Although commonly referred to as a sales tax, the Arizona transaction privilege tax is actually a tax on the business owner for the privilege of conducting certain business activities in the state.

If a business is engaging in business activity a TPT license issued by the Arizona Department of Revenue (ADOR) is needed.  ADOR collects the tax for the counties and cities; however, tax rates vary depending on the type of business activity, the city and the county.

MRRA projects typically entail maintenance, repair, replacement or alteration of existing structures.  See 1(c) for additional information on MRRA projects.

Prime contracting/modification projects typically include the construction of structures from the ground up.

The TPT is imposed on the business activity of performing contracting work as a prime contractor.  The tax base is sixty-five percent of the gross receipts derived from the business.

Alteration is an activity or action that causes a direct physical change (e.g., adding or expanding square footage) to existing property that cannot be classified as maintenance, repair or replacement and where the alteration amount is below that is under the following thresholds:

• 25% of the property’s tax value (residential property); or
• $750,000 (commercial property).

The gross receipts of a prime contracting/modification project is subject to the TPT.  A licensed contractor may, but need not, show tax as a separate line item on their invoice as contractors are permitted to factor taxes.

Please go to https://azdor.gov/transaction-privilege-tax/tax-factoring for more information.

No. You do not remit the TPT on an out-of-state project if, in fact, the entire project is outside of Arizona’s borders.  You may use deduction code 681 to deduction this project from your gross receipts.

If you do a modification project that takes place both in and out of Arizona, you will have to report all your gross receipts derived from the project and then deduct the portion related to the work conducted out-of-state using deduction code 681.

Generally, the gross receipts of a MRRA project are not subject to the TPT for prime contracting TPT purposes. However, the materials used in an MRRA project are subject to retail TPT unless a statutory deduction or exclusion applies.

If the TPT was not paid at the time materials were purchased, the retail equivalent TPT on the price of the materials is due when the materials are used based on the location of the project.  Please See 4(c) for example.

No, the contractor should not include tax as a separate line item on the invoice to the customer for MRRA projects.  Rather, the tax paid on the materials should be treated as an indirect cost of doing business.

No, labor is not taxable and a contractor's invoice for MRRA projects should not include a line item for tax as neither the labor or the materials are taxable (although a contractor will pay tax on the materials when they are purchased).

If increases to an alteration contract causes the project to exceed the alteration threshold by more than 25% before completion of the project, the project will then become a modification project. If the contract becomes modification, then the prime contractor should provide the subcontractor(s) with a completed Form 5005 and require that all subcontractors provide the contractor who hired them with a completed Affidavit of Retail TPT Equivalent Paid by the Subcontractor. This is to obtain a credit on the taxes paid on the cost of materials used in the project. The prime contractor will use the receipts and information from the affidavit to complete the MRRA Credit Summary Workbook and submit it to the Department. The Department will apply it to the tax liability on the modification project.

This should be completed within six (6) months of the alteration project turning into a modification.

Please see the MRRA Credit Request Procedure page for more information on requesting a credit.

Because the prime contractor provided a Form 5005 to all of the subcontractors on the job, the prime contractor should have already received receipts for all of the costs of materials used on the job. Accordingly, the retail equivalent TPT should have already been paid to the Department. Now the prime contractor is able to complete the MRRA Credit Summary Workbook and submit it to the Department to obtain a credit on the taxes paid on the cost of materials used in the project. The Department will apply it to the tax liability on the modification project. 

This should be completed within six (6) months of the alteration project turning into a modification.  

Please see the MRRA Credit Request Procedure page for more information on requesting a credit.

Please use the Evaluating Mixed Construction Contracts worksheet to analyze if the project is an alteration or has become a modification.

