by David A. Fitzgibbons III, Fitzgibbons Law Offices
In a recent private taxpayer ruling, the Arizona Department of Revenue determined that purchases of certain irrigation systems for commercial purposes are exempt from Arizona’s transaction privilege tax, commonly referred to as “sales tax.”
In its ruling, the Department of Revenue determined that such purchases are covered by the same exemption allowed for 4-inch pipe and new agricultural machinery and equipment. Both exemptions are provided in A.R.S. § 42-5061(B).
The ruling is a win for Arizona farmers, including growers in the Casa Grande Valley, who may realize a significant tax savings in purchases of irrigation equipment. Irrigation system construction and maintenance constitute a major cost for growers, particularly those converting flood irrigation systems to more efficient drip systems.
Arizona’s transaction privilege tax (TPT) taxes the privilege of conducting certain businesses in Arizona. Technically, the TPT taxes the seller, not the purchaser, although as a practical matter, the purchaser ultimately pays the tax, which the seller must then pay over to the Department of Revenue and to local taxing authorities. All sales subject to the TPT are also subject to applicable county excise taxes.
Arizona’s use tax is a complementary tax to the TPT, and even if a company is not liable to collect and pay TPT, Arizona’s use tax may apply. A.R.S. § 42-5155(A) imposes the use tax on retail purchases of tangible personal property used, stored or consumed in Arizona.
Irrigation System Details
Irrigation equipment such as inline-steel filters, mainline pipes and 4-inch sub-mainline pipes generally qualify for the TPT exemption, as they are all larger than the required diameter and are used to transport water as part of a commercial agricultural irrigation system. Any fittings, seals and any other parts used in operating those pipes are also exempt.
Exempt items used for commercial agricultural purposes include drip irrigation lines.
The exemption does not apply to all irrigation-related equipment, however. State law – A.R.S. §§ 42-5061(C)(7) and 42-5159(C)(7) – specifically excludes motors and pumps used in irrigation systems. Also, the pipes and other components that generally do not qualify include:
- Sub-mainline pipes less than 4 inches in diameter
- Lateral lines
- Risers less than 4 inches in diameter
- Field and flush valves less than 4 inches in diameter
- Valves not connected to 4-inch or larger pipes
- Seals, couplings, fittings, flanges and other adaptors not attached to 4-inch or larger pipes.
Whether a grower is responsible for the TPT or use tax on the purchases of components for its irrigation system depends on whether any specific statutory exemption or deduction is applicable. To determine whether an exemption applies, you should consult a state and local tax attorney or accountant.
Fitzgibbons Law Offices have served agricultural families and businesses in the Casa Grande Valley for decades. If you have a questions about any of the issues discussed in this article, contact David Fitzgibbons at (520) 426-3824 or firstname.lastname@example.org.