42-5061

42-5061. Retail classification;
definitions

(L10, Ch. 225, sec. 3. Eff. until 10/1/10)

A. The retail classification is comprised of the business of selling tangible
personal property at retail. The tax base for the retail classification is the gross
proceeds of sales or gross income derived from the business. The tax imposed on the
retail classification does not apply to the gross proceeds of sales or gross income from:

1. Professional or personal service occupations or businesses which involve sales
or transfers of tangible personal property only as inconsequential elements.

2. Services rendered in addition to selling tangible personal property at retail.

3. Sales of warranty or service contracts. The storage, use or consumption of
tangible personal property provided under the conditions of such contracts is subject to
tax under section 42-5156.

4. Sales of tangible personal property by any nonprofit organization organized and
operated exclusively for charitable purposes and recognized by the United States internal
revenue service under section 501(c)(3) of the internal revenue code.

5. Sales to persons engaged in business classified under the restaurant
classification of articles used by human beings for food, drink or condiment, whether
simple, mixed or compounded.

6. Business activity which is properly included in any other business
classification which is taxable under this article.

7. The sale of stocks and bonds.

8. Drugs and medical oxygen, including delivery hose, mask or tent, regulator and
tank, on the prescription of a member of the medical, dental or veterinarian profession
who is licensed by law to administer such substances.

9. Prosthetic appliances as defined in section 23-501 prescribed or recommended by
a health professional who is licensed pursuant to title 32, chapter 7, 8, 11, 13, 14, 15,
16, 17 or 29.

10. Insulin, insulin syringes and glucose test strips.

11. Prescription eyeglasses or contact lenses.

12. Hearing aids as defined in section 36-1901.

13. Durable medical equipment which has a centers for medicare and medicaid services
common procedure code, is designated reimbursable by medicare, is prescribed by a person
who is licensed under title 32, chapter 7, 8, 13, 14, 15, 17 or 29, can withstand
repeated use, is primarily and customarily used to serve a medical purpose, is generally
not useful to a person in the absence of illness or injury and is appropriate for use in
the home.

14. Sales to nonresidents of this state for use outside this state if the vendor
ships or delivers the tangible personal property out of this state.

15. Food, as provided in and subject to the conditions of article 3 of this chapter
and section 42-5074.

16. Items purchased with United States department of agriculture food stamp coupons
issued under the food stamp act of 1977 (P.L. 95-113; 91 Stat. 958) or food instruments
issued under section 17 of the child nutrition act (P.L. 95-627; 92 Stat. 3603; P.L.
99-661, section 4302; 42 United States Code section 1786).

17. Textbooks by any bookstore that are required by any state university or
community college.

18. Food and drink to a person who is engaged in business which is classified under
the restaurant classification and which provides such food and drink without monetary
charge to its employees for their own consumption on the premises during the employees'
hours of employment.

19. Articles of food, drink or condiment and accessory tangible personal property to
a school district if such articles and accessory tangible personal property are to be
prepared and served to persons for consumption on the premises of a public school within
the district during school hours.

20. Lottery tickets or shares pursuant to title 5, chapter 5, article 1.

21. The sale of precious metal bullion and monetized bullion to the ultimate
consumer, but the sale of coins or other forms of money for manufacture into jewelry or
works of art is subject to the tax. For the purposes of this paragraph:

(a) "Monetized bullion" means coins and other forms of money which are manufactured
from gold, silver or other metals and which have been or are used as a medium of exchange
in this or another state, the United States or a foreign nation.

(b) "Precious metal bullion" means precious metal, including gold, silver,
platinum, rhodium and palladium, which has been smelted or refined so that its value
depends on its contents and not on its form.

22. Motor vehicle fuel and use fuel that are subject to a tax imposed under title
28, chapter 16, article 1, sales of use fuel to a holder of a valid single trip use fuel
tax permit issued under section 28-5739, sales of aviation fuel that are subject to the
tax imposed under section 28-8344 and sales of jet fuel that are subject to the tax
imposed under article 8 of this chapter.

23. Tangible personal property sold to a person engaged in the business of leasing
or renting such property under the personal property rental classification if such
property is to be leased or rented by such person.

