquor type.

79

this figure is exempt from taxation, the
Arizona Department of Revenue does not
require this figure to be reported.
Therefore, no tax value of this tax
expenditure is available.

If proof is provided that cigarettes for
which the stamps were purchased were
exported from the state, luxury tax may be
refunded (A.R.S. §42-3008A).
No
information is available on the value of this
exemption.

A.R.S. §42-3206 allows discounts on cigarette
stamps. The luxury tax on cigarettes is in
the form of a stamp affixed to the cigarette
package, which is obtained from the
Department of Revenue at the following
rates:

EXEMPTIONS FOR LIQUOR
Liquids containing less than 1/2% alcohol by
volume are exempt from luxury tax (A.R.S.
§42-3001.10A, .13 & .14B).
Since,
reporting is not required by this group of
taxpayers, there is no available information
on potential luxury tax collections.

1.
96% of face value of stamp for
first $36,000 worth of stamps.
2.
97% of face value of stamp for
second $36,000 worth of stamps.
3.
98% of face value of stamp for
additional stamps up to $165,000 in any
month by a distributor. In addition, if
the distributor purchases more than
$165,000 worth of stamps, then the
effective rate for all stamps purchased,
including the first $72,000, will be 98%
of face value.

In accordance with A.R.S. §42-3001.10B,
.13 & .14C, taxable liquors does not include
medicines that are unsuitable for beverage purposes.
No information is available on medicine,
which includes liquor and is unsuitable for
beverage purposes.
According to A.R.S. §42-3008A, luxury tax
is refunded if (1) proof is provided that the
liquor for which the stamps were purchased was
exported from the state and (2) if the liquor
becomes unfit for sale due to breakage or spoilage.
No information is available on liquor for
which stamps were purchased and were
then exported from the state. Liquor unfit
for sale due to breakage or spoilage
includes beer or wine which has exceeded
its shelf life of three to six months and
containers damaged in such a way that the
product's quality is uncertain. Documents
reporting destruction under this provision
indicated $161,400 in tax revenue lost in
fiscal year 2003/04.

If all stamps were purchased at face value,
revenue would have increased by $5.9
million in fiscal year 2003/04.
According to A.R.S. §42-3209A, a
distributor may return unused tobacco
product stamps for a refund. Luxury tax is
also refunded if the cigarettes become unfit for
sale due to breakage or spoilage (A.R.S. §423008A2). Most often, staleness is the
reason for refund. If the state considered
this to be a hazard of doing business and
disallowed such refunds, an additional $7.3
million in fiscal year 2003/04 in luxury
revenues would have resulted.

80

S U M M A RY O F L U X U RY T A X E X P E N D I T U R E S
Revenue Gain
PREFERENTIAL TAX RATES ON LIQUOR:.........................................$419,244,000
TOBACCO PRODUCT EXEMPTIONS AND REFUNDS:
Tobacco powder or products used exclusively for agricultural or
horticultural purposes & unfit for human consumption ..........................................NIA*
Discounts......................................................................................................................... $5,890,00
Breakage or spoilage refunds ........................................................................................ 7,273,000
Exported from state after cigarette stamps purchased ......................................................NIA
TOTAL TOBACCO PRODUCT EXEMPTIONS AND REFUNDS .... $13,163,000
LIQUOR EXEMPTIONS AND REFUNDS:
Liquids containing less than 1/2% alcohol by volume......................................................NIA
Liquor contained in medicines, unsuitable for beverage purposes ..................................NIA
Liquor exported from state after stamps were purchased.................................................NIA
Breakage or spoilage refunds ......................................................................................... $161,400
TOTAL LIQUOR EXEMPTIONS AND REFUNDS ......................................$161,400

TOTAL QUANTIFIABLE LUXURY TAX EXPENDITURES21
............................................................................................ $432,568,400
Return to Table of Contents

*

No Information Available.
expenditures represent foregone revenues to the state general fund and the corrections fund.

21These

81

82

MOTOR CARRIER FEE
TAX EXPENDITURES

83

84

MOTOR CARRIER FEE
EXPENDITURES
22

shipment, or (6) with commodities or
goods being returned to the point of
shipment as a result of damage or
consignee returns. The value of this
expenditure is unavailable.

Motor carriers are responsible for the
following fees: motor carrier fee, gross
weight fee, highway use fee, and title and
registration fee. Receipts from these fees
go into the highway user fund and are
distributed to the state highway fund,
counties, and cities/towns.

A reduced motor carrier tax rate of 7/10 of the
full rate is applied against motor vehicles
weighing 26,000 pounds or more. To
qualify, the vehicle must begin and end its
trip at the same point without adding to its
load any items other than those listed in
the previous paragraph and at the midway
point of a qualifying trip, the load is less
than 45% of the full load capacity of the
vehicle (A.R.S. §28-5856). The tax value of
this information is not available.

PREFERENTIAL VEHICLE FEE
RATES
Motor Carrier Fee
The basic motor carrier fee is set at
amounts ranging from $64 to $800. The
fees are flat amounts based on gross
vehicle weight (A.R.S. §28-5854). The
vehicle weight for this schedule ranges
from 12,001 pounds to 80,000 pounds.
Lightweight motor vehicles with a declared
gross weight of 12,000 or fewer pounds
pay a flat rate of $64 per vehicle (A.R.S.
§28-5492). Lighter vehicles are granted
preferential fee amounts. The value of this
expenditure is currently unavailable.
However, during fiscal year 2003/04,
Arizona based carriers paid $16.7 million in
motor carrier fees.

A reduced motor carrier tax rate of 7/10 of the
full rate applies to motor vehicles or
lightweight motor vehicles if the vehicle is
used only for transporting agricultural
products (A.R.S. §28-5857). Agricultural
products are crops, livestock or supplies
used or produced in farming operations or
products, crops or livestock in their
unmanufactured or unprocessed states.
The value of this expenditure is
unavailable.

A reduced motor carrier fee of 7/10 of the full
rate is applied against motor vehicles
(A.R.S. §28-5855) that pre qualified for the
reduced motor carrier fee with the
department and travel under the following
conditions: 45% or more of the mileage
reported is either (1) without a load; (2)
with equipment which makes a motor
vehicle ready for the road, (3) with
restraining equipment which makes the
load safe, (4) with equipment normally
carried with the motor vehicle and used for
load or unloading, (5) with empty
containers being returned to the point of
22Figures

A $4.00 commercial registration fee is
added to the gross weight fee for each
registered vehicle. Commercial registration fees collected for Arizona based
vehicles was not available for fiscal year
2003/04
Gross Weight Fee
The gross weight fee is set at amounts
ranging from $7.50 to $918, dependent
upon vehicle weight (A.R.S. §28-5433).
The vehicle weight for this schedule ranges

presented for Motor Carrier Tax Expenditures were provided by the Department of Transportation.

85

from up to 8,000 pounds to 80,000
pounds. Vehicles in excess of 80,000 are
subject to special permits. Lighter vehicles
are granted preferential fee amounts. Total
gross weight fees collections for Arizona
based vehicles during fiscal year 2003/04
was not available.

use fees prorated for miles driven in
Arizona. The values of these expenditures
are also unavailable.
EXEMPTIONS FROM VEHICLE
FEES
Motor vehicles, trailers or semitrailers owned and
operated by religious institutions and used
exclusively for the transportation of property
produced and distributed for charitable purposes
are exempt from the gross weight fee
(A.R.S. §28-5432C1). No information is
available for this tax exemption.

If a motor vehicle is used for seasonal
agricultural work, the annual fee will be
reduced by 1/12th for each month the
vehicle is not in use. The reduced fee is
for a period of at least 90 days but less
than a full year (A.R.S. §28-5436). The
value of this expenditure is currently
unavailable.

Motor vehicles, trailers or semitrailers owned and
operated by nonprofit schools which are recognized
as being tax exempt by the federal or state
government are exempt from the gross
weight fee (A.R.S. §28-5432C2) if used
exclusively for transportation of pupils in
connection with school curriculum,
training of pupils or transportation of
property for charitable purposes without
compensa-tion.
No information is
available on the tax value of this
exemption.

If a privately owned school bus is
temporarily operated for purposes other
than providing transportation of children
to and from school, the owner must pay
1/10th of the annual gross weight fee (A.R.S.
§28-5432). The value of this expenditure is
currently unavailable.
Highway Use Fee
The highway use fee is set at amounts
ranging from $50 to $2,217, depending
upon vehicle weight and age. Vehicle
weight for this schedule ranges from up to
8,000 pounds to 80,000 pounds. Highway
use fees collected for Arizona based
vehicles totaled $4.3 million during fiscal
year 2003/04. Vehicles in excess of 80,000
pounds are subject to special permits. If
the model year of the vehicle is 1978 or
older, the use fee schedule is lower, ranging
from $50 to $1,095 (A.R.S. §28-5471). The
values of these expenditures are currently
unavailable.

A nonprofit organization which can present a form
approved by the director of the division of emergency
management may have its motor vehicles,
trailers and semitrailers exempted from the
gross weight fee (A.R.S. §28-5432C3). No
information is available on this tax
exemption.
A vehicle owned and operated by a foreign
government, a consul or any other official
representative of a foreign government, by the
United States, by a state or political subdivision of
a state or by an Indian tribal government is
exempt from the gross weight fee (A.R.S.
§28-5432C4). No information is available
on this tax exemption.

Due to reporting practices, the
Department of Transportation is unable to
split out foreign based motor carrier fee
collections. However, the total amount
received from both of these carriers in
fiscal year 2003/04 was $78.9 million. This
amount includes registration fees, motor
carrier fees, gross weight fees, & highway

A farm vehicle that is issued a farm vehicle license
plate is exempt from highway use fees
(A.R.S. §28-5473D). No information is
available on this tax exemption.
86

S U M M A RY O F M O T O R C A R R I E R T A X
EXPENDITURES
Revenue Gain
PREFERENTIAL FEE RATES:
Motor Carrier Fee
Same motor carrier fees for all Arizona based vehicles ...................................................NIA*
Reduced motor carrier fee for lighter loads.........................................................................NIA
Reduced motor carrier fee for trips starting and ending at the same point
with a lighter load midway...............................................................................................NIA
Reduced motor carrier fee for agricultural loads ................................................................NIA
Commercial Registration Fee.................................................................................................NIA
Gross Weight Fee
Same gross weight fees for all Arizona based vehicles ......................................................NIA
Reduced gross weight fee for seasonal agricultural vehicles .............................................NIA
Reduced gross weight fee for privately owned school busses ..........................................NIA
Highway Use Fee
Same use fees for all Arizona based vehicles.......................................................................NIA
Foreign Based Carriers
Registration fees, motor carrier fees, gross weight fees and highway use fees...............NIA
VEHICLE FEE EXEMPTIONS:
Motor carriers owned by religious institutions and used for charitable
purposes .............................................................................................................................NIA
Motor carriers owned by nonprofit schools........................................................................NIA
Motor carriers owned by nonprofit organizations with a division of
emergency maintenance form.........................................................................................NIA
Motor carriers owned by governments ................................................................................NIA
Farm vehicles ..........................................................................................................................NIA

TOTAL QUANTIFIABLE MOTOR CARRIER FEE
EXPENDITURES23 ...................................................................... NIA
Return to Table of Contents

*No Information Available.
23These expenditures represent foregone revenues to the state highway fund, counties and incorporated
cities/towns.

87

88

MOTOR VEHICLE FUEL
TAX EXPENDITURES

89

90

M O T O R V E H I C L E F U E L TA X
EXPENDITURES
24

There is a tax of 18¢ per gallon on each
gallon of motor vehicle fuel possessed,
refined, manufactured, produced, blended
or compounded by the supplier or
imported by the supplier, whether in the
original package or container in which it
was imported or otherwise. Beginning
January 1, 1998, all suppliers are required
to pay tax on all fuel received. In order to
qualify for an exemption, the taxpayer
must then file for a refund (A.R.S. §285610B). The proceeds of this tax are
distributed to the state highway fund,
counties, incorporated cities and towns, the
off-highway vehicle recreation fund and
the state lake improvement fund.

Motor vehicle fuel that is sold within an Indian
Reservation to an enrolled member of the Indian
tribe is excluded from taxation per A.R.S.
§28-5610A3. The total amount refunded
for this provision during fiscal year
2003/04 was $1,495,600.
A person who purchases and uses motor vehicle
fuel other than in motor vehicles upon the highways
of Arizona, and other than in watercraft upon the
waterways in Arizona, and other than in motor
vehicles operating on a transportation facility or toll
road shall be repaid the motor vehicle fuel
tax paid (A.R.S. §28-5611A). In fiscal year
2003/04, $1,511,900 in motor vehicle fuel
tax was refunded based on this exemption.

EXEMPTIONS FROM THE MOTOR
VEHICLE FUEL TAX
Motor vehicle fuel moving in interstate or foreign
commerce, not destined or diverted to a point within
this state is exempt from the motor vehicle
fuel tax (A.R.S. §28-5610A5).
No
information is available on this tax
expenditure.

Motor vehicle fuel purchased in Arizona, for which
proof of export is available and either exported by
a supplier or sold by a supplier to a distributor for
immediate export is exempt from motor
vehicle fuel tax (A.R.S. §28-5610A1-2).
Requests for refunds against import
liability in the amount of $1,538,300 were
received in fiscal year 2003/04.

Motor vehicle fuel sold to the United States or an
instrumentality or agency of the United States is
exempt from the motor vehicle fuel tax
(A.R.S. §28-5610A6). During fiscal year
2003/04, $701,100 was refunded for this
exemption.

Anyone who purchases motor vehicle fuel
and loses such fuel due to fire, theft or other
accident may request a refund for the tax
paid on this fuel (A.R.S. §28-5611A4). No
refunds of this type were requested for
fiscal year 2003/04.

24Any figures presented for Motor Vehicle Fuel Tax Expenditures were provided by the Arizona Department
of Transportation.

91

S U M M A RY O F M O T O R V E H I C L E F U E L T A X
EXPENDITURES
Revenue Gain
Motor vehicle fuel moving in interstate or foreign commerce.......................................NIA*
Motor vehicle fuel sold to the United States or an instrumentality or agency
of the United States ................................................................................................... $701,100
Motor vehicle fuel sold to Native Americans on Reservations ............................... 1,495,600
Motor vehicle fuel used other than in motor vehicles, watercraft and motor
vehicles operating on a transportation facility or toll road ................................. 1,511,900
Motor vehicle fuel purchased for export .................................................................... 1,538,300
Motor vehicle fuel lost due to fire, theft or other accident .....................................................0

TOTAL QUANTIFIABLE MOTOR VEHICLE FUEL TAX
EXPENDITURES25 ............................................................. $5,210,900
Return to Table of Contents

*

No Information Available.
tax expenditures represent foregone revenues to the off-highway vehicle recreation fund, the state lake
improvement fund, the state highway fund, counties and incorporated cities and towns.