If after analysis the contract becomes modification and due to the prime contractor providing a Form 5005 to all of the subcontractors on the job, the prime contractor should have already received receipts for all of the costs of materials used on the job. Accordingly, the retail equivalent TPT should have already been paid to the Department. Now, the prime contractor is able to complete the MRRA Credit Summary Workbook and submit it to the Department to obtain a credit on the taxes paid on the cost of materials used in the project. The Department will apply it to the tax liability on the modification project.

This should be completed within six (6) months of the alteration project turning into a modification.

Please see the MRRA Credit Request Procedure page for more information on requesting a credit.
 

Please use the Evaluating Mixed Construction Contracts worksheet to analyze if the project is an alteration or has become a modification.

If the contract becomes modification then the prime contractor should provide the subcontractor(s) with a completed Form 5005 and require that all subcontractors provide the contractor who hired them with a completed Affidavit of Retail TPT Equivalent Paid by the Subcontractor. The prime contractor will use the receipts and information from the affidavit to complete the MRRA Credit Summary Workbook and submit it to the Department. This is to obtain a credit on the taxes paid on the cost of  materials used in the project. The Department will apply it to the tax liability on the modification project.

This should be completed within six (6) months of the alteration project turning into a modification.

Please see the MRRA Credit Request Procedure page for more information on requesting a credit.

When a contract contains both MRRA and modification activity, the modification activity is considered "de minimis" if the amount of activity attributable to modification is 15% or less of the total receipts from the total contract. Please refer to the Evaluating Mixed Construction Contracts worksheet for further guidance.

Each contract is independent of any other contract, and taxability of a contract and subsequent change orders will be determined separately. However, any change order that directly relates to the scope of work of the original contract will, for tax purposes, be treated the same as the original contract. Please refer to the Evaluating Mixed Construction Contracts worksheet for further guidance.

Job Order Contracting (JOC) is a contracting method by which an owner engages a contractor for a specific duration or general scope of services. The specific scope of services is then defined under work orders issued to the contractor. For purposes of JOC activities, each work order shall be considered separately when determining whether the contract is a MRRA contract or a modification contract. If the JOC is only for MRRA work, each of the work orders shall be treated as a MRRA contract. Any work order involving alteration activity will need to be evaluated under the applicable alteration threshold. If any work order contains both MRRA and modification activities, the modification activities must be de minimis, otherwise the entire work order will be considered taxable. Please refer to the Evaluating Mixed Construction Contracts worksheet for further guidance.

Please use the Evaluating Mixed Construction Contracts worksheet to analyze if the project remains a MRRA project or will now be considered a modification project.

If after analysis the project becomes a modification project, the prime contractor should have already received receipts from the subcontractors for all of the costs of materials used on the job indicating the taxes paid, due to the prime contractor providing a Form 5005 to all of the subcontractors on the job. In addition, the retail equivalent TPT also should have already been paid directly to the Department by the prime contractor. Now, the prime contractor is able to complete the MRRA Credit Summary Workbook and submit it to the Department to obtain a credit on the taxes paid on the cost of materials used in the project. The Department will apply it to the tax liability on the modification project.

This should be completed within six (6) months of the MRRA project turning into a modification project.

Please see the MRRA Credit Request Procedure page for more information on requesting a credit.

Please use the Evaluating Mixed Construction Contracts worksheet to analyze if the project remains a MRRA project or will now be considered a modification project.

If after analysis the project becomes a modification project, then the prime contractor should immediately provide the subcontractor(s) with a completed Form 5005 and require that all subcontractors provide the contractor who hired them with a completed Affidavit of Retail TPT Equivalent Paid by the Subcontractor. The prime contractor will use the receipts and information from the affidavit to complete the MRRA Credit Summary Workbook and submit it to the Department. This is to obtain a credit on the taxes paid on the cost of materials used in the project. The Department will apply it to the tax liability on the modification project. Once the prime contractor provides the subcontractors with the Form 5005, every subcontractor should purchase any remaining materials for the project tax exempt.

This should be completed within six (6) months of the alteration project turning into a modification.

Please see the MRRA Credit Request Procedure page for more information on requesting a credit.