24. Tangible personal property sold in interstate or foreign commerce if prohibited
from being so taxed by the Constitution of the United States or the constitution of this
state.

25. Tangible personal property sold to:

(a) A qualifying hospital as defined in section 42-5001.

(b) A qualifying health care organization as defined in section 42-5001 if the
tangible personal property is used by the organization solely to provide health and
medical related educational and charitable services.

(c) A qualifying health care organization as defined in section 42-5001 if the
organization is dedicated to providing educational, therapeutic, rehabilitative and
family medical education training for blind, visually impaired and multihandicapped
children from the time of birth to age twenty-one.

(d) A qualifying community health center as defined in section 42-5001.

(e) A nonprofit charitable organization that has qualified under section 501(c)(3)
of the internal revenue code and that regularly serves meals to the needy and indigent on
a continuing basis at no cost.

(f) For taxable periods beginning from and after June 30, 2001, a nonprofit
charitable organization that has qualified under section 501(c)(3) of the internal
revenue code and that provides residential apartment housing for low income persons over
sixty-two years of age in a facility that qualifies for a federal housing subsidy, if the
tangible personal property is used by the organization solely to provide residential
apartment housing for low income persons over sixty-two years of age in a facility that
qualifies for a federal housing subsidy.

26. Magazines or other periodicals or other publications by this state to encourage
tourist travel.

27. Tangible personal property sold to a person that is subject to tax under this
article by reason of being engaged in business classified under the prime contracting
classification under section 42-5075, or to a subcontractor working under the control of
a prime contractor that is subject to tax under article 1 of this chapter, if the
property so sold is any of the following:

(a) Incorporated or fabricated by the person into any real property, structure,
project, development or improvement as part of the business.

(b) Used in environmental response or remediation activities under section 42-5075,
subsection B, paragraph 6.

(c) Incorporated or fabricated by the person into any lake facility development in
a commercial enhancement reuse district under conditions prescribed for the deduction
allowed by section 42-5075, subsection B, paragraph 8.

28. The sale of a motor vehicle to:

(a) A nonresident of this state if the purchaser's state of residence does not
allow a corresponding use tax exemption to the tax imposed by article 1 of this chapter
and if the nonresident has secured a special ninety day nonresident registration permit
for the vehicle as prescribed by sections 28-2154 and 28-2154.01.

(b) An enrolled member of an Indian tribe who resides on the Indian reservation
established for that tribe.

29. Tangible personal property purchased in this state by a nonprofit charitable
organization that has qualified under section 501(c)(3) of the United States internal
revenue code and that engages in and uses such property exclusively in programs for
mentally or physically handicapped persons if the programs are exclusively for training,
job placement, rehabilitation or testing.

30. Sales of tangible personal property by a nonprofit organization that is exempt
from taxation under section 501(c)(3), 501(c)(4) or 501(c)(6) of the internal revenue
code if the organization is associated with a major league baseball team or a national
touring professional golfing association and no part of the organization's net earnings
inures to the benefit of any private shareholder or individual.

31. Sales of commodities, as defined by title 7 United States Code section 2, that
are consigned for resale in a warehouse in this state in or from which the commodity is
deliverable on a contract for future delivery subject to the rules of a commodity market
regulated by the United States commodity futures trading commission.

32. Sales of tangible personal property by a nonprofit organization that is exempt
from taxation under section 501(c)(3), 501(c)(4), 501(c)(6), 501(c)(7) or 501(c)(8) of
the internal revenue code if the organization sponsors or operates a rodeo featuring
primarily farm and ranch animals and no part of the organization's net earnings inures to
the benefit of any private shareholder or individual.

33. Sales of seeds, seedlings, roots, bulbs, cuttings and other propagative material
to persons who use those items to commercially produce agricultural, horticultural,
viticultural or floricultural crops in this state.

34. Machinery, equipment, technology or related supplies that are only useful to
assist a person who is physically disabled as defined in section 46-191, has a
developmental disability as defined in section 36-551 or has a head injury as defined in
section 41-3201 to be more independent and functional.

35. Sales of tangible personal property that is shipped or delivered directly to a
destination outside the United States for use in that foreign country.

