Recently the Arizona Legislature passed a series of tax reform laws and incentive programs (predominantly aimed at enticing Apple to build a manufacturing facility in this state). The manufacturing sector of Arizona is a beneficiary of the tax reform package and is billed as a way to diversify the Arizona economy. On April 8th Senate Bill 1413 was passed by the House and sent on its way to Governor Brewer to be signed in to law. S.B. 1413 is designed to take the tax burden off certain manufacturers operating in Arizona. According to Chad Heinrich, the Vice President of the Greater Phoenix Chamber of Commerce and an advocate for S.B. 1413, the law is premised on the belief that lowering the tax burden on manufacturers will attract more manufacturers to Arizona and help diversify our economy. The law includes three distinct provisions that may substantially affect the tax liability of our manufacturing clients. S.B. 1413:
1. Exempts from the Arizona Transaction Privilege Tax (TPT) sales of electricity or natural gas to a business that is principally engaged in manufacturing or smelting operations AND that uses at least 51% of the electricity or natural gas in the manufacturing or smelting operations.
2. Exempts the purchase price of electricity or natural gas by a business that is principally engaged in manufacturing or smelting operations that uses at least 51% of the electricity or natural gas in manufacturing or smelting operations from use tax.
3. Provides that municipalities must either adopt S.B. 1413 in its entirety or not, they may not change definitions or otherwise alter the law.
Basically, any of our clients that purchase electricity and/or natural gas of which over half is used in their manufacturing process should not be charged AZ TPT by their vendor. Also, they will be relieved from self-assessing any use tax for electricity and/or natural gas used in the same manner — if they purchase those materials from an out-of-state vendor. However, it is unclear how manufacturers are going to prove their eligibility to take advantage of S.B. 1413, but it will likely require purchasers to use some sort of exemption certificate. Furthermore, our clients should be on the look-out for whether the jurisdictions in which they operate have chosen to follow or deviate from S.B. 1413. But, in either event, manufacturing clients who fit the use threshold, should see fairly significant tax savings once S.B. 1413 becomes effective, which at this point is still up in the air.