25The

92

PARI-MUTUEL
TAX EXPENDITURES

93

94

PA R I - M U T U E L T A X E X P E N D I T U R E S
HORSE OR HARNESS RACING
PREFERENTIAL RATES

mutuel revenues
2003/04.

For horse or harness races, the state
receives 2% of the gross amount of the
first $1 million wagered on live races in
pari-mutuel pools and 5% of the gross
amount exceeding $1 million (A.R.S. §5111D). If the state received 5% of all
dollars wagered in horse or harness live
races, the state would have received an
additional $1.4 million in fiscal year
2003/04. The state General Fund did not
receive revenues from greyhound, horse or
harness live racing.

during

fiscal

26

year

Moneys from charity racing days are also
exempt from the state tax (A.R.S. §5111F). Taxation of these events would
have raised an additional $69,900 during
fiscal year 2003/04.
The percentage paid to the state for
greyhound racing and for horse or harness
racing shall be reduced by 1% of the total
amount wagered in counties with a
population of 500,000 or more and by 2%
in all other counties for those permittees who
make approved capital improvements to existing
race tracks (A.R.S. §5-111.03A). The state
share of the pari-mutuel tax was reduced
by $79,400 due to this reduction in the
percentage during fiscal year 2003/04.

EXEMPTIONS FROM THE PARIMUTUEL TAX
Moneys handled in a pari-mutuel pool for wagering
on simulcasts of out-of-state horse or harness races
are exempt from the state tax (A.R.S. §5111D). The state share of the pari-mutuel
tax was reduced by $4.7 million in fiscal
year 2003/04 due to this exemption.

The percentage decrease in pari-mutuel
wagering between the base year and the
previous fiscal year determines a
permittee's eligibility for a hardship tax
credit. The state share of the pari-mutuel
tax for greyhound racing and for horse or
harness racing was reduced by the amount
equal to the amount of the hardship tax
credit (A.R.S. §5-111I). The state share of
the pari-mutuel tax was reduced by $2.3
million in hardship tax credits in fiscal year
2003/04.

Any county fair racing association may have one
racing meeting each year (A.R.S. §5-111E). All
such racing meetings are exempt from the
state tax on horse or harness live racing. If
county fair racing meetings were not
exempt from the tax, the state would have
received an additional $115,200 in pari-

26Any

figures presented for Pari-mutuel Tax Expenditures were provided by the Arizona Department of
Racing.

95

S U M M A R Y O F PA R I - M U T U E L T A X
EXPENDITURES
Revenue Gain
PREFERENTIAL TAX RATES FOR HORSE OR HARNESS
RACING............................................................................................... $1,361,700
PARI-MUTUEL TAX EXEMPTIONS:
Reduction in pari-mutuel tax on simulcast out-of-state races.................................. 4,702,600
County fair racing association meetings......................................................................... 115,200
Charity racing days .............................................................................................................. 69,900
Reduction in pari-mutuel tax for capital improvements to race tracks ....................... 79,400
Reduction in pari-mutuel tax for hardship tax credit................................................ 2,261,900

TOTAL QUANTIFIABLE PARI-MUTUEL TAX EXPENDITURES27
................................................................................................ $8,590,700

Return to Table of Contents

27These

expenditures represent foregone revenues to the breeders award fund; the county fairs' racing
betterment fund; county fairs' livestock agriculture promotion fund; the coliseum and exposition center fund;
the county fair racing fund; the administration of county fair racing betterment retirement fund; the breeders
award fund; the stallion award fund; the greyhound adoption fund; the agriculture consulting and training
fund; and the state general fund.

96

P R I VAT E C A R P R O P E RT Y
TA X E X P E N D I T U R E S

97

98

P R I VA T E C A R P R O P E R T Y T A X
EXPENDITURES
Businesses which operate, furnish or lease
railroad cars to be used for transporting or
accommodating persons or freight over
railroad lines not owned, leased or
operated by the business are subject to a
private car property tax in Arizona. The
taxable value, or net assessed value, of the
private car property is determined by
multiplying the full cash value of the
property by an assessment ratio. The tax
rate that is applied to the net assessed value
is equal to the average primary and
secondary property tax rates in the taxing
districts of the state, which was $12.18 in
2003.

assessed values of the various classes of
property. These assessment ratios range
from 25% to 5%. For private car property,
the assessment ratio is equal to the ratio which the
total net assessed valuation of all taxable property
in class 1, class 6 paragraph 3 and personal
property in class 2 bears to the total full cash value
of such property (A.R.S. §42-14308). For tax
year 2003, the assessment ratio used for
private car property was 20%. This is
considered to be a preferential assessment
ratio because it is an average of the
assessment ratios in several other classes of
property. If private car property had an
assessment ratio equal to the highest
assessment ratio imposed, 25%, tax
collections would have increased by
$334,200.

Arizona statutes set out the assessment
ratios to be used in determining the net

99

S U M M A R Y O F P R I VA T E C A R P R O P E R T Y T A X
EXPENDITURES
Revenue Gain
Preferential assessment ratio at 25% ............................................................................ $334,200

TOTAL QUANTIFIABLE PRIVATE CAR PROPERTY TAX
EXPENDITURES28
...................................................................................................$334,200
Return to Table of Contents

28These

expenditures represent foregone revenues to the state general fund.

100

PROPERTY
TAX EXPENDITURES

101

102

P RO P E RT Y TA X E X P E N D I T U R E S
the part of a homeowner's primary tax bill
that exceeds 1% of the limited property
value. Higher tax rates could mean a larger
state payment.

The property tax system in Arizona has
many components. These components are
intertwined, making it difficult to address
the impact of tax expenditures on one
component in isolation. The state no
longer levies a property tax per $100 of net
assessed value on primary values, so state
revenues are affected by exemptions from
property tax in three ways.

Although the state property tax per $100
of net assessed value is now set at $0,
exemptions filter through to the tax base at
the local level. As mentioned earlier in this
section, these exemptions do affect state
revenues.

First, basic state aid, or a basic level of
funding for education per student
statewide, is provided through the state,
the county and school districts. The
school
district's
responsibility
is
determined by multiplying a uniform tax
rate by assessed valuation. If this amount
is less than the basic level of funding,
additional revenues are received from the
county, funded by the county equalization
rate of 47¢ (calculated annually) per $100
of net assessed value.
If county
equalization revenues cannot bring the
school district to its basic level of funding,
the state provides the rest of the basic state
aid. Therefore, exemptions from the
property tax base may increase the state's
portion of basic state aid.

Article IX of the Arizona Constitution
exempts:
• property owned by widows, subject to
limitations
• property owned by widowers, subject to
limitations
• property owned by disabled persons, subject
to limitations
• all federal, state, county and municipal
property.
• property of educational, charitable and
religious associations or institutions not used or
held for profit.
• household goods owned by the user and used
solely for noncommercial purposes.
• stocks of raw or finished materials,
unassembled parts, work in process or finished
products constituting the inventory of a retailer or
wholesale located within the state and principally
engaged in the resale of such materials, parts or
products, whether or not for resale to the ultimate
consumer.

The second and third methods concern
taxation
of
homeowner
property.
Frequently, if a political subdivision sees a
decline in property values, the tax rate
imposed by that subdivision increases so
that a consistent revenue stream is
provided from the property tax. The same
is true if the political subdivision sees its
taxable base decrease, through exemptions
from the property tax. Through a program
called additional state aid (commonly
known as homeowner's rebate), the state
pays 35% of a homeowner's school district
tax bill, up to $500. If a homeowner's tax
bill increases due to higher tax rates, the
state will be required to pay a larger
amount of money. Finally, the state pays

There are also exemptions from property
taxation listed in the statutes, as follows:
Libraries, colleges, school buildings and
other buildings used for education, with their
furniture, libraries and equipment, and the lands
appurtenant to and used with such buildings, as
long as they are used for the purpose of education
and not used or held for profit (42-11104A).
• Property and buildings pursuant to a lease
or lease-purchase agreement leased from a school
•

103

given or the total annual operating expenses to
pay for principal, interest and operating
expenses as long as that organization was not
created or operating for the primary purpose of
providing the subsidy or payment (4211106.02)
• Property of charitable institutions for relief
of the indigent or afflicted, including the lands
appurtenant to such property, with their
fixtures, equipment and other reasonably
required property, as long as such institutions
and property are not held or used for profit
(42-11107).
• Grounds and buildings belonging to societies
for the prevention of cruelty to animals and for
sheltering, caring for and controlling animals, as
long as the grounds and buildings are used for
those purposes only and not held or used for
profit (42-11113).
• Property held by a charitable organization for
transfer to this state or a political subdivision of
this state to be used as parkland if no rent or
valuable consideration is received by the
charitable organization (42-11114A).
• Property belonging to a volunteer fire
department if the property is used exclusively for
fire suppression and prevention activities and
neither used nor occupied by or for the benefit of
any person (42-11117).
• Property held by a charitable organization to
preserve and protect scientific, biological,
geological,
paleontological,
natural
or
archaeological resources (42-11115)
• Property that is owned by a volunteer
nonprofit organization that is operated
exclusively to promote social welfare and provide
community quasi-governmental services in an
unincorporated area of a county. (42-11118A)
• Property that is owned by a volunteer
nonprofit organization, used exclusively for the
purpose of performing roadway cleanup and
beautification on a gratuitous basis, not used or
held for profit and not used or occupied by or for
the benefit of any person (42-11119).
• Property of musical, dramatic, dance and
community art groups, botanical gardens,
museums and zoos as long as the property is
used for those purposes and not used or held for
profit (42-11116).

district or a community college district (4211104B).
• Hospitals for relief of the indigent or
afflicted, appurtenant land and their fixtures
and equipment to such buildings, as long as they
are not used or held for profit (42-11105A).
• Grounds and buildings owned by
agricultural societies, as long as they are used for
those purposes only, and not used or held for
profit (42-11108).
• Property or buildings used or held primarily
for religious worship, including furniture and
equipment, and the land and improvements
appurtenant to and used with such buildings, as
long as the property is not used or held for profit
(42-11109A).
• Cemeteries set apart and used for interring
the dead, except such portions thereof that are
used or held for profit (42-11110).
• Observatories maintained for astronomical
research and education for the public welfare,
together with all property used in the work or
maintenance of observatories, including property
held in trust, as long as the observatories and
other property are used for such purposes only
and not used or held for profit (42-11112).
• Property used for operation of a health care
institution which provides medical, nursing or
health-related services to handicapped persons or
persons sixty-two years of age or older and
which is not used or held for profit (4211105B).
• Property used for the operation of a
residential apartment housing facility which is
not used or held for profit, which is structured
for handicapped persons or persons sixty-two
years of age or older, which is located adjacent
to a property exempted from taxation and
which is owned and operated by the same
persons or associations as such other adjacent
property (42-11106.01).
• Property used for the operation of a
residential apartment housing facility which is
not used or held for profit, which is structured
for handicapped persons or persons sixty-two
years of age or older and for which a subsidy or
payment is given by federal, state or local
government or by nonprofit organizations in a
substantial amount in relation to the amount
104

• A commodity that is consigned for resale in a

2003 ADDITIONAL STATE AID TO
EDUCATION

warehouse in this state in or from which the
commodity is deliverable on a contract for future
delivery subject to the rules of a commodity
market regulated by the United States
commodity futures trading commission (4211122).
• Animal and poultry feed, including salts,
vitamins and other additives, for animal or
poultry consumption (42-11123).
• Property that is owned by a United States
Veterans' Organization that qualifies as a
charitable organization and is recognized under
either section 501 (C)(3) or 501 (C)(19) of the
Internal Revenue Code if the property is used
predominantly for those purposes and not used or
held for profit (42-11120).
• Property that is not used or held for profit
and that is owned by a community service
organization the mission of which is to serve a
population that includes persons who are
indigent or afflicted, as defined in this section,
and that qualifies as a charitable organization
and is recognized under §501 (C)(3) of the
internal revenue code if the community service
organization is primarily engaged in delivering
services on that property consisting of fitness
programs, camping programs, health and
recreation services, youth programs, child care,
senior citizen programs, individual and family
counseling, employment and training programs,
services for individuals with disabilities, meals,
feeding programs and disaster relief (42-11121).
• Personal property moving through the state or
consigned to a warehouse in the state from a
point outside this state for storage or assembly in
transit to a final destination outside this state
(42-11128A).
• Property claimed to have no situs in this state
for the purposes of taxation shall be considered
property-in-transit or futures contract property
(42-11128B).
• Airline company aircraft (42-14255).
• Property owned or used by districts for the
purpose of irrigation water delivery shall be
exempt from taxation when used for district
purposes (48-3472A).

Pursuant to A.R.S. §15-972, a report
indicating the amount of additional State
Aid to Education is prepared each year.
This additional aid is the amount referred
to as the "Homeowner's Rebate." (The
state pays 35% of a homeowner's school
district tax bill, up to $500.) The summary
at the end of this section shows the a
Additional State Aid to Education tax roll
that was billed in 2004, including additional
amounts that were billed for legal class 3
property on the personal property tax roll.
ADDITIONAL STATE AID TO
EDUCATION

Apache
Cochise
Coconino
Gila
Graham
Greenlee
La Paz
Maricopa
Mohave
Navajo
Pima
Pinal
Santa Cruz
Yavapai
Yuma
Total

29

ASAE Tax
Roll
$459,703
3,763,473
5,204,398
2,871,585
545,970
105,746
276,656
29

7,419,277
3,361,931
52,561,293
8,822,267
1,741,074
9,184,831
3,919,803

Personal
Property
Tax Roll County Total
$26,521
$486,223
127,767
3,891,240
44,873
5,249,272
52,694
2,924,279
45,952
591,921
7,683
113,430
0
276,656
29
176,975,790
135,633
7,554,909
67,603
3,429,534
885,834
53,447,127
869,616
9,691,883
16,819
1,757,893
138,805
9,323,637
184,495
4,104,299
$279,818,010

The breakdown between real and personal
property is not available from Maricopa County.

105

S U M M A RY O F P R O P E R T Y T A X
EXPENDITURES
Revenue Gain
ADDITIONAL STATE AID TO EDUCATION ................................. $279,818,010

TOTAL QUANTIFIABLE PROPERTY TAX EXPENDITURES30
............................................................................................. $279,818,010
Return to Table of Contents

30These

expenditures represent foregone revenues to the state general fund.