36. Sales of natural gas or liquefied petroleum gas used to propel a motor vehicle.

37. Paper machine clothing, such as forming fabrics and dryer felts, sold to a paper
manufacturer and directly used or consumed in paper manufacturing.

38. Coal, petroleum, coke, natural gas, virgin fuel oil and electricity sold to a
qualified environmental technology manufacturer, producer or processor as defined in
section 41-1514.02 and directly used or consumed in the generation or provision of
on-site power or energy solely for environmental technology manufacturing, producing or
processing or environmental protection. This paragraph shall apply for twenty full
consecutive calendar or fiscal years from the date the first paper manufacturing machine
is placed in service. In the case of an environmental technology manufacturer, producer
or processor who does not manufacture paper, the time period shall begin with the date
the first manufacturing, processing or production equipment is placed in service.

39. Sales of liquid, solid or gaseous chemicals used in manufacturing, processing,
fabricating, mining, refining, metallurgical operations, research and development and,
beginning on January 1, 1999, printing, 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 but does not affect any deduction for such chemicals
that is otherwise provided by this section. For the purposes of this paragraph,
"printing" means a commercial printing operation and includes job printing, engraving,
embossing, copying and bookbinding.

40. Through December 31, 1994, personal property liquidation transactions, conducted
by a personal property liquidator. From and after December 31, 1994, personal property
liquidation transactions shall be taxable under this section provided that nothing in
this subsection shall be construed to authorize the taxation of casual activities or
transactions under this chapter. For the purposes of this paragraph:

(a) "Personal property liquidation transaction" means a sale of personal property
made by a personal property liquidator acting solely on behalf of the owner of the
personal property sold at the dwelling of the owner or upon the death of any owner, on
behalf of the surviving spouse, if any, any devisee or heir or the personal
representative of the estate of the deceased, if one has been appointed.

(b) "Personal property liquidator" means a person who is retained to conduct a sale
in a personal property liquidation transaction.

41. Sales of food, drink and condiment for consumption within the premises of any
prison, jail or other institution under the jurisdiction of the state department of
corrections, the department of public safety, the department of juvenile corrections or a
county sheriff.

42. A motor vehicle and any repair and replacement parts and tangible personal
property becoming a part of such motor vehicle sold to a motor carrier who is subject to
a fee prescribed in title 28, chapter 16, article 4 and who is engaged in the business of
leasing or renting such property.

43. Livestock and poultry feed, salts, vitamins and other additives for livestock or
poultry consumption that are sold to persons who are engaged in producing livestock,
poultry, or livestock or poultry products or who are engaged in feeding livestock or
poultry commercially. For the purposes of this paragraph, "poultry" includes ratites.

44. Sales of implants used as growth promotants and injectable medicines, not
already exempt under paragraph 8 of this subsection, for livestock or poultry owned by or
in possession of persons who are engaged in producing livestock, poultry, or livestock or
poultry products or who are engaged in feeding livestock or poultry commercially. For the
purposes of this paragraph, "poultry" includes ratites.

45. Sales of motor vehicles at auction to nonresidents of this state for use outside
this state if the vehicles are shipped or delivered out of this state, regardless of
where title to the motor vehicles passes or its free on board point.

46. Tangible personal property sold to a person engaged in business and subject to
tax under the transient lodging classification if the tangible personal property is a
personal hygiene item or articles used by human beings for food, drink or condiment,
except alcoholic beverages, which are furnished without additional charge to and intended
to be consumed by the transient during the transient's occupancy.

47. Sales of alternative fuel, as defined in section 1-215, to a used oil fuel
burner who has received a permit to burn used oil or used oil fuel under section 49-426
or 49-480.

48. Sales of materials that are purchased by or for publicly funded libraries
including school district libraries, charter school libraries, community college
libraries, state university libraries or federal, state, county or municipal libraries
for use by the public as follows:

(a) Printed or photographic materials, beginning August 7, 1985.

(b) Electronic or digital media materials, beginning July 17, 1994.

49. Tangible personal property sold to a commercial airline and consisting of food,
beverages and condiments and accessories used for serving the food and beverages, if
those items are to be provided without additional charge to passengers for consumption in
flight. For the purposes of this paragraph, "commercial airline" means a person holding a
federal certificate of public convenience and necessity or foreign air carrier permit for
air transportation to transport persons, property or United States mail in intrastate,
interstate or foreign commerce.

50. Sales of alternative fuel vehicles if the vehicle was manufactured as a diesel
fuel vehicle and converted to operate on alternative fuel and equipment that is installed
in a conventional diesel fuel motor vehicle to convert the vehicle to operate on an
alternative fuel, as defined in section 1-215.

51. Sales of any spirituous, vinous or malt liquor by a person that is licensed in
this state as a wholesaler by the department of liquor licenses and control pursuant to
title 4, chapter 2, article 1.

52. Sales of tangible personal property to be incorporated or installed as part of
environmental response or remediation activities under section 42-5075, subsection B,
paragraph 6.

53. Sales of tangible personal property by a nonprofit organization that is exempt
from taxation under section 501(c)(6) of the internal revenue code if the organization
produces, organizes or promotes cultural or civic related festivals or events and no part
of the organization's net earnings inures to the benefit of any private shareholder or
individual.

54. Through August 31, 2014, sales of Arizona centennial medallions by the
historical advisory commission.

55. Application services that are designed to assess or test student learning or to
promote curriculum design or enhancement purchased by or for any school district, charter
school, community college or state university. For the purposes of this paragraph:

(a) "Application services" means software applications provided remotely using
hypertext transfer protocol or another network protocol.

(b) "Curriculum design or enhancement" means planning, implementing or reporting on
courses of study, lessons, assignments or other learning activities.

B. In addition to the deductions from the tax base prescribed by subsection A of
this section, the gross proceeds of sales or gross income derived from sales of the
following categories of tangible personal property shall be deducted from the tax base:

1. Machinery, or equipment, used directly in manufacturing, processing,
fabricating, job printing, refining or metallurgical operations. The terms
"manufacturing", "processing", "fabricating", "job printing", "refining" and
"metallurgical" as used in this paragraph refer to and include those operations commonly
understood within their ordinary meaning. "Metallurgical operations" includes leaching,
milling, precipitating, smelting and refining.

2. Mining machinery, or equipment, used directly in the process of extracting ores
or minerals from the earth for commercial purposes, including equipment required to
prepare the materials for extraction and handling, loading or transporting such extracted
material to the surface. "Mining" includes underground, surface and open pit operations
for extracting ores and minerals.

3. Tangible personal property sold to persons engaged in business classified under
the telecommunications classification and consisting of central office switching
equipment, switchboards, private branch exchange equipment, microwave radio equipment and
carrier equipment including optical fiber, coaxial cable and other transmission media
which are components of carrier systems.

4. Machinery, equipment or transmission lines used directly in producing or
transmitting electrical power, but not including distribution. Transformers and control
equipment used at transmission substation sites constitute equipment used in producing or
transmitting electrical power.

5. Neat animals, horses, asses, sheep, ratites, swine or goats used or to be used
as breeding or production stock, including sales of breedings or ownership shares in such
animals used for breeding or production.

6. Pipes or valves four inches in diameter or larger used to transport oil, natural
gas, artificial gas, water or coal slurry, including compressor units, regulators,
machinery and equipment, fittings, seals and any other part that is used in operating the
pipes or valves.

7. Aircraft, navigational and communication instruments and other accessories and
related equipment sold to:

(a) A person holding a federal certificate of public convenience and necessity, a
supplemental air carrier certificate under federal aviation regulations (14 Code of
Federal Regulations part 121) or a foreign air carrier permit for air transportation for
use as or in conjunction with or becoming a part of aircraft to be used to transport
persons, property or United States mail in intrastate, interstate or foreign commerce.

(b) Any foreign government for use by such government outside of this state.

(c) Persons who are not residents of this state and who will not use such property
in this state other than in removing such property from this state. This subdivision
also applies to corporations that are not incorporated in this state, regardless of
maintaining a place of business in this state, if the principal corporate office is
located outside this state and the property will not be used in this state other than in
removing the property from this state.

8. Machinery, tools, equipment and related supplies used or consumed directly in
repairing, remodeling or maintaining aircraft, aircraft engines or aircraft component
parts by or on behalf of a certificated or licensed carrier of persons or property.

