Navigating Arizona’s Transaction Privilege Tax for Nonprofits

Arizona’s tax structure can be challenging for nonprofit organizations hoping to qualify for a broad range of tax exemptions. Unlike other states, Arizona does not provide a blanket exemption from Transaction Privilege Tax (TPT) for nonprofits. Instead, the Arizona Revised Statutes (A.R.S.) outline specific exemptions for nonprofits depending on their role in transactions—as either a business conducting taxable activities or a customer. Here’s a guide to understanding how Arizona’s TPT impacts nonprofit organizations.

What Makes Arizona’s TPT Unique?

While most states impose a traditional sales tax, Arizona levies a TPT, a tax on the privilege of doing business in the state. Unlike a sales tax passed directly to customers, TPT is a tax on the income businesses derive from their operations, though businesses can transfer the economic burden of the tax to their customers. However, the legal responsibility for TPT payment remains with the business.

Taxable Business Activities for Nonprofits

For nonprofits operating as a business, many activities remain subject to TPT unless explicitly excluded by statute. For example, under the retail classification, nonprofits that sell goods do not need to collect TPT on sales, regardless of the buyer’s identity. However, when a nonprofit organization itself acts as the customer, the vendor may pass on the tax cost to the nonprofit unless a specific statutory exemption applies.

Generally, TPT exemptions are more readily available for sales by nonprofits than for sales to nonprofits. This distinction means that nonprofits often bear TPT costs on purchases unless they meet narrow exemption criteria, such as qualified healthcare or hospital status.

Examples of Transactions Subject to Arizona TPT

When acting as a customer, nonprofits typically face TPT on a variety of purchases, including:

– Hotel stays

– Venue or banquet room rentals

– Rentals of tangible property (e.g., audiovisual equipment)

– Retail purchases for the organization’s use

– Restaurant services (e.g., meals, catering)

Only specific exemptions provided in the statute can shield a nonprofit from TPT on these transactions. In some cases, nonprofits may need an exemption letter from the Arizona Department of Revenue (ADOR) to claim these benefits.

Exemptions and Exemption Letters for Nonprofits

Here’s a breakdown of when Arizona nonprofits need an exemption letter and when they don’t.

Organizations that Need an Exemption Letter from ADOR  

Certain nonprofits must apply for an exemption letter to qualify for TPT benefits, including:

– Qualifying hospitals

– Qualifying healthcare organizations

– Qualifying community healthcare centers

– Rehabilitation programs for individuals with disabilities

Organizations that Do Not Need an Exemption Letter  

Some nonprofit charitable organizations operating under I.R.C. § 501(c)(3) automatically qualify for exemptions, provided they meet certain criteria. Exempt organizations include:

– Charities that serve meals to the needy or indigent at no cost

– Charities providing subsidized apartment housing for low-income individuals over 62

– Nonprofits focused solely on postgraduate health sciences education

For all other nonprofits acting as customers, TPT is typically applicable unless a specific statutory deduction exists.

City-Level Exemptions for Nonprofits

Arizona cities often take a different approach than the state. Many provide a general exemption from city privilege tax for nonprofits conducting taxable activities. However, there are exceptions:

– Proprietary Clubs and nonprofits under I.R.C. § 501(c)(7), (8), and (9): If revenue from non-members exceeds 15% of total revenue, the entire gross income becomes taxable.

– Unrelated Business Income: Gross income from unrelated business activities remains subject to city privilege tax.

These exceptions treat income from unrelated business activities as taxable city income.

Nonprofits Conducting Business: Exemptions and Responsibilities

Exemptions vary depending on whether a nonprofit is acting as a customer or a business. While cities generally provide exemptions from city privilege tax, state exemptions for nonprofits can be narrower and may require an exemption letter for specific activities. For an overview of TPT exemptions available to nonprofits in Arizona, organizations can consult Transaction Privilege Tax Procedure TPP 00-4, which outlines classifications and scenarios under which TPT may or may not apply. 

Conclusion

For nonprofits in Arizona, understanding the nuances of TPT is essential to managing tax obligations effectively. Although certain exemptions exist, most nonprofits will encounter TPT as customers unless they qualify under specific statutory provisions. By seeking guidance and reviewing applicable procedures, nonprofits can navigate the complexities of TPT compliance with greater confidence.

Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.