Sales and Use Tax Exemptions for Research and Development

Explanation of the Statutes

Under Arizona Revised Statutes (ARS) 42-5061(B)14), ARS 42-5159(B)(14), ARS 42-5061(A)(38), and ARS 42-5159(A)(35), the University qualifies to make tax exempt purchases of machinery or equipment and chemicals used in research and development (R&D) as that term is defined by the State. For this purpose, the State's definition of R&D is as follows:

"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 or equipment otherwise exempt under this section to function effectively. Research and development do not include manufacturing quality control, routine consumer product testing, market research, sales promotion, sales service, research in social sciences or psychology, computer software research that is not included in the definition of research and development, or other nontechnological activities or technical services.

Not all departments, and not all R&D qualifies for these tax exemptions. Use of the qualifying items must be a match for the first sentence of the definition while uses listed in the second sentence do not qualify as R&D for this purpose. R&D in psychology or the social sciences does not qualify for these exemptions.

Exemptions for Machinery or Equipment

The State does not define machinery or equipment, but does provide examples of what is not included. Purchases of expendable materials (i.e., research supplies), janitorial equipment or tools, office equipment, furniture, motor vehicles, and buildings do not qualify. Cost of the item is not a factor, qualifying machinery or equipment can be inexpensive or costly. Purchases of computers rarely qualify as exempt under the statutes as partial administrative function is implied.

Software Qualifying as Machinery or Equipment

In certain cases, software used in R&D can qualify as machinery or equipment for the purposes of a tax exemption. However, if software used in R&D does not fit into one of the below four categories, it is taxable. For instance, administrative software used in R&D is taxable. Software that manages labs, assists with scheduling or supply management, provides methods for researchers to request services, or used in quality control fit in the taxable category. Tax Services and the Arizona Department of Revenue (ADOR) developed descriptions and examples of software qualifying as machinery or equipment for R&D use as follows:

  1. Machinery or equipment exempt under A.R.S. § 42-5061(B)(14) or A.R.S. § 42-5159(B)(14) often requires propriety software to function effectively, as intended, or at all. An example of this would be operating software needed for a microscope to function.
  2. Software used to manage and/or control specific tasks conducted on machinery or equipment exempt under A.R.S. § 42-5061(B)(14) or A.R.S. § 42-5159(B)(14). An example of this would be software necessary to have a spectrometer perform a specific task, such as mass spectrometry analyses.
  3. Software as the most efficient means to compile and process generated data to create information, and further, knowledge applicable within the context of the research performed. An example of this would be software that analyzes COVID-related research data and compiles a report based on that data.
  4. Software containing the protocols involving vertebrate animals utilized in research and development. The protocols are reviewed and approved by American Association for Laboratory Animal Science ("IACUC") and outline how research will comply with federal animal welfare regulations to ensure the responsible conduct of research. Without the software, it would be impossible to provide adequate care and ensure compliance with federal regulations for the animals, who are a fundamental resource in conducting research on campus.

Exemption Statement for Machinery or Equipment used in Research and Development

The following statement can be used to attest that an item being purchased is tax exempt under the R&D exemption when a Requisition is initiated, to include AZ BuyWays orders. Please be aware that if the exemption is claimed and the ADOR finds that the exemption was taken in error, the purchasing department will be responsible for any and all sales or use tax that should have been paid along with any penalties or interest assessed.

This purchase will be used for research and development purposes as that term is defined by ARS 42-5061(B)(14) and ARS 42-5159(B)(14). The exemption from sales tax pursuant to ARS 42-5061(B)(14) and the exemption from use tax pursuant to ARS 42-5159(B)914) is authorized by [Name of person authorizing exemption] of [Name of department authorizing exemption].

Exemptions for Chemicals Used

The definition of R&D for the purposes of a tax exemption for chemicals is the same as outlined above under Explanation of Statutes. ARS 42-5061(A)(38) and ARS 42-5159(A)(35) provide sales and use tax exemptions for purchases of chemicals used in R&D as follows:

Sales of liquid, solid or gaseous chemicals used in...research and development..., if using or consuming the chemicals, alone or as part of an integrated system of chemicals, involves direct contact with the materials from which the product is produced for the purpose of causing or permitting a chemical or physical change to occur in the materials as part of the production process. This paragraph does not include chemicals that are used or consumed in activities such as packaging, storage or transportation...

Not all chemicals qualify for tax exemption. Use of the chemicals must be a match for the paragraph above. Chemicals used or consumed in packing, storage or transportation do not qualify.

The State does not define "chemical." Therefore, it is up to the principal investigator or researcher to determine whether the item to be purchased is a chemical, and to determine whether the chemical is used in qualifying R&D.

Exemption Statement for Chemicals Used in Research and Development

The following statement can be used to attest that an item being purchased is tax exempt under the R&D exemption when a Requisition is initiated, to include AZ BuyWays orders. Please be aware that if the exemption is claimed and the ADOR finds that the exemption was taken in error, the purchasing department will be responsible for any and all sales or use tax that should have been paid along with any penalties or interest assessed.

This purchase will be used for research and development purposes as that term is defined by ARS 42-5061(A)(38) and ARS 42-5159(A)(35). The exemption from sales tax pursuant to ARS 42-5061(A)(38) and from assessment of use tax under ARS 42-5159(A)(35) is authorized by [Name of researcher authorizing exemption] of [Name of department authorizing exemption].

For Allowable Purchases Via PCard

Departments should provide a Tax Exemption Certificate (Arizona Form 5000 - Research Machinery or Equipment) or a Tax Exemption Certificate (Arizona Form 5000 - Research Chemicals) to their vendors directly in order to avoid sales tax charges.