Yes, as part of the gross receipts of the modification project. A non-optional warranty that is automatically included with a modification project by the contractor for no extra charge (i.e., it is not an extended warranty or third-party warranty) which is intended to make the property whole in the case of defective workmanship, is treated as if it were part of the original modification project.

Because the warranty is treated as if it were part of the original modification project, materials incorporated into projects in the performance of the warranty may be purchased tax exempt in this situation. Further, the contractor would not be required to pay the retail equivalent TPT under business code 315.

No. A non-optional warranty that is automatically included with a MRRA project by the contractor for no extra charge (i.e., it is not an extended warranty or third-party warranty) which is intended to make the MRRA project whole in the case of defective workmanship, is treated as if it were part of the original MRRA project.

In this situation, because the manufacturer’s warranty is treated as part of the original MRRA project, materials incorporated into projects in the performance of the warranty are taxable at the point-of-purchase, or if purchased tax exempt, the retail equivalent should be remitted under business code 315.

No, extended warranties sold by a contractor or by third-party home warranty companies are not taxable pursuant to A.R.S. § 42-5061(A)(3), whether the warranty covered a modification project, MRRA project, or is purchased at any time.

Materials incorporated into projects in the performance of extended warranties are always considered to be incorporated into a MRRA project, and thus are taxable at the point-of-purchase, or if purchased tax exempt, the retail equivalent should be remitted under business code 315.

No.  A business license may be required by a city to do business in that city.  This requirement varies depending on the city in which you are conducting business.  The state does not require or issue business licenses. A TPT license is required if a person is engaging in a taxable activity and is used to report the taxes due.

Ask the contractor for their transaction privilege tax license number or a copy of their license.

You can then check whether the license is active on the Department’s website at http://AZTaxes.gov/home/licenseverification.

NOTE: When most contractors claim they are a licensed contractor they are speaking of being licensed by the Registrar of Contractors.

Please contact [email protected] if you have more questions.

A business that is not required to be licensed with the Arizona Registrar of Contractors may not be subject to tax under the prime contracting classification. However, depending upon the extent of the business’ activities, the business may need a TPT license since it may be taxable under a different business classification, such as the retail classification.

Business licenses are administered by the cities requiring them, therefore please direct your questions to the specific city in question.

Yes, a prime contractor must register for a TPT license with the Department.  You may apply for a license using Form JT-1.  You cannot register for a license online because you may need to post a bond.  For taxpayer bond information, call (602) 716-6056 or write to:

Arizona Department of Revenue
Taxpayer Information & Assistance
1600 W Monroe Phoenix, AZ 85007

Yes, a subcontractor working on prime contracting/modification projects should be licensed.   You may apply for a license using Form JT-1.  You cannot register for a license online because you may need to post a bond.  For taxpayer bond information, call (602) 716-6056 or write to:

Arizona Department of Revenue
Taxpayer Information & Assistance
1600 W Monroe Phoenix, AZ 85007

If you are only working on a modification project under the control of a Prime Contractor, and all other projects are related to MRRA, then you are not required to obtain a TPT license. 

As an unlicensed subcontractor the prime contractor has the option of applying to the Department for approval of Form 5009L or you may use a Form 5000M together with a Form 5005 issued by the prime contractor  to purchase materials tax free for the modification project.

Yes. The ability to remain unlicensed and participate in a modification project only applies where a MRRA only contractor completes a one-time modification project. If you will be doing more than a single one-off modification project, then you will need a TPT license.

Assuming you are responsible for the completion of the project, an out-of-state contractor must obtain a TPT license.  You may apply for a license using Form JT-1.  You cannot register for a TPT license online because you may need to post a bond. For taxpayer bond information, call (602) 716-6056 or write to:

Arizona Department of Revenue
Taxpayer Information & Assistance
1600 W Monroe Phoenix, AZ 85007

Yes.  You must report for every filing period when you have a TPT license, including the filing periods where you do not receive any income. You may mark the box “no gross receipts” and submit the reporting form.

