By: Paul J. Valentine, Attorney, Jennings, Strouss & Salmon, P.L.C
In Arizona, furnishing natural or artificial
gas, water, or electricity is generally subject to Arizona’s transaction privilege
tax (TPT). Imposed by statute, the tax is levied on the utility company (or
distributor) rather than the end user; however, the utility company may pass
(and almost always does) the economic burden to the end user. An often ignored
deduction exists for qualifying hospitals and health care organizations. As the
tax is passed onto the end user, a qualifying entity can provide an exemption
letter to the utility company that would end the transferred tax obligation. In
short, it can help reduce the qualifying hospital or health care organization’s
utility expenses. A short summary of those provisions are provided below.
The Utility
Classification
Arizona’s TPT is imposed by statute – it explains that the amount
taxed is determined by calculating a business’s gross income, as adjusted by
various exemptions and deductions. Different types of businesses enjoy
different deductions and exemptions depending on, in part, statutorily
prescribed business classifications. One such classification is the Utility
Classification, which taxes the “producing and furnishing to consumers natural
or artificial gas and water [and] providing to retail electric customers
ancillary services, electric distribution services, electric generation
services, electric transmission services and other services related to
providing electricity.”
In other words, the Utility Classification taxes the furnishing of
water, natural or artificial gas and electricity to retail electric customers
and consumers. The term “retail electric customers” is defined as a person who
purchases electricity for their own use, not for resale, redistribution or
retransmission. The word “consumer” is not defined in the statute, but would
likely be interpreted as any purchaser of water or natural or artificial gas.
The Utility
Classification Deduction for Qualifying Hospitals and Health Care Organizations
The Utility Classification allows a deduction from the tax base
for certain sales to “qualifying hospitals” and “qualifying health care
organizations.” In other words, any sale to these qualifying organizations
would be reported on the return, but then would be entitled to a corresponding
deduction under the applicable category. The qualifying entity would benefit
from that deduction because the tax cost would no longer be passed along on its
utility invoice. The deduction to qualifying hospitals is broad and includes
all sales to eligible organizations.
A “qualifying hospital” is defined by statute and means any of the
following:
a. A licensed hospital [that] is organized and operated exclusively
for charitable purposes, no part of the net earnings of which inures to the
benefit of any private shareholder or individual.
b. A licensed nursing care institution or a licensed residential care
institution or a residential care facility operated in conjunction with a
licensed nursing care institution or a licensed kidney dialysis center, which
provides medical services, nursing services or health related services and is
not used or held for profit.
c. A hospital, nursing care institution or residential care
institution [that] is operated by the federal government, [Arizona] or a political
subdivision of [Arizona].
d. A facility that is under construction and that on completion will
be a facility under subdivision (a), (b) or (c) of this paragraph.
Thus, to qualify for a “qualifying hospital” deduction, the
facility must either be a non-profit or operated by a state or federal
institution. Although the organization must be a non-profit, there is no
requirement that the organization operate as a tax exempt entity. Additionally,
the deduction applies to the construction of facilities that would otherwise
qualify.
A “qualifying health care organization” is also defined by statute
and is more narrowly defined. It means an entity that is recognized as
tax-exempt under § 501(c) of the Internal Revenue Code and that uses at least
eighty percent (80%) of all monies received from all sources only for health
and medical related education and charitable services. This expenditure ratio
must be audited yearly by an independent certified public accountant under
generally accepted accounting principles.
The results of the audit must be filed with the Arizona Department of
Revenue.
Additionally, the deduction for “qualifying health care organizations”
is more limited than that available to a “qualifying hospital.” This deduction
is limited to the gross proceeds of sales or gross income from sales to a
qualifying health care organization if the electricity, natural or artificial
gas, or water is used by the organization “solely to provide health and medical
related educational and charitable services.”
Qualifying organizations should request from the Arizona
Department of Revenue an exemption letter confirming their eligibility for the
deduction. Hospitals, nursing and residential care facilities, licensed kidney
dialysis centers, and other tax exempt entities that operate in the health and
medical field should seek the advice of competent legal counsel familiar with Arizona’s
TPT to determine whether they qualify for this deduction, and for assistance
with preparing a request for an exemption letter.
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Paul J. Valentine's practice emphasizes structuring corporate, partnership, and real estate transactions, counseling medium and small businesses and tax-exempt organizations in tax matters, litigating tax cases in federal courts, and handling administrative controversies before the IRS. His experience with Arizona state and city tax controversy includes income tax, sales tax, and commercial rent tax. pvalentine@jsslaw.com
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