9. Railroad rolling stock, rails, ties and signal control equipment used directly
to transport persons or property.

10. Machinery or equipment used directly to drill for oil or gas or used directly in
the process of extracting oil or gas from the earth for commercial purposes.

11. Buses or other urban mass transit vehicles which are used directly to transport
persons or property for hire or pursuant to a governmentally adopted and controlled urban
mass transportation program and which are sold to bus companies holding a federal
certificate of convenience and necessity or operated by any city, town or other
governmental entity or by any person contracting with such governmental entity as part of
a governmentally adopted and controlled program to provide urban mass transportation.

12. Groundwater measuring devices required under section 45-604.

13. New machinery and equipment consisting of tractors, tractor-drawn implements,
self-powered implements, machinery and equipment necessary for extracting milk, and
machinery and equipment necessary for cooling milk and livestock, and drip irrigation
lines not already exempt under paragraph 6 of this subsection and that are used for
commercial production of agricultural, horticultural, viticultural and floricultural
crops and products in this state. For the purposes of this paragraph:

(a) "New machinery and equipment" means machinery and equipment which have never
been sold at retail except pursuant to leases or rentals which do not total two years or
more.

(b) "Self-powered implements" includes machinery and equipment that are
electric-powered.

14. Machinery or equipment used in research and development. For the purposes of
this paragraph, "research and development" means basic and applied research in the
sciences and engineering, and designing, developing or testing prototypes, processes or
new products, including research and development of computer software that is embedded in
or an integral part of the prototype or new product or that is required for machinery or
equipment otherwise exempt under this section to function effectively. Research and
development do 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.

15. Machinery and equipment that are purchased by or on behalf of the owners of a
soundstage complex and primarily used for motion picture, multimedia or interactive video
production in the complex. This paragraph applies only if the initial construction of the
soundstage complex begins after June 30, 1996 and before January 1, 2002 and the
machinery and equipment are purchased before the expiration of five years after the start
of initial construction. For the purposes of this paragraph:

(a) "Motion picture, multimedia or interactive video production" includes products
for theatrical and television release, educational presentations, electronic retailing,
documentaries, music videos, industrial films, CD-ROM, video game production, commercial
advertising and television episode production and other genres that are introduced
through developing technology.

(b) "Soundstage complex" means a facility of multiple stages including production
offices, construction shops and related areas, prop and costume shops, storage areas,
parking for production vehicles and areas that are leased to businesses that complement
the production needs and orientation of the overall facility.

16. Tangible personal property that is used by either of the following to receive,
store, convert, produce, generate, decode, encode, control or transmit telecommunications
information:

(a) Any direct broadcast satellite television or data transmission service that
operates pursuant to 47 Code of Federal Regulations part 25.

(b) Any satellite television or data transmission facility, if both of the
following conditions are met:

(i) Over two-thirds of the transmissions, measured in megabytes, transmitted by the
facility during the test period were transmitted to or on behalf of one or more direct
broadcast satellite television or data transmission services that operate pursuant to 47
Code of Federal Regulations part 25.

(ii) Over two-thirds of the transmissions, measured in megabytes, transmitted by or
on behalf of those direct broadcast television or data transmission services during the
test period were transmitted by the facility to or on behalf of those services.

For the purposes of subdivision (b) of this paragraph, "test period" means the three
hundred sixty-five day period beginning on the later of the date on which the tangible
personal property is purchased or the date on which the direct broadcast satellite
television or data transmission service first transmits information to its customers.

17. Clean rooms that are used for manufacturing, processing, fabrication or research
and development, as defined in paragraph 14 of this subsection, of semiconductor
products. For the purposes of this paragraph, "clean room" means all property that
comprises or creates an environment where humidity, temperature, particulate matter and
contamination are precisely controlled within specified parameters, without regard to
whether the property is actually contained within that environment or whether any of the
property is affixed to or incorporated into real property. Clean room:

(a) Includes the integrated systems, fixtures, piping, movable partitions, lighting
and all property that is necessary or adapted to reduce contamination or to control
airflow, temperature, humidity, chemical purity or other environmental conditions or
manufacturing tolerances, as well as the production machinery and equipment operating in
conjunction with the clean room environment.