106

SEVERANCE
TAX EXPENDITURES

107

108

S E V E R A N C E TA X E X P E N D I T U R E S
Persons engaged in the business of mining
or timbering in Arizona are subject to a
severance tax. Mining severance is taxed at
the rate of 2.5% (A.R.S. §42-5202C) and is
levied upon the net severance base. The
net severance base is defined as fifty
percent of the difference between the gross
value of production and the production
costs (A.R.S. §42-5204).

products were taxed at $2.13 per thousand
board feet, timber severance tax collections
would increase by $500.
SEVERANCE TAX CREDITS
A credit is allowed against severance tax
imposed for accounting and reporting expenses
incurred by the taxpayer (A.R.S. §42-5017A).
The credit equals 1% of the amount of tax
due, not to exceed $10,000 in any calendar
year. In fiscal year 2003/04, information
about the value of the severance tax
accounting credit was unavailable.

The timber severance tax is levied on the
timber products derived from timbering
activity (A.R.S. §42-5202D).
Total
severance tax collections in fiscal year
2003/04 totaled $6.6 million.

SEVERANCE TAX EXCLUSIONS
PREFERENTIAL SEVERANCE TAX
RATES

Mining Severance
The net severance base is fifty percent of the
difference between the gross value of
production and the production costs. (A.R.S.
§42-5204) Both the fifty percent factor
and the value of production costs are
exclusions from severance taxation.
Taxing the net severance base at 100%
would have generated an additional $6.5
million in fiscal year 2003/04. The tax
value of the production costs is unknown.

Timber severance is taxed depending on
the type of timber product. The tax rate
for ponderosa pine timber products is
$2.13 per thousand board feet and the tax
rate for all species except ponderosa pine is
$1.51 per thousand board feet. The tax
rate for all other species except ponderosa
pine is a preferential rate over the
ponderosa pine rate. If all other timber

109

S U M M A RY O F S E V E R A N C E T A X
EXPENDITURES
Revenue Gain
PREFERENTIAL TIMBER SEVERANCE TAX RATE FOR
OTHER TIMBER PRODUCTS.....................................................................................$500
SEVERANCE TAX CREDITS:
Accounting credit ..................................................................................................................NIA*
SEVERANCE TAX EXCLUSIONS:
Fifty percent factor......................................................................................................... 6,541,000
Production Costs .....................................................................................................................NIA

TOTAL QUANTIFIABLE SEVERANCE TAX EXPENDITURES31
................................................................................................ $6,541,500
Return to Table of Contents

*

No Information Available.
expenditures represent foregone revenues to the state general fund, counties and incorporated cities
and towns.
31These

110

TRANSACTION PRIVILEGE
AND USE
TA X E X P E N D I T U R E S

111

112

T R A N S AC T I O N P R I V I L E G E A N D U S E
TA X E X P E N D I T U R E S
Transaction privilege and use tax gross
collections in fiscal year 2003/04 totaled
nearly $4.2 billion. Of that amount, $893.6
million was distributed to the counties and
cities. The remaining $3.3 billion was
deposited into the State General Fund.
Potential transaction privilege and use tax
collections from the various transaction
privilege tax exemptions would have, at a
minimum, increased collections by more
than 155%. The quantifiable exemptions
discussed in this report represent potential
collections of $6.2 billion. Additionally,
lost revenues due to preferential tax rates,
e.g., those items taxed at a rate below 5%,
total $285 million while credits totaled
$19.6 million. Therefore, the State of
Arizona could be collecting at least an
additional $6.5 billion in transaction
privilege and use tax if the credits,
exempted items and items taxed at a
preferential rate were taxed at a 5% rate.

lower rate.
These activities and the
corresponding tax rates are as follows:
CODE
2
13
28

TAXABLE ACTIVITIES
Non-Metal Mining, Oil &
Gas Production
Commercial Lease32
Rental Occupancy Tax

RATE
3.125%
0%
3.0%

If the activities in these categories had
been taxed at a 5% rate in fiscal year 2004,
additional transaction privilege tax of $285
million would have been collected.
TRANSACTION PRIVILEGE AND
USE TAX REFUNDS AND CREDITS
A motion picture production company that
produces at least one motion picture in Arizona in
a year may apply for a refund, considered to be a
remission of transaction privilege and use taxes
paid (A.R.S. §42-5015). The amount of the
refund is 50% of the transaction privilege
and use taxes imposed with respect to
tangible personal property purchased by
the motion picture production company.
No claims were made in fiscal year
2003/04.

The Proposition 301-Education Tax,
collected $488 million at the 0.6% rate.
While the two taxes are collected on
roughly the same tax base, the Proposition
301 monies are dedicated to Education
related funds. We continue to present the
value of exemptions at the 5% rate. The
effect of these exemptions on Proposition
301 can be estimated by taking 12% of the
amounts shown later in this section. For
fiscal year 2003/04, the value of the
exemptions on the Proposition 301
Education funds was $744.2 million.

A credit is allowed against transaction
privilege tax imposed for accounting and
reporting expenses incurred by the taxpayer
(A.R.S. §42-5017). The credit equals 1% of
the amount of tax due, not to exceed
$10,000 in any calendar year. In fiscal year
2003/04, the value of the accounting credit
equaled $19.6 million.

PREFERENTIAL TRANSACTION
PRIVILEGE TAX RATES

TRANSACTION PRIVILEGE AND
USE TAX EXEMPTIONS

In most categories, sales in Arizona are
taxed at a 5% rate. Three categories of
taxable activities, however, are taxed at a

32The

tax rate for this class changed to 0% from
1.0% effective July 1, 1997.

113

Certain types of income or sales by
businesses are exempt from transaction
privilege and use tax. Some of these
businesses have taxable sales as well as
exempt sales; some have no taxable sales at
all. In the case of those businesses that
have both taxable and exempt sales, there
is some information on the value of the
exemption. Those businesses that only
have exempt sales generally do not file
transaction privilege tax returns; therefore,
no figures are reported for the value of the
exempt business.
The following
information lists all exemptions identified
in the Arizona Revised Statutes, whether
information was available on the tax value
of the exemption or not.

The business of selling tangible personal
property at wholesale, by definition, is not
taxable.
During fiscal year 2003/04,
wholesale trade was estimated to be $53.3
billion. If taxed at a 5% rate, collections
from this category would be $2.7 billion.
The transaction privilege and use tax is
levied upon the gross income or the gross
proceeds of sales. Gross proceeds of sales
do not include cash discounts allowed (A.R.S.
§42-5001.5). The value of merchandise
traded in on the purchase of new
merchandise when the trade-in allowance is
deducted from the sales price of the new
merchandise before completion of the sale
is exempt (A.R.S. §42-5001.6).
No
information is available on the value of
cash discounts or trade-ins.

The primary type of business exempt from
transaction privilege tax in Arizona is the
business of providing a service (A.R.S. §425061A1, A2). Service industries can be
broken down into three major categories:
(1) professional; (2) business; and, (3)
personal services.
Examples of
professional services include legal,
engineering and medical businesses. Types
of business services include repair shops
and management consulting. Cleaning
services, beauty shops, sports and social
services, such as day care, are examples of
the personal service category. A summary
of potential transaction privilege tax
revenue from these three major categories
is as follows:
Professional Services
Business Services
Personal Services

Sales of warranty or service contracts are exempt
from transaction privilege tax (A.R.S. §425061A3). No information is available on
this tax expenditure.
Sales of tangible personal property by any nonprofit
organization and operated exclusively for charitable
purposes and recognized by the department and the
United States Internal Revenue Service as such a
nonprofit organization for charitable purposes are
exempt from transaction privilege and use
tax (A.R.S. §42-5061A4; 42-5074B6; A.R.S.
§42-5159A15a).
No information is
available on this tax expenditure.
The sale of stocks and bonds is not subject to
transaction privilege tax in Arizona (A.R.S.
§42-5061A7). Using the 1997 Census of
Financial, Insurance, and Real Estate
Industries and inflating the Arizona
receipts for security brokers & dealers, the
potential tax collections from the act of the
sale of stocks and bonds (not including the
value of the investment) at a 5% tax rate
would be an estimated $101.3 million in
fiscal year 2003/04. No information is
available on the value of the exemption on
the investment themselves.

$631,643,000
$582,239,000
$ 86,359,000

Total transaction privilege tax revenue
available from these businesses is $1.3
billion. Although the estimate of potential
tax collections provided here does not
include estimates for all services, the
majority has been captured. A detailed list
of the services included can be found in
the table at the end of this section.
114

would have brought in $502.1 million in
additional revenues.

Items required by prescription, such as
prescription drugs and medical oxygen (A.R.S.
§42-5061A8, A.R.S. §42-5159A16), insulin,
syringes, glucose test strips (A.R.S. §425061A10, A.R.S. §42-5159A19), and
eyeglasses and contact lenses (A.R.S. 425061A11, A.R.S. §42-5159A18) are exempt
from transaction privilege and use tax.
Sales of prescription drugs in Arizona are
believed to be approximately $3.4 billion.
Taxing these sales at a 5% rate would
result in $169.3 million in additional tax
collections to the state. Potential tax
collections of $9.0 million would result
from taxing sales of eyeglasses and contact
lenses.

Textbooks sold by any bookstore that are required
by any state university or community college are
not subject to the transaction privilege or
use tax (A.R.S. §42-5061A17, A.R.S. §425159A28)
Information about this
exemption is not yet available.
Meals provided to employees of restaurants are
exempt from transaction privilege and use
taxation (A.R.S. §42-5061A18, A.R.S. §425159A24). Using an average value of $7.11
per meal, employees of full service
restaurants working five days per week
would consume meals worth $142 million.
This converts to tax collections of $7.1
million at a 5% tax rate for fiscal year
2003/04.

Prosthetic
appliances
prescribed
or
recommended by a physician, dentist or
other professional (A.R.S. §42-5061A9,
A.R.S. §42-5159A17) and hearing aids
(A.R.S. §42-5061A12, A.R.S. §42-5159A20)
are exempt from transaction privilege and
use tax, as are durable medical equipment
(A.R.S.
§42-5061A13,
A.R.S.
§425159A21). No information is available for
this tax expenditure.

No transaction privilege or use tax is
applied to food, drink or condiment
purchased for school lunches (A.R.S. §425061A19, A.R.S. §42-5159A26).
No
information is available for this tax
expenditure.
Arizona lottery ticket sales (A.R.S. §425061A20, A.R.S. §42-5159A27), amounting
to $366.6 million in fiscal year 2003/04, are
not taxable. Additional tax collections of
$18.3 million would have been received if
the sales were taxed at a 5% rate.

Sales to nonresidents of Arizona for use
outside Arizona if the vendor ships or
delivers the tangible personal property
outside of the state are exempt from
transaction privilege tax (A.R.S. §425061A14). No information is available on
this tax expenditure.

The sale of precious metal bullion and monetized
bullion to the ultimate consumer is exempt
from transaction privilege tax (A.R.S. §425061A21).
Precious metal bullion is
defined as precious metal, including gold,
silver, platinum, etc., which has been
smelted or refined so that its value depends
on its contents and not on its form.
Monetized bullion means coins and other
forms of money which are manufactured
from gold, silver, etc., and which have
been used as a medium of exchange. No
information is available for this tax
expenditure.

Food for home consumption (A.R.S. §425061A15, A.R.S. §42-5159A22) was
exempted from transaction privilege and
use tax effective July 1980. This includes
items purchased with food stamps (A.R.S.
§42-5061A16, A.R.S. §42-5159A23). Food
sales deductions are still reported but very
difficult to capture.
A survey of
deductions reported by the state's largest
grocery and warehouse stores provides an
estimate of food sales in fiscal year
2003/04 of $10 billion. A 5% tax on these
115

Tangible personal property sold to a qualifying
hospital or a qualifying health care organization
used by the organization solely to provide
health and medical related educational and
charitable services is exempt from
transaction privilege and use tax (A.R.S.
§42-5061A25a,b, §42-5063C3, §42-5065B2,
§42-5066B3, §42-5067B, §42-5074B8;
A.R.S. §42-5159A13a, b, d).
No
information is available on this tax
expenditure.

No transaction privilege or use tax is
charged on magazines or other periodicals or
other publications by this state to encourage tourist
travel (A.R.S. §42-5061A26, 42-5065A2,
A.R.S. §42-5159A29). Arizona Highways
magazine is the primary publication of this
type. No information is available on the
value of this exemption.
Articles or materials purchased to be
incorporated into a final product for sale
are exempt from transaction privilege and
use tax. Two examples of this exemption
can be quantified. Sales of articles to a
contractor with a transaction privilege tax license
for incorporation or fabrication under a
construction contract (A.R.S. §42-5061A27a)
were estimated using the 1997 Census of
Construction Industries for Arizona. On
the basis of estimated sales of $4.5 billion
in this category, potential tax collections at
a 5% tax rate would have been $223.7
million. Sales of articles to be incorporated into a
manufactured product (ACRR R15-5-1839,
A.R.S. §42-5159A4) were estimated using
the 1997 Census of Manufacturing. On
the basis of estimated sales of $12.8 billion,
potential tax collections at a 5% tax rate
would have been $639.9 million in fiscal
year 2003/04.

Tangible personal property sold to or purchased by
qualifying community health centers and health
care organizations dedicated to assisting
blind, visually impaired, and multihandicapped children are exempt from
transaction privilege and use tax (A.R.S.
§42-5061A25c, A.R.S. §42-5061A25d,
A.R.S. §42-5159A13e).
No data is
available on the value of this exemption.
Sales of tangible personal property to a
nonprofit charitable organization that regularly
serves meals to the needy and indigent on a
continuing basis at no cost is exempt from the
transaction privilege and use tax (A.R.S.
§42-5061A25e, A.R.S. §42-5159A13j). No
information is available on the value of this
exemption.
Sales of tangible personal property to a
nonprofit charitable organization 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, is exempt
from the transaction privilege and use tax
(A.R.S. §42-5061A25f, A.R.S. §425159A13l) The gross proceeds of sales
from a contract for construction of a residential
apartment housing facility that qualifies for a
federal housing subsidy for low income persons over
sixty-two years of age and that is owned by a
nonprofit charitable organization is exempt
from the prime contracting classification of
transaction privilege tax (A.R.S. §425075B13). Information is not available on
these expenditures.

