You’d need COLLATE in both places most likely.
Select City COLLATE DATABASE_DEFAULT AS Place, State, Country FROM DEPT1
UNION ALL
Select '' COLLATE DATABASE_DEFAULT AS Place, 'Arizona' As State, Country FROM DEPT2
Edit: You may need it on every string if you get it in one places
Select
City COLLATE DATABASE_DEFAULT AS Place,
State COLLATE DATABASE_DEFAULT AS State,
Country COLLATE DATABASE_DEFAULT AS Country
FROM DEPT1
UNION ALL
Select
'' COLLATE DATABASE_DEFAULT,
'Arizona' COLLATE DATABASE_DEFAULT ,
Country COLLATE DATABASE_DEFAULT
FROM DEPT2
Edit2:
It happens because your column collation is probably different to your database collation. So “City” has one collation but string constants have another.