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BILL # SB 1539 |
TITLE: |
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SPONSOR: Carroll |
STATUS: As Amended by Senate FIN |
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PREPARED BY: Ethan Scheider |
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Under current law, property incorporated into the creation of a "clean room" used for the manufacturing of semiconductor products are exempt from the Transaction Privilege Tax (TPT) and Use Tax. The strike-everything-amendment to SB 1539 would expand this exemption to include clean rooms used in any industry for manufacturing, processing, fabrication or research and development.
The current exemption applies to materials used to create a clean room, such as fixtures, piping, lighting, movable partitions, and as well as the equipment used to reduce contamination and control airflow, temperature, and humidity. The exemption does not apply to the building or any permanent, nonremovable component of the building that houses the clean room environment. The bill would become effective on the first day of the month following the general effective date.
Estimated Impact
We anticipate that the bill's expansion of the current clean room TPT and Use Tax exemption to include all industries (rather than the semiconductor industry only) could result in a General Fund revenue reduction in the millions of dollars, beginning in FY 2026.
We do not have sufficient data to estimate the specific amount of this revenue reduction. We do know, however that the current semiconductor clean room sales tax exemption reduced state TPT collections by $(24.7) million in FY 2024. Since the bill would make this exemption available to all industries that use clean rooms, such as the biotechnology industry, aerospace and defense, and medical device manufacturing, we believe a revenue loss in the millions of dollars is possible.
We have reached out to the Arizona Department of Revenue (ADOR) for their estimated impact of the bill but are yet to receive a response.
Under current law, businesses may claim a TPT or Use Tax exemption for tangible personal property that comprises a clean room used for manufacturing, processing, fabrication or research and development of semiconductor products. ADOR reports the fiscal impact of the current exemptions in its FY 2024 Tax Expenditure Report. According to ADOR, businesses deducted $494 million for the sale of property that comprises a clean room used for semiconductor production in FY 2024. At the state TPT rate of 5.0%, the dollar value of this exemption was $24.7 million in FY 2024.
Besides their use in semiconductor production, clean rooms are utilized by various industries, including pharmaceuticals, biomedical, food and beverage, aerospace, and many others. Due to the variety in the purpose, size and specifications of clean rooms, we would expect that the amount of gross proceeds or income deducted per clean room would vary significantly under an expanded TPT and use tax exemption. To provide some perspective, according to a commercial construction cost estimating and consulting firm with large corporate clients, clean room costs typically range from $200 to $550 per square foot. (It is not clear from this information, however, how much of that cost is for the construction of the building or structure as opposed to the materials and equipment used in the clean rooms.)
Local Government Impact
State TPT revenues are shared with local governments and any reduction in these collections would result in decreased distributions to cities and counties.
2/27/25