The sale of a motor vehicle is exempt from
transaction privilege tax under two
conditions (A.R.S. §42-5061A28). If the
buyer is a nonresident of this state and the state of
residence does not allow a corresponding use tax
exemption and if the nonresident has secured a
special thirty-day nonresident vehicle registration,
the transaction is not taxable. Also, if the
purchaser is an enrolled member of an Indian tribe
who resides on the Indian reservation established
for that tribe, no tax can be imposed. No
information is available for this tax
expenditure.
Tangible personal property purchased or leased by
a nonprofit charitable organization that engages in
and uses such property exclusively for training, job
116

placement or rehabilitation programs or testing for
mentally or physically handicapped persons is
exempt from the transaction privilege and
use tax (A.R.S. §42-5061A29, A.R.S. §425159A13f). No information is available on
the tax value of this exemption.

5159A34). No information is available on
the value of this exemption.
Tangible personal property shipped or delivered
directly to a foreign country for use in that country
is exempt from transaction privilege tax
(A.R.S. §42-5061A35). No data is available
on the value of this exemption.

Tangible personal property sold and sales
under the amusement and restaurant
classifications by a nonprofit organization if the
organization is associated with a major league
baseball team or a national touring professional
golf association is not subject to transaction
privilege or use tax (A.R.S. §42-5061A30;
42-5073A5 42-5074B4; A.R.S. §425159A15b). Similar qualified organizations
which sponsor or operate a rodeo featuring
primarily farm and ranch animals are also
exempt from the transaction privilege and
use tax (A.R.S. §42-5061A32, 42-5073A6;
42-5074B5; A.R.S. §42-5159A15c). No
information is available on these tax
expenditures.

Sales of natural gas or liquefied petroleum gas used
to propel a motor vehicle are exempt from
transaction privilege and use tax (A.R.S.
§42-5061A36, A.R.S. §42-5063B3, A.R.S.
§42-5159A33). No information is available
on the value of this exemption.
Paper machine clothing sold to a paper
manufacturer and directly used or consumed in
paper manufacturing is exempt from
transaction privilege and use tax (A.R.S.
§42-5061A37, A.R.S. §42-5159A30). No
information is available for this
expenditure.

Sales of commodities, as defined by title 7 United
States Code § 2, that are consigned for resale in a
warehouse in or from which the commodity is
deliverable on a contract for future delivery subject
to the rules of a commodity market are exempt
from transaction privilege and use tax
(A.R.S.
§42-5061A31,
A.R.S.
§425159A14). No information is available on
the tax value of this exemption.

The gross proceeds of sales or gross income derived
from sales of machinery, equipment, utility product,
materials and other tangible personal property used
directly to construct a qualified environmental
technology manufacturing, producing or processing
facility are deducted from transaction
privilege tax base (A.R.S. §42-5061E, 425063C4). Use tax does not apply to the
storage, use or consumption in Arizona of
machinery, equipment, materials or other tangible
personal property if use directly to construct a
qualified
environmental
technology
manufacturing, producing or processing
facility (A.R.S. §42-5159E). Information is
not available on these expenditures.

There is no transaction privilege or use tax
on the sale of seeds, seedlings, roots, bulbs,
cuttings and other propogative material to persons
who uses those items to commercially produce
agricultural, horticultural, viticultural or
floricultural crops in Arizona (A.R.S. §425061A33, A.R.S. §42-5159A9).
No
information is available on the tax value of
this exemption.

Sales of coal, petroleum, coke, natural gas, virgin
fuel oil and electricity to an environmental
technology manufacturer, producer or
processor and that are directly used or
consumed in the generation or provision
of on-site power or energy are exempt
from transaction privilege and use tax
(A.R.S.
§42-5061A38,
A.R.S.
§42-

Machinery, equipment and certain supplies used to
assist the physically or developmentally disabled or
those persons with head injuries are exempt
from transaction privilege and use tax
(A.R.S.
§42-5061A34,
A.R.S.
§42117

5159A31). Information is not available on
the value of these expenditures.

portion of the Producer Price Index. On
the basis of estimated feed sales of
$275.7million, potential tax collections at a
5% tax rate would have been $13.8 in
Fiscal Year 2003/04.

Sales of liquid, solid or gaseous chemicals used in
manufacturing, processing, fabricating, mining,
refining, metallurgical operations or research and
development are exempt from transaction
privilege and use tax if the chemicals are
used for the purpose of causing or
permitting a chemical or physical change to
occur in the materials as a part of the
production process (A.R.S. §42-5061A39,
A.R.S. §42-5159A35). Information is not
available on this expenditure.

There is no transaction privilege or use tax
on the sale or purchase of implants used as
growth promotants and injectable medicines for
livestock and poultry owned by persons
engaged in producing or feeding livestock
or poultry (A.R.S. §42-5061A44, A.R.S.
§42-5159A7). Information is not available
on this expenditure.

Under the retail classification and the
restaurant classification, sales of food, drink or
condiment for consumption within the premises of
any jail or prison or any other institution under
the jurisdiction of the county sheriff,
DOC, DPS, or DYTR are exempt from
transaction privilege and use tax, (A.R.S.
§42-5061A41; 42-5074B9; A.R.S. §425159A36). No data is available on the
value of this exemption.

Sales of motor vehicles at auction to nonresidents
of this state for use outside this state if the
vehicles are shipped or delivered outside of
the state are exempt from the transaction
privilege tax (A.R.S. §42-5061A45). No
information is available on the value of this
exemption.
Transaction privilege and use tax does not
apply to sales of tangible personal property
to persons engaged in business under the
transient lodging classification if the
property is personal hygiene products or articles
used for drink or condiment, except alcoholic
beverages, which are furnished to and to be
consumed by the transient during his occupancy
(A.R.S.
§42-5061A46,
A.R.S.
§425159A13k). Information is not available
on this expenditure.

Motor vehicles and any repair and tangible
personal property that becomes a part of the motor
vehicles sold to a licensed motor carrier subject to
a fee under title 28, chapter 9, article 6 who
lease or rent the property are not subject to
transaction privilege or use tax (A.R.S. §425061A42, A.R.S. §42-5159A37).
No
information is available on the value of this
exemption.

Sales or purchases of alternative fuel to a used oil
fuel burner who is permitted under §49-426
or §49-480 to burn used oil or used oil fuel
are exempt from transaction privilege and
use tax (A.R.S. §42-5061A47, A.R.S. §425159A42). No information is available on
this tax expenditure.

Livestock, poultry, feed and supplies for use or
consumption in the businesses of farming, ranching
and feeding livestock and poultry, not including
fertilizers, herbicides and insecticides are
not subject to use tax in Arizona (A.R.S.
§42-5159A8). Sales of livestock and poultry
feed, salts, vitamins for livestock or poultry
consumption sold to persons engaged in
producing livestock, poultry or products
are exempt from transaction privilege tax
(A.R.S. §42-5061A43). The sale of animal
feed was estimated using the 1997 Census
of Agriculture and was inflated by the feed

Printed, photographic, electronic or digital media
materials for use in libraries funded with public
moneys in Arizona, are exempt from
transaction privilege and use tax (A.R.S.
§42-5061A48, A.R.S. §42-5159A12). No

118

information is available on the value of this
tax expenditure.

Machinery or equipment used directly in
manufacturing, processing, fabricating, job
printing, refining or metallurgical operations is
not subject to transaction privilege or use
tax (A.R.S. §42-5061B1, A.R.S. §425159B1). Limited information is available
on this type of machinery or equipment.
Using the 1997 Census of Manufacturing
and inflating this figure by the rate of
increase in the Producer Price Index for
machinery and equipment, an estimated
$2.4 billion in sales of this machinery taxed
at 5% would have brought in an additional
$120.8 million in revenues.

Under the retail classification and the
restaurant classification, tangible personal
property sold to or purchased by a commercial
airline that consist of food, beverages and
condiments and accessories used for serving, if the
items are provided without additional
charge, are exempt from transaction
privilege and use tax (A.R.S. §42-5061A49;
42-5074C;
A.R.S.
§42-5159A43).
Information is not available on this
expenditure.
Sales of new alternative fuel vehicles, as defined in
A.R.S. §43-1086, if the vehicle was
manufactured as a diesel fuel vehicle and converted
to operate on alternative fuel, and equipment that
is installed in a conventional diesel fuel motor
vehicle to convert the vehicle to operate on an
alternative fuel. (A.R.S. §42-5061A50, A.R.S.
§42-5159A44) Information is not available
on this expenditure.

Sales of machinery or equipment used in mining
directly in the process of extracting ores or
minerals from the earth for commercial
purposes (A.R.S. §42-5061B2, A.R.S. §425159B2) and sales of machinery or equipment
used in drilling for or extracting oil or gas from the
earth (A.R.S. §42-5061B10, A.R.S. §425159B10) are not taxed. The Census of
Mining provided figures for capital
expenditures of machinery and equipment
for 1997. Inflating this figure by the rate
of increase in the Producer Price Index for
machinery and equipment resulted in an
estimate of $320.2 million for sales of this
machinery in fiscal year 2003/04. A 5%
tax on this machinery would have brought
in $16 million in additional revenues.

Sales of any spirituous, vinous or malt liquor by a
person that is licensed in this state as a wholesaler
by the department of liquor licenses and control.
(A.R.S. §42-5061A51) No information is
available on the value of this tax
expenditure.
Sales of tangible personal property to be
incorporated or installed as part of environmental
response or remediation activities under A.R.S.
§42-5075B6. (A.R.S. §42-5061A52) No
information is available on the value of this
tax expenditure.

Tangible personal property sold to persons engaged
in business under the telecommunications
classification, consisting of central office
switching equipment, switchboards, private
branch exchange equipment, microwave
radio equipment and carrier equipment
including optical fiber, coaxial cable and
other transmission media which are
components of carrier systems are exempt
from the transaction privilege and use tax
(A.R.S. §42-5061B3, A.R.S. §42-5159B3).
No information is available on this tax
expenditure.

Sales of tangible personal property by a nonprofit
organization if the organization produces,
organizes or promotes cultural or civic related
festivals or events and no part of the organization’s
net earnings inures to the benefit of any private
shareholder or individual.
(A.R.S. §425061A53) No information is available on
the value of this tax expenditure.

Machinery, equipment or transmission lines used
directly in producing or transmitting electrical
119

power, but not including distribution is
exempt from the transaction privilege and
use tax (A.R.S. §42-5061B4, A.R.S. §425159B4).
Transformers and control
equipment used in transmission substation
sites are included in this exemption. No
information is available on this exemption.

property in intrastate or interstate transportation
for hire is exempt from the transaction
privilege and use tax (A.R.S. §42-5061B9,
A.R.S. §42-5159B9). No data is available
on the value of this exemption.
Transaction privilege and use tax do not
apply to sales of buses or other urban mass
transit vehicles which are used directly to transport
persons or property for hire or pursuant to a
governmentally adopted and controlled urban mass
transportation program and which are sold to bus
companies holding a federal certificate of
convenience and necessity (A.R.S. §42-5061B11,
A.R.S. §42-5159B11). No information is
available on this exemption.

Neat animals, horses, asses, sheep, swine or goats
used or to be used as breeding or production stock
are not subject to the transaction privilege
or use tax (A.R.S. §42-5061B5, A.R.S. §425159B5). No information is available on
the tax value of this exemption.
There is no transaction privilege or use tax
on pipes or valves four inches in diameter or larger
used to transport oil, natural gas, artificial gas,
water or coal slurry (A.R.S. §42-5061B6,
A.R.S. §42-5159B6). No information is
available on the value of this tax
expenditure.

Groundwater measuring devices and their
installation required under A.R.S. §45-604
are exempt from transaction privilege and
use tax (A.R.S. §42-5061B12, A.R.S. §425075B2, A.R.S. §42-5159B12).
No
information is available on the value of
these devices.

Aircraft, navigational and communication
instruments sold to (a) a person holding a
federal certificate of public convenience
and necessity or foreign air carrier permit
for air transportation in intrastate,
interstate or foreign commerce, (b) any
foreign government for use outside of
Arizona, or (c) nonresidents who will not
use such property in Arizona other than in
removing such property from Arizona are
not subject to the transaction privilege and
use tax (A.R.S. §42-5061B7, A.R.S. §425159B7). No data is available on the value
of this exemption.

New machinery and equipment (never sold at retail
pursuant to leases or rentals which do not total two
years or more) used for commercial production of
agricultural, horticultural, viticultural and
floricultural crops in Arizona are exempt from
transaction privilege and use tax (A.R.S.
§42-5061B13, A.R.S. §42-5159B13). This
equipment consists of tractors, tractordrawn
implements,
self-powered
implements and drip irrigation lines. No
information is available on the value of this
exemption.

Machinery, tools, equipment and related supplies
used or consumed directly in repairing, remodeling
or maintaining aircraft, aircraft engines or aircraft
component parts by or on behalf of a certified or
licensed carrier of persons or property are exempt
from tax (A.R.S. §42-5061B8, A.R.S. §425159B8). No information is available on
this exemption.

Transaction privilege and use tax does not
apply to sales of machinery or equipment used
in research and development. Research and
development means basic and applied
research in the sciences and engineering,
and designing, developing or testing
prototypes, processes or new products,
including research and development of
computer software that is embedded in or
an integral part of the prototype or new
product or that is required for machinery

Railroad rolling stock, rails, ties and signal control
equipment used directly to transport persons or
120

or equipment to function effectively
(A.R.S.
§42-5061B14,
A.R.S.
§425159B14). No information is available on
the value of this exemption.

Machinery and equipment used directly in the
feeding of poultry, the environmental control of
housing for poultry, the movement of eggs within a
production and packaging facility or the sorting or
cooling of eggs. (A.R.S. §42-5061B18, A.R.S.
§42-5159B18). No information is available
on the value of this exemption.

Machinery and equipment purchased by or on
behalf of owners of a soundstage complex and
primarily used for motion picture, multimedia or
interactive video production are exempt from
transaction privilege and use tax (A.R.S.
§42-5061B15,
A.R.S.
§42-5159B15).
Information is not available on the value of
this exemption.

Machinery or equipment, including related
structural components, that is employed in
connection with manufacturing, processing,
fabricating, job printing, refining, mining, natural
gas
pipelines,
metallurgical
operations,
telecommunications, producing or transmitting
electricity or research and development and that is
used directly to meet or exceed rules or regulations
adopted by the federal energy regulatory
commission, the United States environmental
protection agency, the United States nuclear
regulatory commission, the Arizona department of
environmental quality or a political subdivision of
this state to prevent monitor, control or reduce
land, water or air pollution. (A.R.S. §425061B19, A.R.S. §42-5159B19)
No
information is available on the value of this
exemption.