(b) Does not include the building or other permanent, nonremovable component of the
building that houses the clean room environment.

18. Machinery and equipment used directly in the feeding of poultry, the
environmental control of housing for poultry, the movement of eggs within a production
and packaging facility or the sorting or cooling of eggs. This exemption does not apply
to vehicles used for transporting eggs.

19. Machinery or equipment, including related structural components, that is
employed in connection with manufacturing, processing, fabricating, job printing,
refining, mining, natural gas pipelines, metallurgical operations, telecommunications,
producing or transmitting electricity or research and development and that is used
directly to meet or exceed rules or regulations adopted by the federal energy regulatory
commission, the United States environmental protection agency, the United States nuclear
regulatory commission, the Arizona department of environmental quality or a political
subdivision of this state to prevent, monitor, control or reduce land, water or air
pollution.

20. Machinery and equipment that are sold to a person engaged in the commercial
production of livestock, livestock products or agricultural, horticultural, viticultural
or floricultural crops or products in this state and that are used directly and primarily
to prevent, monitor, control or reduce air, water or land pollution.

21. Machinery or equipment that enables a television station to originate and
broadcast or to receive and broadcast digital television signals and that was purchased
to facilitate compliance with the telecommunications act of 1996 (P.L. 104-104; 110 Stat.
56; 47 United States Code section 336) and the federal communications commission order
issued April 21, 1997 (47 Code of Federal Regulations part 73). This paragraph does not
exempt any of the following:

(a) Repair or replacement parts purchased for the machinery or equipment described
in this paragraph.

(b) Machinery or equipment purchased to replace machinery or equipment for which an
exemption was previously claimed and taken under this paragraph.

(c) Any machinery or equipment purchased after the television station has ceased
analog broadcasting, or purchased after November 1, 2009, whichever occurs first.

22. Qualifying equipment that is purchased from and after June 30, 2004 through June
30, 2014 by a qualified business under section 41-1516 for harvesting or the initial
processing of qualifying forest products removed from qualifying projects as defined in
section 41-1516. To qualify for this deduction, the qualified business at the time of
purchase must present its certification approved by the department.

23. Machinery, equipment and other tangible personal property used directly in
motion picture production by a motion picture production company. To qualify for this
deduction, at the time of purchase, the motion picture production company must present to
the retailer its certificate that is issued pursuant to section 42-5009, subsection H and
that establishes its qualification for the deduction.

C. The deductions provided by subsection B of this section do not include sales of:

1. Expendable materials. For the purposes of this paragraph, expendable materials
do not include any of the categories of tangible personal property specified in
subsection B of this section regardless of the cost or useful life of that property.

2. Janitorial equipment and hand tools.

3. Office equipment, furniture and supplies.

4. Tangible personal property used in selling or distributing activities, other
than the telecommunications transmissions described in subsection B, paragraph 16 of this
section.

5. Motor vehicles required to be licensed by this state, except buses or other
urban mass transit vehicles specifically exempted pursuant to subsection B, paragraph 11
of this section, without regard to the use of such motor vehicles.

6. Shops, buildings, docks, depots and all other materials of whatever kind or
character not specifically included as exempt.

7. Motors and pumps used in drip irrigation systems.

D. In addition to the deductions from the tax base prescribed by subsection A of
this section, there shall be deducted from the tax base the gross proceeds of sales or
gross income derived from sales of machinery, equipment, materials and other tangible
personal property used directly and predominantly to construct a qualified environmental
technology manufacturing, producing or processing facility as described in section
41-1514.02. This subsection applies for ten full consecutive calendar or fiscal years
after the start of initial construction.

E. In computing the tax base, gross proceeds of sales or gross income from retail
sales of heavy trucks and trailers does not include any amount attributable to federal
excise taxes imposed by 26 United States Code section 4051.

F. In computing the tax base, gross proceeds of sales or gross income from the sale
of use fuel, as defined in section 28-5601, does not include any amount attributable to
federal excise taxes imposed by 26 United States Code section 4091.

G. If a person is engaged in an occupation or business to which subsection A of
this section applies, the person's books shall be kept so as to show separately the gross
proceeds of sales of tangible personal property and the gross income from sales of
services, and if not so kept the tax shall be imposed on the total of the person's gross
proceeds of sales of tangible personal property and gross income from services.

