Frequently Asked Questions - Tax Services

Transaction Privilege Tax is often referred to as Sales Tax.
Businesses having a presence in or a connection of some kind with the State of Arizona must obtain an Arizona business license and, when making taxable sales, are required to collect and remit applicable Transaction Privilege Tax (TPT) to the Arizona Department of Revenue. Although commonly referred to as "sales tax," TPT is differentiated from sales tax in that it is a tax imposed on the seller rather than on the purchaser. Transaction privilege tax is an excise tax imposed on vendors for the privilege of doing business in Arizona. It is ultimately the vendor, not the customer, who is liable to the Arizona Department of Revenue for tax associated with taxable sales made in Arizona. Although not required to do so, vendors generally choose to pass the tax on to the customer, so we generally tend to think of TPT as a sales tax.

No. The University of Arizona is not a tax-exempt entity for this purpose, so it generally pays sales tax on its purchases. Arizona statutes exempt certain purchases from sales tax and the University tries to take these exemptions when available. Determination of exemption is made on a purchase-by-purchase basis, and if the University determines that a purchase can be exempt from tax, an exemption certificate is provided to the vendor. The University does not, therefore, provide a certificate indicating that all of its purchases from a given vendor would be tax exempt.

Purchase of all tangible goods (unless a specific exemption exists) and some services are subject to sales tax.
More detail: Arizona statutes state that there is a presumption that, "all gross proceeds of sales and gross income derived from a business activity classified under a taxable business classification comprise the tax base from the business until the contrary is established." In other words, all sales are considered taxable until the seller of goods or services provides proof that the sale should be nontaxable or tax exempt. Sellers overcome this presumption by requiring that customers believing their purchases to be exempt from tax provide Arizona Form 5000, an exemption certificate.
Common Sales Tax Exemptions on Purchases of:

• Professional or personal services (if not as part of the purchase of tangible personal property)
• Tangible personal property purchased for resale
• Warranty or service contracts (if not required as part of the purchase of tangible personal property, and listed separately in the invoice)
• Prescription drugs, certain medical equipment, prostheses, insulin, prescription eyeglasses, and hearing aids
• Printed and other media materials purchased by publicly-funded libraries in Arizona, and made available to the public (materials not available to public are not exempt; equipment is not exempt either)
• Internet access and cable services
• Custom computer software (pre-written software and pre-written software update are taxable)
• Conference fees
• Professional membership dues
• Machinery and equipment used in research and development
• Chemicals used in research and development
• Food for (human) home consumption
• Freight or shipping if separately stated on the invoice
• Commercial lease
• Others as set forth in ARS §42-5061.

Use tax is a tax on the use, storage, or consumption of tangible personal property. Out-of-state vendors do not generally charge sales tax, so the University is required to figure out what the sales tax would have been on the purchase and send that amount to the Arizona Department of Revenue. The purpose of a use tax is to prevent the avoidance of sales tax made possible by purchasing tangible property from out-of-state vendors. Such purchasing habits put in-state vendors at a disadvantage and leads to loss of revenue for the state. Arizona's use tax was enacted in 1955 to "protect sellers in the state of Arizona from inequities that would result without a use tax."
The use tax also applies to purchases on which another state's sales tax or other excise tax was imposed if the rate of that tax is less than the Arizona use tax rate.

Use tax is similar to sales tax, in that it is a tax collected in relation to sales made to Arizona customers. However, it is differentiated from sales tax in that for sales tax, the primary consideration is whether or not the sale occurred in the state, while for use tax it is whether the property purchased out-of-state is brought into the state for use, storage or consumption.

In general, the purchaser, rather than the out-of-state vendor, is liable to the Arizona Department of Revenue for use tax

The University remits use tax to the Arizona Department of Revenue on a monthly basis.

As with sales tax, there are exemptions from use tax. Some of the exemptions commonly used by UA departments include:

• Tangible personal property purchased for resale
• Tangible personal property on which sales tax has already been paid
• Tangible personal property, the sale or use of which has already been subject to an equal or greater excise tax under the laws of some other state
• Internet access and cable services
• Custom computer software (pre-written software and pre-written software update are taxable)
• Conference fees
• Professional membership dues
• Medically prescribed drugs, equipment (such as wheelchairs) or devices (such as hearing aids)
• Food for (human) home consumption
• Printed and other media materials purchased by publicly-funded libraries in Arizona, and made available to the public (Materials not available to public are not exempt. Equipment is not exempt either)
• Machinery or equipment used in research and development 1 (see explanation below)
• Chemicals used in research and development 2 (see explanation below)
• Others as set forth in ARS §42-5159.
  Because the presumption is that property brought into the State of Arizona is subject to use tax, departments making purchases they deem to be nontaxable or tax exempt should be careful to retain documentation supporting their position.