Tangible personal property used by any direct
broadcast satellite television or data transmission
service or facility to receive, store, convert,
produce, generate, decode, encode, control
or
transmit
telecommunications
information is exempt from transaction
privilege and use tax (A.R.S. §42-5061B16,
A.R.S. §42-5159B16a).
The broadcast
satellite television or data transmission
service or facility must operate within
federal regulations. Sales of services by direct
broadcast satellite television services that operate
within federal regulation are not taxable
under
the
telecommunications
classification (A.R.S. §42-5064B4). No
information is available on the value of
these exemptions.

Machinery and equipment that are sold to a person
engaged in the commercial production of livestock,
livestock products or agricultural, horticultural,
viticultural or floricultural crops or products in this
state and that are used directly and primarily to
prevent, monitor, control or reduce air, water or
land pollution. (A.R.S. §42-5061B20, A.R.S.
§42-5159B20) No information is available
on the value of this exemption.

Clean rooms that are used for
manufacturing, processing, fabrication or
research
and
development
of
semiconductor products are exempt from
transaction privilege and use taxes (A.R.S.
§42-5061B17, A.R.S. §42-5159B17). This
includes the integrated systems, fixtures,
piping, movable partitions, lighting and
property that is necessary for control of
the clean room. No information is
available on the value of this exemption.
The income derived from the installation,
assembly, repair or maintenance of the clean rooms
is exempt from taxation under the
contracting classification. (A.R.S. §425075B12). No information is available on
the value of this exemption.

Machinery or equipment that enables a television
station to originate and broadcast or to receive and
broadcast digital television signals and that was
purchased to facilitate compliance with the
telecommunications act of 1996. . (A.R.S. §425061B21, A.R.S. §42-5159B21)
No
information is available on the value of this
exemption.
The portion of the sales price of heavy trucks and
trailers that reflect the federal luxury excise tax
121

(A.R.S. §42-5061E) are exempt from
transaction privilege tax. The portion of
the sales price of use fuel that reflects the
federal luxury excise tax is also exempt
from transaction privilege tax (A.R.S. §425061F). Information is not available on
these expenditures.

deducted from the tax base, but the
deduction is not to exceed $5,000 for each
device (A.R.S. §42-5061N, A.R.S. §425075B14). Information is not available on
this expenditure.
Sales 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 telecommunications
services taxable under A.R.S. §42-5064 is
considered a sale for resale under the
transaction privilege and use taxes (A.R.S.
§42-5061P, A.R.S. §42-5159A41).
In
addition, the gross proceeds of sales or gross
income do not include the sales commissions
received as a result of a customer entering
or continuing a contract (A.R.S. §425061O). Information is not available on
these expenditures.

The gross proceeds of 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. §411514.02. (A.R.S. §42-5061D)
No
information is available on the tax value of
this exemption.
Sales of overhead materials or other tangible
personal property to a manufacturer, modifier,
assembler or repairer are exempt from
transaction privilege and use tax if the
gross proceeds of sales derived from the
property are exempt from transaction
privilege tax due to performing a contract
between the United States government and
the manufacturer, modifier, assembler or
repairer (A.R.S. §42-5061J, A.R.S. §425159A39). For those sales of tangible personal
property made directly to the United States
government that are not deducted under A.R.S.
§42-5061J, 50% of the gross proceeds or
gross income derived will be deducted
from the tax base (A.R.S. §42-5061K).
Data is not available on the value of these
exemptions.

Ambulances or ambulance services provided
under Title 48 or certified pursuant to Title
36, chapter 21.1 or provided by a city or
town in a county with a population of less
than 150,000 is not subject to taxation
under the transporting classification of the
transaction privilege tax (A.R.S. §425062A3). No information is available on
the tax value of this exemption.
The transporting classification of the
transaction privilege tax excludes public
transportation services for the dial-a-ride programs
and special needs transportation services (A.R.S.
§42-5062A4). No information is available
on the tax value of this exemption.

The gross proceeds of sales or gross income derived
from a manufacturer’s cash rebate on the sales price
of a motor vehicle if the buyer assigns the buyer’s
right in the rebate to the retailer; or the waste tire
disposal fee imposed pursuant to A.R.S. §441302. (A.R.S. §42-5061M1, §42-5061M2).
No data is available on the tax value of this
exemption.

The transporting classification of the
transaction privilege tax also excludes
transporting freight or property for hire by a
railroad operating exclusively in this state if the
transportation comprises a portion of a single
shipment of freight or property, involving more than
one railroad, either from a point in this state to a
point outside this state or from a point outside this
state to a point in this state. (A.R.S. §425062A5) No information is available on
the tax value of this exemption.

Sales of solar energy devices and the contractor’s
retail cost of a solar energy device that the
contractor supplied and installed are to be
122

utility system are excluded from the taxable
base under the utilities classification of
transaction privilege tax (A.R.S. §425063c1, A.R.S. §42-5159F1).
No
information is available on the tax value of
this exemption.

The gross proceeds of sales or gross income derived
from transporting for hire persons, freight or
property by a railroad pursuant to a contract with
another railroad is exempt from transaction
privilege tax if the other railroad has
already paid the transaction privilege tax on
the transporting of goods (A.R.S. §425062B1). No data is available on the tax
value of this exemption.

Revenues received by any person owning a utility
system in the form of reimbursement or
contribution compensation for property and
equipment installed to provide utility access to, on
or across the land of an actual utility consumer if
the property and equipment become the property of
the utility are excluded from the taxable base
under the utilities classification of the
transaction privilege tax (A.R.S. §425063c2, A.R.S. §42-5159F2).
No
information is available on the tax value of
this exemption.

Sales of electricity to a distributor who has a
transaction privilege tax license (A.R.S. §425063B1) are essentially sales of electricity
for resale. Information on this activity is
not available at this time from the Arizona
Corporation Commission.
Sales of natural gas or liquefied petroleum gas used
to propel a motor vehicle are not taxable under
the utility classification of transaction
privilege tax (A.R.S. §42-5063B2). No data
is available on the tax value of this
exemption.

Interstate sales of electricity, natural gas and water
(ACRR R15-5-2014) are exempt from
transaction privilege tax. Information is
not available for this expenditure at this
time.

Sales of alternative fuel, as defined in A.R.S. §1215 to a used oil fuel burner who has received a
permit to burn used oil or used oil fuel under
A.R.S. §49-426 or 49-480. (A.R.S. §425063B3) No data is available on the tax
value of this exemption.

Income from interstate telcommunication services
(A.R.S. §42-5064) is not taxable under the
telecommunications
classification
of
transaction privilege tax.
No data is
available on the tax value of this
exemption.

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. (A.R.S. §425063B4) No data is available on the tax
value of this exemption.

Sales of intrastate telecommunications services by a
cable television system or by a microwave television
transmission system that transmits television
programming to multiple subscribers are not
subject to transaction privilege tax (A.R.S.
§42-5064A1).
The National Cable
Television Association provides that in
2003, Arizona had 1,209,640 basic cable
subscribers. With an average expanded
basic monthly fee of $36.59, the estimated
revenues were $531.1 million. Potential
collections from a tax rate of 5% would
equal an estimated $26.6 million in fiscal
year 2003/04.

Revenues received by a municipally owned utility in
the form of fees charged to persons constructing
residential, commercial or industrial developments
or connecting residential, commercial or industrial
developments to a municipal utility system if the
fees are segregated and used only for capital
expansion, system enlargement or debt service of the
123

Sales of internet access services to subscribers and
customers. (A.R.S. §42-5064A2).
No
information is available on the tax value of
this exemption.

Sales of job printing, engraving, embossing, and
copying for use outside the state if the materials are
shipped or delivered out of the state, regardless of
where title to the materials passes or their free on
board point are exempt from the job printing
classification (A.R.S. §42-5066B2). No
data is available on the tax value of this
exemption.

End user common line charges and carrier access
charges established by federal communications
regulations are exempt from transaction
privilege tax (A.R.S. §42-5064B2, A.R.S.
§42-5064B3). No information is available
on the tax value of this exemption.

Leasing or renting four or fewer rooms of an
owner-occupied residential home, furnishing no
more than a breakfast meal, with no more
than 50% average annual occupancy rate is
not subject to the transaction privilege tax
under the transient lodging classification
(A.R.S. §42-5070B3). No information is
available on the value of this exemption.

Sales of direct broadcast satellite television services
pursuant to 47 Code of Federal Regulations parts
25 and 100 by a direct broadcast satellite
television service that operates pursuant to 47 Code
of Federal Regulations parts 25 and 100.
(A.R.S. §42-5064B4) No data is available
on the tax value of this exemption.

Leasing or renting films, tapes or slides used by
theaters or movies, which are engaged in business
under the amusement classification, or use by
television stations or radio stations is not subject
to the transaction privilege tax under the
personal property rental classification
(A.R.S. §42-5071A1). No information is
available on the value of this exemption.

The gross proceeds from manufacturing or
publishing books are exempt from transaction
privilege tax (A.R.S. §42-5065A1). No data
is available on the tax value of this
exemption.
The gross income derived from advertising is
excluded from the tax base for the
publication classification under transaction
privilege tax (A.R.S. §42-5065B1).
Advertising receipts for fiscal year 2002/03
were estimated using the 1997 Census of
Scientific and Technical Services to be
$499.2 million. A 5% tax on advertising
would have resulted in $25 million in
potential tax collections.

Operating coin operated washing, drying and dry
cleaning machines or coin operated car washing
machines at establishments for the use of such
machines are not subject to transaction
privilege tax (A.R.S. §42-5071A4).
Potential tax revenue for fiscal year
2003/04 is $12.7 million from coinoperated laundries and dry cleaning
services and $1 million from coin-operated
car washing machines.

The gross proceeds of sales to a person in
Arizona who has a transaction privilege tax
license and who distributes printing, engraving,
embossing or copying without consideration in
connection with the publication of a newspaper or
magazine are not included in the taxable
base under the job printing classification of
the transaction privilege tax (A.R.S. §425066B1). No information is available on
this exemption.

Leasing or renting tangible personal property for
incorporation into comprising any part of a
qualified environmental technology facility.
(A.R.S. §42-5071A5) No data is available
on the value of this exemption.
Leasing or renting aircraft, flight simulators or
similar training equipment to students or staff by
nonprofit, accredited educational institutions that
offer associate or bachelor’s degrees in aviation or
aerospace related fields. (A.R.S. §42-5071A6)
124

No data is available on the value of this
exemption.

amusements classification (A.R.S. §425073A4). The impact of this exemption
can be quantified by growing the 1997
Census of Arts, Entertainment and
Recreation data for Arizona. On the basis
of estimated sales of $105.6 million for
those categories, potential tax collections at
a 5% rate equal $5.3 million in fiscal year
2003/04.

Leasing or renting photographs, transparencies or
other creative works used by this state on internet
web sites, in magazines or in other publications
that encourage tourism. (A.R.S. §42-5071A7)
No data is available on the value of this
exemption.
Freight charges included in the sales price of
any nonmetalliferous mineral product are
subtracted from the taxable base under the
mining classification of the transaction
privilege tax (A.R.S. §42-5072C). No data
is available on the value of this exemption.

Sales of admissions to intercollegiate football
contests if the contests are operated by a nonprofit
organization are exempt from transaction
privilege tax (A.R.S. §42-5073A7). During
fiscal year 2003/04, admissions to such
contests are estimated to have been $12.5
million. At 5%, potential tax collections
would have been $0.6 million.

Tuition and fees paid to universities and
community colleges (A.R.S. §42-5073A1) are
exempt from transaction privilege tax.
Information on tuition figures for fiscal
year 2003/04 were not available at this
time.

Fees and assessments received by a homeowners
organization from members or guests of
members are not taxable under the
amusement classification (A.R.S. §425073A8). The value of this exemption is
not available.

Private or group instructional activities and
membership and initiation fees for health or fitness
clubs or private recreational establishments with
memberships greater than 28 days are exempt
from the amusement classification of
transaction privilege tax (A.R.S. §425073A2, A.R.S. §42-5073B1). Potential tax
revenue can be estimated by growing the
1997 Census of Arts, Entertainment, and
Recreation and Education Services receipt
data for Arizona. Estimated sales for the
above categories equal $353.7 million,
which gives a potential collection figure of
$17.7 million for fiscal year 2003/04.

Under the restaurant classification of
transaction privilege tax, sales by a
congressionally chartered veterans organization of
food or drink prepared for consumption on the
premises leased, owned or maintained by the
organization are exempt from tax (A.R.S.
§42-5074B2). No information is available
on the value of this exemption.
Sales by churches, fraternal benefit societies and
other nonprofit organizations which do not
regularly engage or continue in the restaurant
business for the purpose of fund raising are
exempt from transaction privilege tax
(A.R.S. §42-5074B3). No information is
available on the value of this tax
expenditure.

Events sponsored by the Arizona Coliseum and
Exposition Center Board (A.R.S. §42-5071A2,
§42-5073A3) are not subject to transaction
privilege tax.
Information about this
exemption is not yet available.

Under the restaurant classification of
transaction privilege tax, sales to qualifying
hospitals. (A.R.S. §42-5074B7).
No
information is available on the value of this
tax expenditure.

A musical, dramatic or dance group or a botanical
garden, museum or zoo that qualified as a
nonprofit charitable organization is exempt
from transaction privilege tax under the
125

assembly, repair or maintenance of
machinery or other tangible personal
property that is deducted under the retail
classification A.R.S. §42-5061B and that
does not become permanently attached to the
structure or project is exempt from the
prime contracting classification of
transaction privilege tax (A.R.S. §425075B7). No information is available on
the value of this tax expenditure.

While income from prime contracting is
taxable, both the sale price of land and the
wages and salaries paid for any labor employed in
construction (A.R.S. §42-5075B and B1) are
not taxable. The tax is limited to that
portion which is essentially materials (tax is
applied to 65% of gross proceeds). The
amount of contracting wages and salaries
estimated by the Department of Economic
Security for fiscal year 2003/04 was $6.5
billion. At a 5% tax rate, the tax on the
labor component is $326.0 million. An
estimate for the total sales price of land is
not available.

Income received from a contract for
constructing a lake facility development in a
commercial enhancement reuse district is exempt
from the prime contracting classification of
transaction privilege tax (A.R.S. §425075B8). Information is not available on
this expenditure.

The gross proceeds of sales or gross
income received from a contract entered
into for the construction, alteration, repair,
addition,
subtraction,
improvement,
movement, wrecking or demolition of any
building,
highway,
road,
railroad,
excavation or other structure, project,
development or improvement located in a
military reuse zone for a manufacturer, assembler
or fabricator of aviation or aerospace products is
exempt from transaction privilege tax
under the prime contracting classification
(A.R.S. §42-5075B4). No information is
available for this exemption.

Income from a contract for the construction of
an environmentally controlled facility for the raising
of poultry for the production of eggs and the sorting,
cooling and packaging of eggs is exempt from
the prime contracting classification of
transaction privilege tax (A.R.S. §425075B10). Information is not available on
this expenditure.
Income from a contract with a person in
the agricultural industry for construction,
alteration, repair, improvement movement,
wrecking, demolition, addition to or subtraction
from any building, highway, road, excavation,
manufactured building or other structure,
development or improvement used directly and
primarily to prevent, monitor, control or reduce air
water or land pollution. (A.R.S. §42-5075B11)
No information about this expenditure is
available.

The gross proceeds of sales derived from a
contract to construct a qualified environmental
technology manufacturing, producing or processing
facility is exempt from transaction privilege
tax under the prime contracting
classification (A.R.S. §42-5075B5). The
value of this exemption is not available.
The gross proceeds of sales from a contract
to provide response to a release or suspected release
of a hazardous substance is exempt from the
prime contracting classification of
transaction privilege tax (A.R.S. §425075B6). Information is not available on
this expenditure.

Income from a contract entered into for
the construction of a launch site, as defined in
14 Code of Federal Regulations section
401.5. (A.R.S. §42-5075B15)
No
information about this expenditure is
available.

The gross proceeds of sales that are from a
contract entered into for the installation,

Income from a contract entered into for
the construction of a domestic violence shelter that
126

is owned and operated by a nonprofit charitable
organization. (A.R.S. §42-5075B16)
No
information about this expenditure is
available.

licensed nursing care institutions are exempt
from use tax (A.R.S. §42-5159A13c).
Information is not available on this
expenditure.

Gross proceeds of sales or gross income derived from
contracts to perform post-construction treatment of
real property for termite and general pest control,
including wood destroying organisms. A.R.S. §425075B17) No information is available on
the value of this tax exemption.

Tangible personal property purchased by a
nonprofit charitable organization from the parent
or affiliate organization that is located out of state
is exempt from use tax (A.R.S. §425159A13h). No data is available on the
value of this exemption.

Gross proceeds of sales or gross income derived from
contracts to build certain state university research
infrastructure projects. A.R.S. §42-5075B18)
No information is available on the value of
this tax exemption.

Motor vehicles that are removed from inventory and
are provided to charitable or educational
institutions or state universities or their affiliated
organizations are exempt from use tax
(A.R.S. §42-5159A32). No information is
available on the value of this exemption.

Use tax does not apply for tangible personal
property not exceeding $200 in any one month
purchased by an individual at retail outside the
continental limits of the United States for
personal use and enjoyment (A.R.S. §425159A10). No data is available on the
value of this exemption.

Use tax does not apply to tangible personal
property that is or directly enters into and
becomes an ingredient or part of cards used
as prescription plan identification cards (A.R.S.
§42-5159A38).
Information is not
available on this expenditure.

All purchases made by a residential care
institution that is operated in conjunction with

127

T R A N S AC T I O N P R I V I L E G E A N D U S E TA X
EXPENDITURES
Additional
Collections
PREFERENTIAL TAX RATE CATEGORIES
At A 5% Rate
Nonmetalliferous Mining; Oil and Gas Production.............................................. $5,396,000
Commercial Lease .................................................................................................... 279,514,000
Rental Occupancy Tax.......................................................................................................84,000
Total Preferential Tax Rates ............................................................................$284,994,000
CREDITS
Motion Picture Production Company refund ......................................................................... 0
Accounting Credit .................................................................................................... $19,640,000
Total Credits ...........................................................................................................$19,640,000
EXEMPTIONS
Professional Services:
Legal ...................................................................................... $101,187,000
Engineering ............................................................................... 72,314,000
Architectural.............................................................................. 21,912,000
Surveying ..................................................................................... 2,450,000
Accounting, Auditing & Bookkeeping .................................. 43,860,000
Physicians ................................................................................ 193,719,000
Optometrists ............................................................................... 5,963,000
Chiropractors ............................................................................ 10,596,000
Dentists ...................................................................................... 53,993,000
Physical, Occupational & Speech Therapists ......................... 9,461,000
Nursing & Personal Care Facilities........................................ 54,303,000
Outpatient Care ........................................................................ 22,815,000
Home Health Care Services.................................................... 23,420,000
Other Ambulatory Health Services........................................ 15,650,000
Total Reportable Professional Services......................................................... $631,643,000
Business Services:
Services to Dwellings & Other Buildings ........................... $37,424,000
Credit Reporting, Collection Agencies.................................. 12,345,000
Advertising Agencies .............................................................................. 33
Public Relations .......................................................................... 1,596,000
Market Research ......................................................................... 5,611,000
Telemarketing Bureaus ............................................................ 13,153,000
Direct Mail Advertising ............................................................................33
Display Advertising...................................................................................33
33

The value of exempting this service is reported elsewhere as a specific exemption (A.R.S. §42-5065B1.)

128

Document Prep Services......................................................... $2,720,000
Stenographic Services ................................................................ 1,225,000
Graphic Design........................................................................... 6,460,000
Commercial Photography ......................................................... 1,211,000
Computer Programming ......................................................... 23,903,000
Computer Systems Design Services....................................... 34.481,000
Management Consulting Services .......................................... 43.156,000
Environmental Consulting Services ........................................ 3,658,000
Scientific & Technical Consulting Services ............................ 6,675,000
Scientific Research & Development...................................... 14,810,000
Testing Laboratories & Facilities ............................................. 9,760,000
Investigation & Security Services........................................... 18,736,000
Interior Design............................................................................ 6.005,000
Telephone Answering Service .................................................. 6,310,000
Business Service Centers ......................................................... 12,869,000
Employee Leasing Services..................................................... 71.493,000
Temporary Help Services........................................................ 73.694,000
Linen & Uniform Supply .......................................................... 9,269,000
Automobile Parking ................................................................... 2,314,000
Automotive Repair Shops ....................................................... 95.942,000
Automotive Services, Except Repair ..................................... 20,797,000
Electronic & Machinery Repair Shops.................................. 41,153,000
Re-upholstery & Furniture Repair ........................................... 1,618,000
Watch, Clock & Jewelry Repair....................................................701,000
Miscellaneous Repair & Related Services ............................... 3,150,000
Total Business Services.................................................................................... $582,239,000
Personal Services:
Dry cleaning & Laundry.......................................................... $7,168,000
Hair, Nail & Skin Care Services ............................................. 14,917,000
Footwear, Leather & Garment Repair & Alteration .................502,000
Death Care Services ................................................................... 7,875,000
Photographic Studios, Portraits ............................................... 2,975,000
Diet Reducing Services............................................................. 2,184,000
Personal & Household Goods Repair................................... 13,248,000
Miscellaneous Personal Services .............................................. 1,893,000
Child Day Care Services .......................................................... 10,683,000
Other Social Services ............................................................... 15,835,000
Technical & Trade Schools....................................................... 9,079,000
Total Personal Services............................................................................................ $86,359,000
Wholesale Trade ..................................................................................................$2,665,150,000
Cash Discounts .................................................................................................................... NIA*
Trade-Ins ................................................................................................................................ NIA
Sale of Warranty or Service Contracts................................................................................ NIA
Sale of Tangible Personal Property by a Nonprofit Organization................................. NIA

*

No Information Available.

129

Sale of Stocks and Bonds34 .................................................................................. $101,274,000
Prescription Drugs and Medical Oxygen.............................................................. 169,266,000
Eyeglasses and Contact Lenses .................................................................................. 8,977,000
Insulin, Insulin Syringe and Glucose Test Strips ............................................................ NIA*
Prosthetic Appliances ........................................................................................................... NIA
Hearing Aids .......................................................................................................................... NIA
Durable medical equipment................................................................................................. NIA
Sales to Nonresidents for use outside Arizona if the property is shipped or
delivered outside the state ............................................................................................... NIA
Food for Home Consumption ............................................................................... 502,120,000
Textbooks that are required by any state university or community
college................................................................................................................................. NIA
Meals Provided to Employees of Restaurants.......................................................... 7,121,000
Food Used in School Lunches ............................................................................................ NIA
Sale of Arizona Lottery Tickets................................................................................ 18,330,000
Precious Metal Bullion and Monetized Bullion ................................................................ NIA
Tangible Personal Property sold to a Qualifying Hospital or a Qualifying
Health Care Organization ............................................................................................... NIA
Tangible Personal Property Sold to or Purchased by Qualifying Community
Health Centers and Health Care Organizations .......................................................... NIA
Tangible Personal Property Sold to a Non-Profitable Organization which
Regularly Serves Meals to the Needy and Indigent ..................................................... NIA
Tangible Personal Property Sold to a Non-Profitable Organization which
Provides Housing for Low Income Persons Over Sixty-Two Years ....................... NIA
Gross Proceeds from Contracts to Build Housing for Nonprofits to
HouseLow Income Persons Over Sixty-Two Years .................................................. NIA
Magazines or other Periodicals or other Publications To Encourage
Tourist Travel ................................................................................................................... NIA
Sale of Articles to a Contractor for Incorporation or Fabrication
Under a Contract................................................................................................. 223,676,000
Sale of Articles to be Incorporated into a Manufactured Product.................... 639,912,000
Exempt Motor Vehicle Sales (certain nonresidents and Indians) .................................. NIA
Tangible Personal Property Purchased by a Nonprofit Charitable
Organization that uses such property for training, etc., for mentally
or physically handicapped persons ................................................................................ NIA
Tangible Personal Property Sold by a Nonprofit Organization associated
with a major league baseball team or a national touring professional
golf association ................................................................................................................. NIA
Tangible Personal Property Sold by a Nonprofit Organization associated
with a rodeo featuring primarily farm and ranch animals .......................................... NIA
Sales of Commodities under Futures Contracts Consigned to a Warehouse
for Resale ........................................................................................................................... NIA
Sales of New Semitrailers or New Semitrailer Parts Manufactured in
Arizona............................................................................................................................... NIA
Seeds, Seedlings, Roots, Bulbs, Cuttings and Other Propogative Material
34 This includes the value of
* No Information Available.

the securities activities, not the value of the stocks and bonds.

130

used to commercially produce agricultural, horticultural, viticultural
or floricultural crops in Arizona................................................................................... NIA*
Machinery, Equipment and Certain Supplies Used to Assist the Physically
or Developmentally Disabled or those Persons with Head Injuries ........................ NIA
Tangible Personal Property Shipped or Delivered Directly to a Foreign
Country for use in that Country..................................................................................... NIA
Sales of Natural Gas or Liquefied Petroleum Gas used to Propel a
Motor Vehicle ................................................................................................................... NIA
Paper Machine Clothing Used or Consumed in Paper Manufacturing......................... NIA
Machinery, Equipment, Utility Product, Materials and Other Tangible Personal
Property Used to Construct a Qualified Environmental Technology
Facility ................................................................................................................................ NIA
Sales of Coal, Petroleum, Coke, Natural Gas, Virgin Fuel Oil and Electricity
to an Environmental Technology Facility .................................................................... NIA
Sales of Liquid, Solid or Gaseous Chemicals Used in Manufacturing, Processing
Fabricating, Mining, Refining, Metallugical Operations or Research and
Development..................................................................................................................... NIA
Sales of Food or Drink Consumed on the Premises of a Jail, Prison, or any
Other Institution and Nonprofit Charitable Organizations that Regularly
Serve Meals to the Needy and Indigent on a Continuing Basis ................................ NIA
Motor Vehicles and any Tangible Personal Property or Repair that Becomes a
Part of the Motor Vehicles sold to a Licensed Motor Operator that Lease
or Rent the Property ........................................................................................................ NIA
Livestock, Poultry, Feed and Supplies for Use or Consumption in the
Businesses of Farming, Ranching and Feeding Livestock and
Poultry................................................................................................................... $13,786,000
Sale or Purchase of Implants Used as Growth Promotants and Injectable
Medicine............................................................................................................................. NIA
Sales of Motor Vehicles at Auction to Nonresidents of this State for Use
Outside of this State......................................................................................................... NIA
Personal Hygiene Products Which are Furnished to and to be Consumed by
Hotel Occupant ................................................................................................................ NIA
Sales or Purchases of Alternative Fuel to a Used Oil Fuel Burner ................................ NIA
Printed, Photographic, Electronic or Digital Media Materials for use in
Publicly Funded Libraries ............................................................................................... NIA
Tangible Personal Property Consisting of Food, Beverages and Condiments
Sold to or Purchased by a Commercial Airline............................................................ NIA
Sale of New Alternative Fuel Vehicles and Conversion Equipment............................. NIA
Sale of Spirituous, Vinous or Malt Liquor by a Liquor Wholesaler............................... NIA
Property to be Incorporated as Part of Environmental Response or
Remediation Activities..................................................................................................... NIA
Tangible Personal Property by a Nonprofit that Produces, Organizes or
Promotes Cultural or Civic Related Festivals............................................................... NIA
Machinery or Equipment used directly in Manufacturing, Processing,
Fabricating, Job Printing, Refining or Metallurgical Operations.................. 120,809,000
Sale of Machinery or Equipment Used in Mining and in Drilling for or Extracting
Oil or Gas from the Earth ................................................................................... 16,012,000
*

No Information Available.