H. If a person is engaged in the business of selling tangible personal property at
both wholesale and retail, the tax under this section applies only to the gross proceeds
of the sales made other than at wholesale if the person's books are kept so as to show
separately the gross proceeds of sales of each class, and if the books are not so kept,
the tax under this section applies to the gross proceeds of every sale so made.

I. A person who engages in manufacturing, baling, crating, boxing, barreling,
canning, bottling, sacking, preserving, processing or otherwise preparing for sale or
commercial use any livestock, agricultural or horticultural product or any other product,
article, substance or commodity and who sells the product of such business at retail in
this state is deemed, as to such sales, to be engaged in business classified under the
retail classification. This subsection does not apply to businesses classified under the:

1. Transporting classification.

2. Utilities classification.

3. Telecommunications classification.

4. Pipeline classification.

5. Private car line classification.

6. Publication classification.

7. Job printing classification.

8. Prime contracting classification.

9. Owner builder sales classification.

10. Restaurant classification.

J. The gross proceeds of sales or gross income derived from the following shall be
deducted from the tax base for the retail classification:

1. Sales made directly to the United States government or its departments or
agencies by a manufacturer, modifier, assembler or repairer.

2. Sales made directly to a manufacturer, modifier, assembler or repairer if such
sales are of any ingredient or component part of products sold directly to the United
States government or its departments or agencies by the manufacturer, modifier, assembler
or repairer.

3. Overhead materials or other tangible personal property that is used in
performing a contract between the United States government and a manufacturer, modifier,
assembler or repairer, including property used in performing a subcontract with a
government contractor who is a manufacturer, modifier, assembler or repairer, to which
title passes to the government under the terms of the contract or subcontract.

4. Sales of overhead materials or other tangible personal property to a
manufacturer, modifier, assembler or repairer if the gross proceeds of sales or gross
income derived from the property by the manufacturer, modifier, assembler or repairer
will be exempt under paragraph 3 of this subsection.

K. There shall be deducted from the tax base fifty per cent of the gross proceeds
or gross income from any sale of tangible personal property made directly to the United
States government or its departments or agencies, which is not deducted under subsection
J of this section.

L. The department shall require every person claiming a deduction provided by
subsection J or K of this section to file on forms prescribed by the department at such
times as the department directs a sworn statement disclosing the name of the purchaser
and the exact amount of sales on which the exclusion or deduction is claimed.

M. In computing the tax base, gross proceeds of sales or gross income does not
include:

1. A manufacturer's cash rebate on the sales price of a motor vehicle if the buyer
assigns the buyer's right in the rebate to the retailer.

2. The waste tire disposal fee imposed pursuant to section 44-1302.

N. There shall be deducted from the tax base the amount received from sales of
solar energy devices. The retailer shall register with the department as a solar energy
retailer. By registering, the retailer acknowledges that it will make its books and
records relating to sales of solar energy devices available to the department for
examination.

O. In computing the tax base in the case of the sale or transfer of wireless
telecommunications equipment as an inducement to a customer to enter into or continue a
contract for telecommunications services that are taxable under section 42-5064, gross
proceeds of sales or gross income does not include any sales commissions or other
compensation received by the retailer as a result of the customer entering into or
continuing a contract for the telecommunications services.

P. For the purposes of this section, a sale of wireless telecommunications
equipment to a person who holds the equipment for sale or transfer to a customer as an
inducement to enter into or continue a contract for telecommunications services that are
taxable under section 42-5064 is considered to be a sale for resale in the regular course
of business.

Q. Retail sales of prepaid calling cards or prepaid authorization numbers for
telecommunications services, including sales of reauthorization of a prepaid card or
authorization number, are subject to tax under this section.

R. For the purposes of this section, the diversion of gas from a pipeline by a
person engaged in the business of:

1. Operating a natural or artificial gas pipeline, for the sole purpose of fueling
compressor equipment to pressurize the pipeline, is not a sale of the gas to the operator
of the pipeline.

2. Converting natural gas into liquefied natural gas, for the sole purpose of
fueling compressor equipment used in the conversion process, is not a sale of gas to the
operator of the compressor equipment.

