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ARIZONA STATE SENATE
Fifty-Fourth Legislature, First Regular Session
independent functional utility; deduction
Purpose
Eliminates, from the definition of independent functional utility, the requirement that any attachment to real property be nonpermanent.
Background
Current statute provides a deduction from the contracting tax base for gross income or the gross proceeds of sale for income derived from a contract for the installation, assembly, repair or maintenance of machinery, equipment or other tangible personal property that is deducted from the tax base and that has independent functional utility (IFU).
IFU is defined under statute as, "machinery, equipment or other tangible personal property that can independently perform its function without attachment to real property other than attachment for any of the following purposes:
1) assembling the machinery or equipment;
2) connecting items of machinery or equipment together;
3) connecting the machinery or equipment to water, power, gas, communication or other services; or
4) stabilizing or protecting the machinery or equipment by bolting, burying or similar non-permanent connections to real property" (A.R.S. § 42-5075).
In a private taxpayer ruling the Arizona Department of Revenue stated:
"Taxpayer may deduct gross income derived from a contract for the installation of exempt machinery under 42-5075(B)(7), only if that exempt machinery and equipment has IFU such that any attachment of the exempt machinery and equipment to real property is of a non-permanent nature. In this case, a common feature of the installation is that they have to be stabilized on concrete pads, vaults or foundations . . . Thus, in cases where a foundation or concrete pad or vault must be installed, the systems being installed will not be considered IFU" (PTR LR 17-009).
There may be a negative fiscal impact to the state General Fund if additional deductions from the tax base occur as a result of this legislation.
Provisions
1. Eliminates, from the definition of independent functional utility, for purposes of determining the tax base for the prime contracting classification and exemption from municipal tax, the requirement that any attachment to real property be nonpermanent.
2. Includes a legislative intent clause.
3. Makes technical corrections relating to multiple enactments.
4. Makes technical and conforming changes.
5. Becomes effective on the general effective date, retroactive to taxable periods beginning from and after June 30, 1997.
Prepared by Senate Research
February 11, 2019
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