131

Certain Equipment used in the Telecommunications Industry...................................... NIA
Machinery, Equipment or Transmission Lines used directly in Producing or
Transmitting Electrical Power...................................................................................... NIA*
Neat Animals, Horses, Asses, Sheep, Swine or Goats used or to be used as
breeding or production stock ......................................................................................... NIA
Pipes or Valves Four Inches in Diameter Used to Transport Oil, Natural Gas,
Artificial Gas, Water or Coal Slurry............................................................................... NIA
Certain Aircraft, Navigational and Communication Instruments .................................. NIA
Machinery, Tools, Equipment Used in Repairing, Remodeling or Maintaining
Aircraft, Aircraft Engines or Aircraft Component Parts............................................ NIA
Railroad Rolling Stock, Rails, Ties and Signal Control Equipment Used to
Transport Persons or Property for hire ........................................................................ NIA
Buses or Other Urban Mass Transit Vehicles Used to Transport Persons
for hire or pursuant to a governmentally adopted and controlled
urban mass transportation program .............................................................................. NIA
Certain Groundwater Measuring Devices and their installation .................................... NIA
New Machinery and Equipment Used for Commercial Production of
Agricultural, Horticultural, Viticultural and Floricultural Crops ............................... NIA
Machinery or Equipment used in Research and Development...................................... NIA
Machinery and Equipment Purchased by or on Behalf of Owners of a
Soundstage Complex ....................................................................................................... NIA
Tangible Personal Property Used by any Direct Broadcast Satellite Television
or Data Transmission Service or Facility...................................................................... NIA
Sales of Services by Direct Broadcast Satellite Television Services ............................... NIA
Clean Rooms Used for Manufacturing, Processing Fabrication or Research
and Development ............................................................................................................. NIA
Gross Income from Installation, Assembly, Repair or Maintenance
Clean Rooms..................................................................................................................... NIA
Machinery and Equipment Used in the Feeding of Poultry or Production
and Packaging of Eggs..................................................................................................... NIA
Machinery and Equipment used to Meet Land, Water and Air Quality
Standards ........................................................................................................................... NIA
Machinery and Equipment used by Agriculture to Prevent, Monitor,
Control or Reduce Pollution .......................................................................................... NIA
Digital Television Machinery and Equipment Purchases for Compliance
with the Telecommunications Act of 1996 .................................................................. NIA
Portion of Sales Price of Luxury Automobiles that Reflects the Federal
Luxury Excise Tax............................................................................................................ NIA
Portion of Sales Price of Use Fuel that Reflects the Federal Luxury
Excise Tax ......................................................................................................................... NIA
Gross Income from Machinery, Equipment and Materials used Directly
to Construct a Qualified Environmental Technology Facility................................... NIA
Sales of Overhead Materials or Other Tangible Personal Property to a
Manufacturer, Modifier, Assembler or Repairer if Performing a Contract
between the United States Government and the Manufacturer................................ NIA
Sales of Tangible Personal Property made to the United States Government
Not Deducted under A.R.S. §42-5061L........................................................................ NIA
*

No Information Available.

132

Gross Income from Motor Vehicle Manufacturer’s Cash Rebates if
Assigned to the Retailer................................................................................................. NIA*
Gross Income derived from the Waste Tire Disposal Fee ............................................. NIA
Sales of Solar Energy Devices ............................................................................................. NIA
Sales of Wireless Telecommunication Equipment as an Inducement to
Enter Into or Continue a Contract for Telecommunication Services or
Sales Commissions Received .......................................................................................... NIA
Ambulances or Ambulance Services .................................................................................. NIA
Public Transportation Services for Dial-A-Ride Programs and Special Needs
Transportation Services................................................................................................... NIA
Gross Proceeds for Transporting Freight or Property by an Exclusively Arizona
Railroad for Portions of Single Shipments Involving Other Railroads.................... NIA
Gross Proceeds of Sales or Gross Income Derived from Transporting For
Hire Persons, Freight or Property by a Railroad Pursuant to a Contract
with Another Railroad ..................................................................................................... NIA
Sales of Electricity to a Distributor..................................................................................... NIA
Sales of Natural Gas or Liquefied Petroleum Gas used to Propel a Motor
Vehicle................................................................................................................................ NIA
Sales of Alternative Fuel to a Used Oil Fuel Burner........................................................ NIA
Sales of Electric Services to a Retail Electric Customer Who Is Located
Outside This State for Delivery and Use Outside the State....................................... NIA
Revenues Received by a Municipally Owned Utility in the form of Fees
Charged to Persons Constructing Residential, Commercial or Industrial
Developments................................................................................................................... NIA
Revenues Received By Any Person Owning a Utility System in the Form of
Reimbursement or Contribution Compensation for Property and Equipment
Installed to Provide Utility Access to, on or across the land of an actual
utility consumer ................................................................................................................ NIA
Interstate Sales of Electricity, Natural Gas & Water........................................................ NIA
Interstate Telecommunication Services ............................................................................. NIA
Sales of Intrastate Telecommunications Services by a Cable Television System
or by a Microwave Television Transmission System ..................................... $26,556,000
Sales of internet access services……………………….................................................. NIA
End User Common Line Charges and Carrier Access Charges Established by
Federal Communications Regulations........................................................................... NIA
Sales of Direct Broadcast Satellite Television Services .................................................... NIA
Manufacturing or Publishing Books................................................................................... NIA
Gross Income of Publications Derived from Advertising ................................... 24,961,000
Sales to a Person who Distributes Printing, Engraving, Embossing or Copying
Without Consideration In Connection With the Publication of a Newspaper
or Magazine ....................................................................................................................... NIA
Sales of Job Printing, Engraving, Embossing, and Copying for Use Outside
the State if the Materials are Shipped or Delivered Out of the State ....................... NIA
Leasing or Renting Four or Fewer Rooms of an Owner Occupied Residence
Bed and Breakfast with less than 50% Average Annual Occupancy........................ NIA
Leasing Films, Tapes or Slides Used by Theaters or Movies or Used By
Television Stations or Radio Stations............................................................................ NIA
*

No Information Available.

133

Operating Coin Operated Washing, Drying and Dry Cleaning
Machines............................................................................................................... $12,684,000
Operating Coin Operated Car Washing Machines.................................................. 1,005,000
Leasing or Renting Personal Property for Incorporation into a Qualified
Environmental Technology Facility ............................................................................ NIA*
Leasing or Renting Aircraft or Training Equipment by a Non-Profit School
Offering Aviation and Aerospace Degrees................................................................... NIA
Leasing or Renting Photographs, Transparencies or Other Creative
Works used by this State on Internet Web Sites, in Magazines or Other
Publications that Encourage Tourism........................................................................... NIA
Freight Charges Relating Nonmetalliferous Mineral Products....................................... NIA
Tuition and Fees Paid to Universities & Community Colleges ...................................... NIA
Private or Group Instructional Activities and Membership and Initiation Fees
for Health or Fitness Clubs or Private Recreational Establishments with
Memberships Greater than 28 Days................................................................... 17,686,000
Events Sponsored by the Arizona Coliseum & Exposition Board................................ NIA
Musical, Dramatic or Dance groups or a Botanical Garden, Museum or Zoo
that Qualifies as a Nonprofit Charitable Organization...................................... 5,279,000
Sales of Admissions to Intercollegiate Football Contests ..........................................625,000
Fees and Assessments Received by a Homeowners Organization ................................ NIA
Sales By a Congressionally Chartered Veterans Organization of Food
or Drink ............................................................................................................................. NIA
Sales By Churches, Fraternal Benefit Societies and Other Nonprofit Organizations
Which Do Not Regularly Engage or Continue in the Restaurant Business
for the purpose of fund raising ...................................................................................... NIA
Restaurant Sales to Qualifying Hospitals ........................................................................... NIA
Wages & Salaries for Labor Employed in Construction ................................... 325,983,000
Contracting in a Military Reuse Zone for a Manufacturer, Assembler or
Fabricator of Aviation or Aerospace Products............................................................ NIA
Gross Proceeds from Contracts to Construct a Qualified Environmental
Technology Facility .......................................................................................................... NIA
Gross Proceeds of Sales from a Contract to Provide Response to a Release
or Suspected Release of a Hazardous Substance ......................................................... NIA
Gross Proceeds of Sales from a Contract to Install, Assemble, Repair or
Maintain Machinery that does not become permanently attached. .......................... NIA
Income Received from a Contract for Constructing a Lake Facility
Development in a Commercial Enhancement Reuse District................................... NIA
Income from Contracts for Construction of Facilities for Raising Egg Producing
Poultry, or the Production and Packaging of Eggs .................................................... NIA
Income from Contracts for Construction Work to Prevent, Monitor, Control
or Reduce Pollution in the Agriculture Industry ......................................................... NIA
Income from Contracts for Construction of a Launch Site............................................ NIA
Income from Contracts for Construction of a Domestic Violence Shelter ................. NIA
Gross Proceeds from Contracts to Perform Post-Construction Treatment of Real
Property for Termite and General Pest Control.......................................................... NIA
Gross Proceeds from Contracts to Construct Certain State University
Research Infrastructure Projects .................................................................................... NIA
*

No Information Available.

134

Tangible Personal Property Not Exceeding $200 Purchased By An Individual
at Retail Outside the Continental United States – USE TAX ONLY ................... NIA*
Purchases Made by a Residential Care Institution that is Operated in Conjunction
with Licensed Nursing Care Institutions – USE TAX ONLY ................................. NIA
Tangible Personal Property Purchased by a Nonprofit Charitable Organization
from the Parent or Affiliate Organization located Out of StateUSE TAX ONLY ............................................................................................................ NIA
Motor Vehicles Removed From Inventory and Provided to Charitable or
Educational Institutions or State Universities or their Affiliated OrganizationUSE TAX ONLY ............................................................................................................ NIA
Tangible Personal Property which Directly Enters into or becomes an Ingredient
or Part of Cards Used as Prescription Plan Identification Cards
- USE TAX ONLY.......................................................................................................... NIA
Total Exemptions.............................................................................................$6,201,454,000

TOTAL QUANTIFIABLE TRANSACTION PRIVILEGE AND USE
TAX EXPENDITURES35.................................................. $6,506,088,00036
Value of Exemptions from the Proposition 301-Education Tax ..........$744,174,000
Return to Table of Contents

*

No Information Available.
expenditures represent foregone revenues to the state general fund, counties and incorporated
cities/towns.
36Changes from previous years may be a result of changes in the Census/Base year figures and/or
measurable changes in economic activity, as in the case of construction-based figures.
35These

135

136

UNDERGROUND
STORAGE TANK
TAX EXPENDITURES

137

138

U N D E RG R O U N D S T O R AG E T A N K T A X
EXPENDITURES
37

An underground storage tank tax is
imposed by A.R.S. §49-1031.
For
purposes of this tax, it is presumed until
proven differently that all regulated
substances which are motor vehicle fuel,
aviation fuel and diesel and which are
refined,
manufactured,
produced,
compounded or blended in Arizona, or
imported into the state, will be placed in an
underground storage tank from which the
fuel is dispensed to users who consume the
fuel and do not further distribute it. The
tax is levied at the rate of 1¢ per gallon of
regulated substance. Revenue from this
tax is deposited into the Department of
Environmental
Quality
Assurance
Account, used for corrective action
projects.

information on the tax value of this tax
expenditure.
Underground storage tanks used for the purpose of
storing, handling or distributing naphtha-type jet
fuel or kerosene-type jet fuel are exempt from
the underground storage tank tax (A.R.S.
§49-1031C).
Since the Arizona
Department of Environmental Quality
does not regulate these types of tanks they
are not required to be registered with the
department and can no longer be tracked.
As with the underground storage tanks
owned by the federal government and the
state of Arizona, the owner/operators of
these types of underground storage tanks
are not required to report the number of
times their tanks are refueled. Due to the
lack of information, there is no way to
calculate the impact of this tax
expenditure.

This tax does not apply to underground
storage tanks operated by the United States or
Arizona and its agencies (A.R.S. §49-1031C).
Currently, there are 100 federal tanks in
use with an average tank capacity of 10,129
gallons. There are 68 state tanks currently
in use with an average tank capacity of
10,669 gallons.
The Department of
Environmental Quality does not require
the owners/operators of these tanks to
report the total number of times they are
refueled.
Therefore, there is no

Above-ground storage tanks are not subject to
this tax. The owners/operators of these
types of tanks are not required to register
their tanks with the Department of
Environmental Quality nor with the State
Fire Marshal. Municipalities regulate these
types of tanks in their own city. Thus, due
to the lack of information, it is not possible
to determine the impact.

37Any

figures presented for Underground Storage Tank Tax Expenditures were provided by the Arizona
Department of Environmental Quality.

139

S U M M A RY O F U N D E R G R O U N D S T O R A G E
TA N K TA X E X P E N D I T U R E S
Revenue Gain
Underground Storage Tanks Operated by the U.S. or Arizona .....................................NIA*
Tanks used for Naphtha-Type or Kerosene-Type Jet Fuel ..............................................NIA
Above-Ground Storage Tanks ..............................................................................................NIA

TOTAL QUANTIFIABLE UNDERGROUND STORAGE TANK TAX
EXPENDITURES38
......................................................................................................... NIA

Return to Table of Contents

*

No Information Available.
expenditures represent foregone revenues to the DEQ Assurance Account.

38These

140

UNEMPLOYMENT
INSURANCE
TAX EXPENDITURES

141

142

U N E M P L OY M E N T I N S U R A N C E T A X
EXPENDITURES
39

No information was received from the Arizona Department of Economic Security on
unemployment insurance tax expenditures.

39Any figures presented for Unemployment Insurance Tax Expenditures were provided by the Arizona
Department of Economic Security.

143

S U M M A RY O F U N E M P L O Y M E N T I N S U R A N C E
TA X E X P E N D I T U R E S
Revenue Gain
Exemptions from wages.................................................................................................................
Exemptions from the definition of employee.............................................................................
Exemptions from employment .....................................................................................................

TOTAL QUANTIFIABLE UNEMPLOYMENT INSURANCE TAX
EXPENDITURES40 .............................................................................
Return to Table of Contents

40These

expenditures represent foregone revenues to the state unemployment insurance fund.

144

USE FUEL
TAX EXPENDITURES

145

146

U S E F U E L TA X E X P E N D I T U R E S
There is a tax of 26¢ per gallon on each
gallon of use fuel (all fuel that is not
considered motor vehicle fuel, like diesel
fuel) used in the propulsion of a motor
vehicle on any highway within this state,
with the exception of clean burning use
fuel.
The proceeds of this tax are
distributed to the state highway fund,
counties and incorporated cities and towns.
There is a $0.02 per gallon credit for all use
fuel purchased in Arizona and used outside
of the state (A.R.S. §28-5728). The total
amount refunded for this type of purchase
during fiscal year 2003/04 was $556,700.

41

the use fuel tax (A.R.S. §28-5716A7a).
Road rollers or vehicles which are designed and
used primarily for grading, paving, earth moving
and other construction work on highways and
which are not designed or used primarily
for transportation of persons or property
and which are incidentally operated or
moved over the highway are also exempt
from use fuel tax (A.R.S. §28-5716A7b).
Refunds granted for these types of
exemptions together totaled $8.7 million in
fiscal year 2003/04.
Liquid use fuel sold within an Indian
reservation to an enrolled member of the
tribe is excluded from taxation per A.R.S.
28-5716A3. The total amount refunded
for this provision during fiscal year
2003/04 was $173,300.