S. If a seller is entitled to a deduction pursuant to subsection B, paragraph 16,
subdivision (b) of this section, the department may require the purchaser to establish
that the requirements of subsection B, paragraph 16, subdivision (b) of this section have
been satisfied. If the purchaser cannot establish that the requirements of subsection B,
paragraph 16, subdivision (b) of this section have been satisfied, the purchaser is
liable in an amount equal to any tax, penalty and interest which the seller would have
been required to pay under article 1 of this chapter if the seller had not made a
deduction pursuant to subsection B, paragraph 16, subdivision (b) of this section.
Payment of the amount under this subsection exempts the purchaser from liability for any
tax imposed under article 4 of this chapter and related to the tangible personal property
purchased. The amount shall be treated as transaction privilege tax to the purchaser and
as tax revenues collected from the seller to designate the distribution base pursuant to
section 42-5029.

T. For the purposes of section 42-5032.01, the department shall separately account
for revenues collected under the retail classification from businesses selling tangible
personal property at retail:

1. On the premises of a multipurpose facility that is owned, leased or operated by
the tourism and sports authority pursuant to title 5, chapter 8.

2. At professional football contests that are held in a stadium located on the
campus of an institution under the jurisdiction of the Arizona board of regents.

U. In computing the tax base for the sale of a motor vehicle to a nonresident of
this state, if the purchaser's state of residence allows a corresponding use tax
exemption to the tax imposed by article 1 of this chapter and the rate of the tax in the
purchaser's state of residence is lower than the rate prescribed in article 1 of this
chapter or if the purchaser's state of residence does not impose an excise tax, and the
nonresident has secured a special ninety day nonresident registration permit for the
vehicle as prescribed by sections 28-2154 and 28-2154.01, there shall be deducted from
the tax base a portion of the gross proceeds or gross income from the sale so that the
amount of transaction privilege tax that is paid in this state is equal to the excise tax
that is imposed by the purchaser's state of residence on the nonexempt sale or use of the
motor vehicle.

V. For the purposes of this section:

1. "Aircraft" includes:

(a) An airplane flight simulator that is approved by the federal aviation
administration for use as a phase II or higher flight simulator under appendix H, 14 Code
of Federal Regulations part 121.

(b) Tangible personal property that is permanently affixed or attached as a
component part of an aircraft that is owned or operated by a certificated or licensed
carrier of persons or property.

2. "Other accessories and related equipment" includes aircraft accessories and
equipment such as ground service equipment that physically contact aircraft at some point
during the overall carrier operation.

3. "Selling at retail" means a sale for any purpose other than for resale in the
regular course of business in the form of tangible personal property, but transfer of
possession, lease and rental as used in the definition of sale mean only such
transactions as are found on investigation to be in lieu of sales as defined without the
words lease or rental.

W. For the purposes of subsection J of this section:

1. "Assembler" means a person who unites or combines products, wares or articles of
manufacture so as to produce a change in form or substance without changing or altering
the component parts.

2. "Manufacturer" means a person who is principally engaged in the fabrication,
production or manufacture of products, wares or articles for use from raw or prepared
materials, imparting to those materials new forms, qualities, properties and
combinations.

3. "Modifier" means a person who reworks, changes or adds to products, wares or
articles of manufacture.

4. "Overhead materials" means tangible personal property, the gross proceeds of
sales or gross income derived from which would otherwise be included in the retail
classification, and which are used or consumed in the performance of a contract, the cost
of which is charged to an overhead expense account and allocated to various contracts
based upon generally accepted accounting principles and consistent with government
contract accounting standards.

5. "Repairer" means a person who restores or renews products, wares or articles of
manufacture.

6. "Subcontract" means an agreement between a contractor and any person who is not
an employee of the contractor for furnishing of supplies or services that, in whole or in
part, are necessary to the performance of one or more government contracts, or under
which any portion of the contractor's obligation under one or more government contracts
is performed, undertaken or assumed and that includes provisions causing title to
overhead materials or other tangible personal property used in the performance of the
subcontract to pass to the government or that includes provisions incorporating such
title passing clauses in a government contract into the subcontract.