Purchases that fall within the following object codes are not subject to AZ sales or use tax. As such, the system will not automatically assess use tax on:

• 3820 - Postage & Mailing
• 3870 - Express Shipping
• 5520 - Conference Registration Fees
• 5535 - Purchasing Transaction Fees
• 5540 - Dues
• 5560 - Freight In/Out (Noncapital Related)
• 5810 & 5830 - Resale Supplies - Tax Collected at Sale
• 7810 - Library Acquisitions - Books
• 7820 - Library Acquisitions - Periodicals
• 7830 - Library Acquisitions - Other

The effective use tax rate as of June 1, 2013 is 5.60%.

Refer to the Complete Sales and Use Tax Rate Table found here. The University is exempt from paying City tax and therefore should collect only the State and County taxes from its customers.

No, the University should not collect any taxes when making sales to another department.

Yes, if the sale is taxable under the Arizona Revised Statute. If the sale is claimed exempt by the customer, the department should collect an exemption certificate from the customer.

• Printing / copying / binding services
• Publication
• Food
• Sale by Bookstore (other than textbooks)

The department is responsible for collecting required taxes on the taxable transactions. If department does not collect the required tax, the tax will be factored in the invoice and the required percentage of tax will be collected from department. The factoring sheet is on the AZ Department of Revenue website. Tax Factoring

No. Only vendors who are registered in AZ can collect taxes on sales made in AZ. However, the UA should pay Use tax on the purchase, if the purchase was otherwise taxable.

Please contact Tax Compliance at taxservices@fso.arizona.edu to analyze the situation and to help you get temporary sales tax license for that state.

The tax should be collected for the state where the property is delivered to your customer. If the item is shipped to the customer, then tax applies for the delivery state. You should collect the tax only if you are registered to collect tax in that state. If the customer picks up the item at your location, tax should be collected for your state.

If you are selling goods over the internet and the UA has a presence in the state of delivery, the UA has established nexus and will be required to register to collect sales tax on all taxable items regardless of method of order placement. In other words, whether the order is placed over the Internet or through traditional means, if the UA has nexus with the state in which the product is being shipped, sales tax should be billed and collected.

Currently, the UA has place of business only in AZ and therefore has no nexus in any other state. For example, if UA ships to a customer in Phoenix, there is nexus, and tax is collected. If the UA ships out of AZ, the UA need not collect any tax since it does not have nexus in any other state other than AZ.

Yes. You must separately state the sales tax amount on your invoice or receipt unless you provide a written statement to the customer that the sales price includes sales tax. The "tax included" statement must be displayed where people would normally be advised of the terms of the sale (e.g., brochures, invoices, contracts, signage). If you use a written statement that sales tax is included in the sales price, you have collected sales tax and must report the collected tax by backing it out of the total amount received.

As a seller, the department is responsible for collecting and remitting the correct amount to the State. If you do not collect and remit the correct amount, Financial Services will charge your department when you owe any additional tax / penalties / interest to the State.

The procedure for correcting use tax errors depends on how the tax was paid or should have been paid at the time of purchase. Errors in use tax can arise in relation to a P-Card Purchase or Purchase Order.

P-Card Purchase
To correct use tax erroneously processed on a Procurement Card Transaction (PCDO), refer to our documentation on Correcting Use Tax on a PCDO. NOTE: Most use tax errors related to P-Card transactions result from incorrect reconciliation or failure to use a purchase invoice when reconciling transactions. The Purchasing Card Policies Manual on the P-Card website is an excellent resource.

Purchase Order
If use tax was charged inappropriately on a purchase order, Accounts Payable should be contacted directly. The same procedure is followed if use tax was not paid on a purchase but should have been remitted. Occasionally, both sales and use tax are paid on a purchase. When sales and use tax have both been paid, the use tax should be reversed. Follow the guidelines outlined above to correct the error making sure that the amount being reversed is the use tax amount, not the sales tax amount.

Equipment used in Research and Development
The statute (ARS §42-5159(B)(14)) defines research and development as, "basic and applied research in the sciences and engineering, and designing, developing or testing prototypes, processes or new products." Not all departments can qualify for this sales tax exemption. The statute allows the exemption for purchases of machinery and equipment used in research, "in the sciences and engineering," but expressly excludes the exemption for, "research in social sciences or psychology, computer software research that is not included in the definition of research and development, or other non-technological activities or technical services." Further, purchases of computers rarely qualify for sales tax exemption under this statute. Office equipment, furniture and supplies used up in the process of research are taxable.

The following statement can be used to certify that an item being purchased is tax exempt under the research and development exemption when a PREQ is initiated, to include AZ BuyWays orders. Please be aware that if the exemption is claimed and the Arizona Department of Revenue 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.

Sales Tax Exemption Statement
This purchase will be used for research and development purposes as that term is defined by ARS 42-5061(B)(14). The exemption from sales tax pursuant to ARS 42-5061(B)(14) is authorized by (Name of person authorizing exemption) of (Name of department authorizing exemption).

Use Tax Exemption Statement
This purchase will be used for research and development purposes as that term is defined by ARS 42-5159(B)(14). The exemption from sales tax pursuant to ARS 42-5159(B)(14) is authorized by (Name of person authorizing exemption) of (Name of department authorizing exemption).

