Non-profit organizations that are tax-exempt from federal and state income tax are not necessarily exempt from state and local taxes. In lieu of a sales tax, Arizona imposes a Transaction Privilege Tax (“TPT”) on seventeen separate business classifications. Certain tangible personal property and retail sales transactions are exempt from Arizona’s TPT.
The general rule is that sales made to churches, schools, and other non-profit organizations are taxed. However, under the Arizona Revised Statutes (“A.R.S.”) the following types of transactions are not subject to the State of Arizona’s Transaction Privilege Tax:
1. Tangible personal property sold or leased to qualifying health care organizations if the tangible personal property is used solely to provide health and medical related educational and charitable services or if the organization is dedicated to providing certain services to handicapped children.
2. Tangible personal property sold or leased to qualifying hospitals.
3. Tangible personal property sold or leased to a qualifying community health center.
4. Tangible personal property sold or leased to a non-profit §501(c)(3) organization that regularly serves free meals to the needy or indigent on a continuing basis.
5. Tangible personal property sold or leased in this state to a non-profit charitable §501(c)(3) organization that uses such property exclusively for training, job placement, or rehabilitation programs or testing for mentally or physically handicapped persons.
6. Retail sales made by a non-profit charitable §501(c)(3) organization that is recognized by the IRS as a non-profit charitable organization. (This exception is for sales made by the charitable organization, not purchases.)
7. Retail sales by certain non-profit organizations associated with a national touring professional golfing association or a major league baseball team.
8. Retail sales by certain non-profit organizations sponsoring, operating or conducting a rodeo that primarily features farm and ranch animals.
9. Retail sales and amusement activities by certain §501(c) (6) organizations that produce, organize, or promote cultural or civic related festivals or events.
10. Sales of food and drink for fund raising by churches, lodges and other non-profit organizations not regularly engaged in the restaurant business.
11. Sales of food or drink prepared for consumption on the premises of any veteran’s service organization chartered by Congress, including auxiliary units.
12. Sales of food or drink to qualifying hospitals or qualified health care institutions.
13. Leasing or renting of real property for use primarily for religious worship to a non-profit organization that qualifies under §501(c)(3) of the United States Internal Revenue Code.
Organizations that qualify for an exemption may need to apply annually to the Arizona Department of Revenue for exemption from Arizona’s Transaction Privilege Tax. More information can be found on the Arizona Department of Revenue website and in the A.R.S, Title 42, Chapter 5 and in Title 15, Chapter 5 of the Arizona Administrative Code.
Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide.