The Arizona Transaction Privilege Tax exemption for forklifts used by manufacturers has been clarified and expanded as a result of a recent ruling received by the sales tax consultants at Agile Consulting Group. Transaction Privilege Tax or TPT is to Arizona what Sales and Use Tax is to most other U.S. states. Transaction Privilege Tax is levied on sales of most goods and some services in the state of Arizona. However, there is an exemption in place for the manufacturing industry.
In a prior post, Agile has discussed the Arizona sales tax exemption for manufacturing. The exemption is outlined in Ariz. Rev. Stat. Ann. §42-5061(B)(1) and includes a number of different categories of purchases commonly made by manufacturers. One area where the Statutes and the Arizona Department of Revenue’s guidance has been lacking relates to forklifts, which are arguably one the most universally used types of machinery and equipment across all types of manufacturing operations regardless of the product being produced. In fact, no prior rulings or guidance have been provided regarding how the Arizona Department of Revenue suggests that the manufacturing exemption applies to forklift purchases, leases, repairs, as well as the fuel used to power these units.
Agile requested clarification of the Arizona Transaction Privilege Tax exemption for forklifts used by manufacturers in a ruling submitted to the Arizona Department of Revenue in June 2023. Additionally, our sales tax consultants argued for favorable tax treatment of these forklifts across twelve different scenarios for forklifts in use at a plant for one of our longstanding Arizona manufacturing clients. In the response Agile received from the Arizona Department of Revenue’s Taxpayer Services Section representative, we received encouraging news for all Arizona manufacturers that use forklifts within their manufacturing process.
The key takeaways from the ruling Agile received about the Arizona Transaction Privilege Tax exemption for forklifts used by manufacturers are:
1. Forklifts have the underlying characteristics of qualifying “machinery and equipment”, however, that does not mean that all forklifts qualify for an exemption from Arizona Transaction Privilege Tax, which is Arizona’s equivalent to sales and use tax.
2. To qualify for the exemption, a forklift must meet two criteria:
a. First, the forklift must be “used directly” in manufacturing, processing, or other types of production. Direct use is determined by whether the function or step is essential to the operation. A good guideline is that the closer the item comes to direct contact with the product being produced, the greater likelihood that the item is being “used directly”.
b. Second, the forklift must be used within the prescribed boundaries of the “manufacturing, processing, fabricating, job printing, refining, or metallurgical operations”. Arizona considers manufacturing or production to begin at “the first stage where processing ultimately begins in order to place the tangible personal property in a different form, composition or character than that in which it was acquired”. Arizona considers manufacturing or production to end whenever “the finished product is completed, finished or packaged for commerce”. Any functions or steps that fall between these two points are considered to fall within the acceptable boundaries.
2. Any forklift that meets the two-pronged test above can take full advantage of the Arizona Transaction Privilege Tax exemption for forklifts, however, the determination made by any taxpayer can be questioned by the Arizona Department of Revenue and its auditors.
3. For a qualifying forklift, the exemption applies equally to purchases, long-term and short-term leases.
4. For a qualifying forklift, the exemption applies to repair or replacement parts used in the maintenance and upkeep of such units.
5. Fuel does not qualify for the Arizona sales tax exemption for manufacturing regardless of whether it is used in a qualifying forklift or not.
While we have focused our discussion around forklifts specifically, the underlying logic of the Arizona Transaction Privilege Tax exemption for forklifts would apply to any form of intraplant transportation equipment or conveyance machinery such as hoists, cranes, hydraulic lifts, conveyors or pipes.
As detailed in our previous post regarding the Arizona sales tax exemption for manufacturing, an Arizona manufacturer can claim the exemption on a go forward basis with its vendors via providing a valid Arizona Form 5000 exemption certificate. An Arizona manufacturer is also able to recoup any taxes paid in error over the prior 48 months. Additional information about how to accomplish these objectives can be found in our prior post, or you can reach out to Agile Consulting Group directly for guidance and assistance.
As with all sales and use tax research, the specific circumstances and fact patterns of each taxpayer’s scenario need to be considered when determining taxability. Additional advice from Agile Consulting Group’s sales tax consultants can be found on our page summarizing Arizona sales and use tax exemptions also known as Transaction Privilege Tax. If you have questions, comments or would like to discuss your circumstances regarding this issue or any other sales and use tax issue, please contact an Agile sales tax consultant at (888) 350-4TAX (4829) or via email.
Meet Aaron Giles at info@salesandusetax.com.