Chemicals Used in Research and Development

Arizona Revised Statutes provide sales & use tax exemption on chemicals that are used in research and development, as defined in ARS 42-5061 (A) (38) and ARS 42-5159 (A) (35):
“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...”

I. Explanation of the Statutes

• For Arizona sales & use tax exemption purpose, “research and development” does 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. Chemicals used in such activities do not qualify as chemicals used in “research and development”;
• The chemicals must be used in the way described in ARS 42-5061 (A) (38) and ARS 42-5159 (A) (35) in order to qualify for chemicals used in research and development;
• The chemicals that are used or consumed in activities such as packaging, storage or transportation do not qualify as “chemicals used in research and development”.

AZ Statutes do not define “chemical”. Therefore, it will be up to the researcher to determine whether an item to be purchased is a chemical, and determine whether the chemical is used in “research and development” as defined in the above.

II. Apply the tax exemption
The tax exemption on the chemicals is determined by how the chemicals are used, as described in the above, not how the chemicals are purchased. Therefore, if the items are qualified chemicals used in research and development, tax exemption applies on all types of purchases

Add the following statement in the notes and attachments:
This purchase will be used for research and development purposes as that term is defined by ARS 42-5159(A)(35) and ARS 42-5061(A)(38). 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 purchases via P-Card (if the purchase is allowed on P-Card)

The departments should provide a Tax Exemption Certificate (Arizona Form 5000 - Research Chemicals) to the vendor directly in order to avoid tax charges.

The purchaser (the researcher) at the department must sign the Certification Box at the bottom of the second page of the Certificate to authorize the tax exemption.

Yes, a copy of the form can be given to the prize recipient upon request.

If offering a prize/award from a drawing with a UA business purpose, the form will need to be filled out before giving the prize to the recipient. For employee recognition awards, use an Employee Recognition Award Compensation Form instead (Policy 9.11 Employee Recognition)

The prize/award is taxable to the recipient regardless of the amount and may require reporting to the IRS by the University.

Non-employee recipients who are US citizens or permanent residents will receive a 1099-MISC if the combined payments from the University for non-cash awards and the face value of cash/cash equivalents are equal to or greater than $600.00.

Non-employee recipients who are nonresident aliens will receive a 1042-S for the prize and any grossed up taxes, regardless of the amount.

Employee recipients will have the amount added to their W-2.

The award is taxable to the individual regardless of the amount or whether a form is provided. Recipients should consult with a professional tax preparer. University of Arizona employees, while in their official role at the UA, are not allowed to act as tax consultants or provide tax advice.

The recipient has the right to refuse the award if they are unwilling to provide the required information on the form.

Email is not a secure or encrypted delivery system, and since the form requires the provision of sensitive information submissions should be sent as directed in the instructions.

The University is exempt from federal income tax for engaging in activities which include research and discovery, teaching and learning, outreach and public service, and fostering national or international amateur sports competition.

The University is not exempt from income tax imposed on activities which are substantially unrelated to the University’s exempt purposes, even though these activities may bring in funds to support the University’s exempt operations.

Unrelated business income, for most organizations, is income produced from an activity that is a trade or business, regularly carried on, and not substantially related to the exempt purpose of the organization.

The calculated tax associated with unrelated business income.

1. If applicable, dual use of a facility for both exempt and non-exempt activity must be reviewed.
   Example: Product testing and research for commercial or industrial application may occur in the same lab where testing and research related to the University’s exempt purpose occurs. The income generated from standard product testing represents UBI as it does not meet the definition of research for this purpose.
2. The selling of products of exempt functions is not subject to UBIT.
   Example: The College of Agriculture and Life Sciences operates a Farmer’s Market selling tomatoes grown by students in the program. As the tomatoes are a product of the exempt function of teaching and learning, their sale to external customers is not an unrelated activity. However, if tomato sauce was also made and sold, the income generated from sauce sales would represent UBI as the product is no longer the original product of the exempt function.

Any activity generating external income requires the completion of a UBIT Questionnaire, to be sent to Tax Services at taxservices@fso.arizona.edu.

The questionnaire can be filled out by the individual in charge of the project, such as the Principal Investigator (PI) or activity coordinator.

The questionnaire is located on the Research Gateway website under Contracting Forms and Templates.

Both direct and indirect costs related to the production of UBI may be deducted.

The Internal Revenue Code (IRC) allows for certain exceptions, with most centering on passive income activities such as investment income, real property rental, or disposition gains and losses. The IRC also allows for specific exclusions related to volunteer workforces, convenience of members, donated merchandise and qualified sponsorships.

1. Catering services provided to the general public
2. Use of recreational facilities by alumni and the general public,
3. Parking lot services provided to the general public,
4. Product testing and research for commercial or industrial application.

1. Sales of farm and agricultural products produced by an exempt function,
2. Student dormitories rented to enrolled students,
3. Revenue from University sporting events, including admissions and TV/radio rights,
4. In general, research activities that are not routine, not for consumer product testing, or not for commercial or industrial application.

All fundamental and applied research performed by the University is excluded from UBI.