PREFERENTIAL USE FUEL TAX
RATES
Fuel used on light class motor vehicles used on a
highway in this state for convenience and facility or
on vehicles exempt from gross weight fees is taxed
at $0.18 per gallon (A.R.S. §28-5709). The
amount of refunds issued for fiscal year
2003/04 was $11.4 million. Liquid use
fuel, used for export purposes is taxed at a
$0.26 per gallon rate.
The amount
refunded for this type of use fuel was $1.3
million.

Each supplier that properly remits use fuel tax
may retain four-tenths of one per cent of the tax
imposed to cover the costs of administration of the
tax (A.R.S. §28-5751). This amount would
have been collected by the state if this
provision were not in effect. The value of
this provision for fiscal year 2003/04 is
$2.2 million.

EXEMPTIONS TO THE USE FUEL
TAX

Effective April 1, 1997, all clean burning
fuels are no longer taxed (A.R.S. §285708A2). Since taxpayers who consume
alternative fuels are not required to report
their use information to the department,
no information is available on this
exemption.

Farm tractors and implements of husbandry
designed primarily for or used in agricultural
operations and only incidentally operated or
moved upon a highway are exempt from

41Any

figures presented for Use Fuel Tax Expenditures were provided by the Arizona Department of
Transportation.

147

S U M M A RY O F U S E F U E L T A X E X P E N D I T U R E S
Revenue Gain
PREFERENTIAL TAX RATES:
Fuel purchased in Arizona and used outside the state............................................... $556,700
Light class and exempt vehicles use rate................................................................... 11,433,100
Liquid use fuel used for export .................................................................................... 1,347,800
EXEMPTIONS:
Farm tractors, implements of husbandry and road rollers or vehicles
designed and used for grading, paving, earth moving and other
construction work on highways............................................................................. 8,752,400
Native American Refunds ................................................................................................ 173,300
Administration exemption for use fuel suppliers ...................................................... 2,238,600
Exemption for clean burning fuels .....................................................................................NIA*

TOTAL QUANTIFIABLE USE FUEL TAX EXPENDITURES42
.............................................................................................. $24,501,900
Return to Table of Contents

*No Information Available.
42These tax expenditures represent foregone revenues to the state highway fund, counties and incorporated
cities and towns.

148

VEHICLE LICENSE
TAX EXPENDITURES

149

150

V E H I C L E L I C E N S E TA X
EXPENDITURES
43

Under current law, Arizona imposes a
vehicle license tax at the rate of $2.95 for
each $100 in vehicle value during the first
twelve months of life of the vehicle.
During the succeeding periods, the tax rate
is $3.04. However, the vehicle value is
60% of the manufacturer's base retail price
in the first year and declines by 16.25%
each year thereafter. The minimum vehicle
license tax is $10. The proceeds of this tax
are distributed to the state highway fund,
counties, incorporated cities and towns,
county assessors and the state general
fund.

Trailers used solely in the operation of a
farm for transporting the unprocessed fiber or
forage products of a farm or any implement of
husbandry designed primarily for or used in
agricultural operations and only incidentally
operated or moved upon a highway (A.R.S.
§28-2153D2)
• Road rollers or road machinery, including
power sweepers, temporarily operating or moved
upon the highway (A.R.S. §28-2153D3)
• Vehicles operated by an owner under special
provisions relating to lienholders, manufacturers,
dealers and nonresidents (A.R.S. §282153D4)
• Motorized or nonmotorized equipment
designed primarily for and used in mining
operations and only incidentally operated or
moved on a highway (A.R.S. §28-2153D5)
• A motor vehicle being towed by a tow truck
which has been registered (A.R.S. §282153D6)
• A golf cart or other motor vehicle used in
the operation of a golf course and only
incidentally operated or moved on a highway
(A.R.S. §28-2153D7)
• Wheeled equipment, such as compressors,
forklifts, portable cement mixers, tow dollies, tar
pots, water trailers, welders, etc. (A.R.S. §282153D8)
•

PREFERENTIAL VEHICLE
LICENSE TAX RATES
Three classes of motor vehicles pay lower
vehicle license tax rates. Privately owned
motor vehicles which are exclusively
operated as a school bus (A.R.S. §28-5804),
privately owned ambulances and fire
fighting vehicles (A.R.S. §28-5806), and
motor vehicles powered by alternative
fuels (A.R.S. §28-5805) have a vehicle
value in the first year of 1% of the
manufacturer's base retail price.
The
minimum tax for these vehicles is $5.00.
The information on this tax expenditure is
not available at this time.

Also exempt from vehicle license taxes are
vehicles purchased by an enrolled member of an
Indian tribe who resides on the Indian reservation
established for that tribe and who purchases an
unregistered vehicle for removal to the Indian
reservation (A.R.S. §28-2154C). Information
on this exemption is not available.

EXEMPTIONS FROM THE
VEHICLE LICENSE TAX
Any vehicle, which is not required to be
registered in Arizona, is not required to pay
a vehicle license tax. Vehicles which are
exempt from registration are:
• Farm tractors (A.R.S. §28-2153D1)

Vehicles owned by a foreign government, by a
consul or other official representative of a foreign
government, by the United States, by a state or

43Any

figures presented for Vehicle License Tax Expenditures were provided by the Arizona Department of
Transportation.

151

political subdivision of a state, by an Indian tribal
government or by a nonprofit organization which
presents to the motor vehicle division a form
approved by the director of the division of emergency
management (A.R.S. §28-2511A) are exempt
from vehicle license tax. There is no
information available on this tax
exemption.

veteran that is certified by the veterans'
administration to be 100% disabled and
drawing compensation on that basis is not
required to pay vehicle license tax (A.R.S.
§28-5802).
There is no information
available on vehicle license tax exemptions
granted to veterans in fiscal year 2003/04.
Disabled Arizona residents are not
required to pay vehicle license tax on a
vehicle they own if they are a recipient of
public monies as a disabled individual
under title 16 of the Social Security Act.
However, only one vehicle may be claimed
for this exemption (A.R.S. §28-5803).
Information is not available on this
expenditure.

There are vehicle license tax exemptions
allowed for veterans, under certain conditions,
and for disabled individuals, within stated limits.
A veteran residing in Arizona is exempt
from license tax for a vehicle acquired by
financial aid from the veterans'
administration (A.R.S. §28-5802). Any

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S U M M A RY O F V E H I C L E L I C E N S E T A X
EXPENDITURES
Revenue Gain
PREFERENTIAL TAX RATES:
School buses...........................................................................................................................NIA*
Ambulances and fire fighting vehicles..................................................................................NIA
Motor vehicles operated by alternative fuels.......................................................................NIA
EXEMPTIONS:
Farm tractors............................................................................................................................NIA
Trailers used solely in the operation of a farm for transporting the
unprocessed fiber or forage products of a farm or any implement
of husbandry designed primarily for or used in agricultural operations...................NIA
Road rollers or road machinery.............................................................................................NIA
Any owner permitted to operate a vehicle under special provisions
relating to lienholders, manufacturers, dealers and nonresidents..............................NIA
Motorized or nonmotorized equipment designed primarily for and used
in mining operations.........................................................................................................NIA
Motor vehicles being towed by a tow truck ........................................................................NIA
Golf carts or other motor vehicles on a golf course. .........................................................NIA
Wheeled equipment.................................................................................................................NIA
Vehicles purchased by Indians residing on the reservations.............................................NIA
Vehicles owned by a government or by a nonprofit organization with a
form approved by the division of emergency management.......................................NIA
Vehicles owned by certain veterans ......................................................................................NIA
Vehicle owned by disabled individuals.................................................................................NIA

TOTAL QUANTIFIABLE VEHICLE LICENSE TAX
EXPENDITURES44 ...................................................................... NIA
Return to Table of Contents

*No Information Available.
tax expenditures represent foregone revenues to the counties, incorporated cities and towns, county
assessors, the state highway fund and the state general fund.
44These

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154

WATERCRAFT LICENSE
TAX EXPENDITURES

155

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WA T E R C R A F T L I C E N S E T A X
EXPENDITURES
45

Arizona imposes a watercraft license tax on
watercraft operating on all of the
waterways of this state. Revenues received
from this tax are deposited in the
watercraft licensing fund, the state lake
improvement fund, the law enforcement
fund and the boating safety fund.

customer may use his/her boat while the
paperwork is being processed. Since the
watercraft agent is responsible for
submitting the fees and license tax along
with the paperwork, the value for this type
of watercraft is included in the preferential
tax rates previously mentioned.

WATERCRAFT LICENSE TAX
PREFERENTIAL RATES

EXEMPTIONS FROM
WATERCRAFT LICENSE TAX

The watercraft license tax is 45¢ per foot
of length of each watercraft up to and
including eighteen feet and 68¢ per foot of
length for each foot over eighteen feet
(A.R.S. §5-321A) for resident owners. The
taxation of smaller watercraft at a lower
rate than larger watercraft is a preferential
tax rate. If the tax on watercraft were 68¢
per foot regardless of length, additional
revenues of $437,100 would have been
collected in fiscal year 2003/04.

Vessels owned by agencies of the federal government
in performance of their official duties are exempt
from the watercraft license tax (A.R.S. §5302A). These vessels are also covered
under A.R.S. §5-322A2 under the
exemption for military or public vessels of
the United States. It is estimated that
approximately 50 federal boats are on
Arizona waters with an average length of
16 feet. If these vessels were subject to
taxation, an additional $500 in watercraft
license tax revenues would have been
collected in fiscal year 2003/04.

For nonresident owners, the watercraft
license tax is $2.90 per foot of length of
each watercraft up to and including
eighteen feet and $5.50 per foot of length
for each foot over eighteen feet. If the tax
on the watercraft were $5.50 per foot
regardless of length, $905,400 in additional
revenues would have been received in
fiscal year 2003/04.

Watercraft dealer registration is different
than any other. Decals and certificates that
are issued are not attached to a specific
boat; they can be switched between boats
owned by the same dealer for the purpose
of demonstrating the boats for sale. The
fee for this type of registration, per A.R.S.
§5-321C is $2.50. Since we have no way of
knowing how many boats a dealer has on
his lot at any given time, we are unable to
give an estimate of the revenue.

Watercraft agents are boat dealers who
have been given the authority to issue
temporary watercraft certificates for new
boats only. This is pursuant to A.R.S. §5322A4, which states undocumented
watercraft can operate under a valid temporary
certificate issued pursuant to the rules adopted by
the Game and Fish Commission.
The

Foreign watercraft temporarily using the waters of
the state (A.R.S. §5-322A1) are exempt from
the watercraft license tax. The only time
that foreign vessels operate in this state

45Any

figures presented for Watercraft License Tax Expenditures were provided by the Arizona Department
of Game and Fish.

157

would be during a major regatta or race. A
large majority of these races occur on the
Colorado River, specifically Lake Havasu,
which is a navigable waterway under the
jurisdiction of the U.S. Coast Guard. The
loss of revenue from this exemption is in
the negligible to non-existent range.

their watercraft were not exempt from this
tax.
A.R.S. §5-322H exempts owners of commercial
watercraft from the license tax but those
taxpayers are not exempt
from the
advalorem property taxes. If this type of
watercraft had been taxed in fiscal year
2003/04, an additional $16,700 would have
been collected.

Also exempt from the watercraft license
tax are watercraft used solely as lifeboats (A.R.S.
§5-322A3). Due to the makeup of the
boating population in Arizona, the
incidence of lifeboats is nearly nonexistent. Only very large boats on large
bodies of water have the need or can even
physically accommodate a lifeboat.
Therefore, any revenue lost due to this
exemption would be in the negligible to
non-existent range.

Military personnel stationed in Arizona who can
provide proof that they are non-residents,
they are exempt from this tax. This
exemption resulted in a tax expenditure of
$11,900 in fiscal year 2003/04.
Residents of Indian reservations, who can
provide proof that they reside on that
portion of the reservation within the
boundaries of Arizona established for the
tribe of which they are a member, are
exempt from this tax. If reservations were
taxed in fiscal year 2003/04, an additional
$200 would have been collected.

Any watercraft owned by the state or by any
political subdivision is exempt from the
watercraft license tax (A.R.S. §5-322B).
The state and its political subdivisions
would have been subject to tax in the
amount of $3,800 in fiscal year 2003/04 if

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S U M M A R Y O F WA T E R C R A F T L I C E N S E T A X
EXPENDITURES
Revenue Gain
PREFERENTIAL TAX RATES:
Resident preferential rates .............................................................................................. $439,200
Nonresident preferential rates ......................................................................................... 905,400
EXEMPTIONS:
Vessels owned by the agencies of the federal government ...............................................$500
Persons doing business as marine dealers and licensed in Arizona ...............................NIA*
Foreign watercraft temporarily using the waters of the state............................................NIA
Life boats ..................................................................................................................................NIA
Watercraft owned by the state or by a political subdivision.............................................3,800
Owners of commercial watercraft not exempt from ad valorem tax .......................... 16,600
Watercraft owned by non-resident military personnel................................................... 11,900
Watercraft owned by residents of Indian reservations ........................................................200

TOTAL QUANTIFIABLE WATERCRAFT LICENSE TAX
EXPENDITURES46 ............................................................. $1,377,600
Return to Table of Contents

*

No Information Available.
tax expenditures represent foregone revenues to the watercraft licensing fund, the state lake
improvement fund and the law enforcement and boating safety fund.
46These

159

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W O R K E R S ’ C O M P E N S AT I O N
PREMIUM LIEU
TA X E X P E N D I T U R E S

161

162

WO R K E R S ’ C O M P E N S AT I O N P R E M I U M
L I E U TA X E X P E N D I T U R E S
47

Workers’ compensation premiums are
taxed at a rate up to 3% on all premiums
collected during the calendar year, less
certain deductions from total premiums
(A.R.S. §23-961G). These deductions are
for applicable cancellations, returned
premiums, and policy dividends or refunds

paid or credited to policyholders within
Arizona and not reapplied as premiums for
new, additional or extended insurance.
During calendar year 2003 the deductions
from premiums totaled $56.4 million
which results in a tax expenditure of $1.7
million.

47Any

figures presented for Workers’ Compensation Premium Lieu Tax Expenditures were provided by the
Industrial Commission of Arizona.

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S U M M A RY O F W O R K E R S ’ C O M P E N S A T I O N
P R E M I U M L I E U TA X E X P E N D I T U R E S
Revenue Gain
Deductions from total premiums............................................................................... $1,693,200

TOTAL QUANTIFIABLE WORKERS’ COMPENSATION PREMIUM
LIEU TAX EXPENDITURES48 .......................................... $1,693,200

Return to Table of Contents

48These expenditures represent foregone revenues to the Administrative and Special Funds of the Industrial
Commission.

164