Arizona sales tax exemptions cover a defined set of goods, buyers, and business inputs: manufacturing machinery and raw materials, agricultural supplies, prescription drugs and durable medical equipment, solar and wind equipment, purchases by qualifying 501(c)(3) organizations, and goods you already paid an equal or higher sales tax on in another state. To actually get the exemption, you need to claim it correctly at the point of sale and keep the paperwork.
One wrinkle before the list. What Arizonans call sales tax is technically the Transaction Privilege Tax (TPT), a tax on the seller’s gross receipts rather than on the buyer.1Arizona Department of Revenue. Transaction Privilege Tax The cost gets passed through the same way, but the exemptions are written as deductions from the seller’s taxable receipts. Retail exemptions live mainly in ARS 42-5061, and use tax exemptions (for goods bought out of state and used here) live in ARS 42-5159.
Manufacturing and Production Purchases
Arizona exempts tangible personal property that becomes an ingredient or component of a manufactured product sold in the regular course of business.2Arizona Legislature. Arizona Code 42-5159 – Exemptions Raw materials, chemicals, and parts physically incorporated into a finished good are exempt. Steel bought to fabricate structural beams for resale qualifies.
Several categories of machinery and equipment are also exempt when used directly in production:3Arizona Commerce Authority. Sales Tax Exemptions for Manufacturing
- Machinery or equipment used directly in manufacturing, processing, or fabricating (ARS 42-5159(B)(1)).
- Machinery, equipment, or transmission lines used directly in producing or transmitting electrical power. Distribution equipment does not qualify (ARS 42-5159(B)(4)).
- Machinery or equipment used in research and development (ARS 42-5159(B)(15)).
- Electricity or natural gas purchased by businesses principally engaged in manufacturing or smelting.
The word “directly” does the heavy lifting. A machine that touches the product or performs the transformation itself usually qualifies. Office furniture in the plant’s administrative wing does not, even though it sits inside a manufacturing facility.
Agricultural Purchases
Livestock and poultry sold to buyers in the business of farming, ranching, or producing livestock or poultry are exempt, along with feed, salts, vitamins, and other feed additives used in those operations. The statute defines “poultry” broadly enough to include ratites such as ostriches and emus.2Arizona Legislature. Arizona Code 42-5159 – Exemptions Feed purchased for noncommercial boarding of livestock also qualifies.
Propagative materials for commercial crop production are exempt as a separate category. That covers seeds, fertilizers, pesticides, seedlings, roots, bulbs, and cuttings used to grow agricultural, horticultural, or floricultural crops in Arizona.4Arizona Legislature. Arizona Code 42-5159 – Exemptions The use has to be commercial. A backyard garden is not covered.
The retail classification under ARS 42-5061 contains parallel deductions, so sellers of these items can deduct the receipts from their TPT return.5Arizona Department of Revenue. Arizona Transaction Privilege Tax Ruling TPR 18-1
Prescription Drugs and Medical Equipment
Prescription drugs, including medical oxygen, are exempt when prescribed by a licensed health care professional. Prosthetic appliances are exempt. Durable medical equipment is exempt if it meets Medicare’s classification criteria: it has to be durable enough for repeated use, medically necessary, generally useful only to someone sick or injured, suitable for home use, and expected to last at least three years.6Medicare.gov. Durable Medical Equipment (DME) Coverage
Wheelchairs, hospital beds, and home oxygen equipment prescribed by a provider typically qualify. Over-the-counter items generally do not, even when they serve a medical purpose. If no licensed provider wrote a prescription, the exemption usually does not apply.
Solar, Wind, and Renewable Energy
Solar and wind equipment are exempt from Arizona TPT. Renewable energy credits sold by generators to utilities for compliance with the state’s renewable energy standard are also outside the tax, clarified by Senate Bill 1229 in 2012.7Database of State Incentives for Renewables and Efficiency. Solar and Wind Equipment Sales Tax Exemption
ARS 42-5159 also references exemptions tied to environmental response or remediation equipment, but this is narrower than a general pollution-control exemption. The equipment has to connect to specific remediation work described in ARS 42-5075.2Arizona Legislature. Arizona Code 42-5159 – Exemptions
Nonprofit and Charitable Organizations
Organizations recognized under IRC Section 501(c)(3) can claim Arizona TPT exemptions on purchases that support their charitable missions. The categories generally include qualifying hospitals, health care organizations, and groups providing educational, therapeutic, or rehabilitative services. Property for programs serving people with disabilities and supplies used by organizations that provide meals to people in need also qualify.
One compliance point matters above all others: your federal 501(c)(3) status is a prerequisite. The IRS automatically revokes exempt status when an organization fails to file its required annual return for three consecutive years.8Internal Revenue Service. Annual Form 990 Filing Requirements for Tax-Exempt Organizations Lose the federal status and the Arizona exemption goes with it, with no separate state process to save it.
Items Already Taxed in Another State
If you buy tangible personal property outside Arizona and bring it in for use here, no Arizona use tax is owed if you already paid another state’s sales or excise tax at a rate equal to or higher than Arizona’s. If the other state’s rate was lower, you owe the difference.2Arizona Legislature. Arizona Code 42-5159 – Exemptions Keep the invoice and the proof of tax paid; without those, you cannot substantiate the credit if asked.
ARS 42-5159 also exempts property that is constitutionally protected from state taxation, such as goods moving in interstate commerce or items federal law requires to remain tax-free.2Arizona Legislature. Arizona Code 42-5159 – Exemptions
How to Actually Claim an Exemption
Arizona requires sellers to collect and keep an exemption certificate from any buyer claiming a purchase is tax-free. The Streamlined Sales Tax Exemption Certificate is accepted in Arizona along with 23 other member states, and the buyer has to supply a valid state-issued tax ID number.9Streamlined Sales Tax Governing Board. Exemptions Sellers generally do not have to verify the ID, but they do need the certificate on file. No certificate, no deduction. A legitimate exemption that was never documented turns into back tax, interest, and penalties in an audit.
Keep records long enough to cover the audit window. The Arizona Department of Revenue has four years from the later of the return’s due date or filing date to assess additional tax. If receipts were understated by more than 25%, the window extends to six years. If no return was filed, there is no limit. Six years of retained certificates, invoices, and returns is a sensible floor.
A Note for Out-of-State Sellers
If you sell into Arizona from out of state, exemptions are only half the picture. Remote sellers with $100,000 or more in gross sales into Arizona in the current or prior calendar year must obtain a TPT license and begin collecting. Sales made through a marketplace facilitator do not count toward your individual threshold because the marketplace collects on those transactions. Hitting the threshold triggers collection on the first day of the month that begins at least 30 days later, and the obligation continues through that calendar year and the next.