Generally speaking, you will not need a TPT license if you only perform MRRA work and you are required to pay tax when you purchase your materials.

If you are completing only MRRA projects and will not complete any modification projects, then you do not need a TPT license.  However, you are required to pay tax when you purchase your materials in Arizona.

No. There is no credit for materials purchased out of state for taxes paid to another state. You are encouraged to either purchase the materials tax free out of state and remit the Arizona retail equivalent TPT when the material are used in the project or purchase the materials in Arizona and pay TPT at the time of purchase. If the first option is taken, you will require a TPT license to report the retail equivalent TPT. If the second option is taken you will not be required to obtain a TPT license.

See the Forms page.

You should provide every subcontractor on the job with a properly completed Form 5005 and mark the box on the form indicating the type of project covered.  This form provides documentation that you will be responsible for any TPT on the project and that you will be reporting and remitting the TPT to the Department. It is also an indicator to the subcontractor that they should not charge you tax on their portion of the project.

You should provide every subcontractor on the project with a properly completed Form 5005 and mark the box indicating the type of project covered.  This form provides documentation of liability for the retail equivalent TPT by the contractor that issued the form for the MRRA project.  You should request that the subcontractor provide you with all receipts for materials purchased that were incorporated into the project so that you can accurately calculate the retail TPT due on the materials, if no tax was paid at the time of purchase.

The Form 5005 is for documentation of liability for transaction privilege tax (TPT) by the contractor that issued the form. It is also an indication that you should not charge the prime contractor tax on your portion of the project.  This form should be kept by you to show that you do not owe TPT on your gross receipts from the project. However, you must report and deduct your subcontracting income using deduction code 550.

You should issue a completed Form 5005 to your subcontractors and also attach a copy of the Form 5005 that you received from the prime.  If the single project details are included this will provide documentation that the prime that issued the Form 5005 to you is ultimately responsible for the project.

You should be given a completed Form 5005 by the subcontractor that hired you with a copy of the Form 5005 from the prime contractor attached.  If the single project details are included this will provide documentation that the prime that issued the Form 5005 to the subcontractor that hired you is ultimately responsible for the project.

The Form 5005 is for documentation of liability for transaction privilege tax (TPT) by the contractor that issued the form.  This form should be kept by you to show that you do not owe TPT on the gross receipts of the project.  As an unlicensed contractor, you do not have to report TPT.  However, to purchase materials tax free for the project, the prime contractor must obtain an approved Form 5009L from the Department and provide this to you. This form will allow you, the unlicensed subcontractor, to purchase materials tax free for use in the modification project.

The Form 5005 is for documentation of liability for transaction privilege tax (TPT) by the contractor that issued the form.  This form should be kept by you to show that you do not owe TPT on the gross receipts of the project.  In addition, a subcontractor should provide receipts to the prime contractor to ensure the retail equivalent TPT is accurately calculated and paid on any materials purchased tax exempt and incorporated into the project. It is also an indicator that the subcontractor should not charge tax to the prime contractor on their portion of the project.

The Form 5005 is for documentation of liability for transaction privilege tax (TPT) by the contractor that issued the form.  This form should be kept by you to show that you do not owe retail equivalent TPT on the materials used in the project.  However,  to purchase materials tax free for the project, the prime contractor must obtain a Form 5009L from the Department and provide this to you or you may use a Form 5000M together with the Form 5005 and present it to the vendor. This will allow you to purchase materials tax free.  In addition, you should provide receipts to the prime contractor to ensure the retail equivalent TPT is calculated accurately and paid on the materials purchased tax exempt and incorporated into the project.

A retailer should not accept a Form 5005 as an exemption certificate unless it is presented together with a Form 5000M by an unlicensed contractor.  The Form 5005 by itself is used to provide documentation to a contractor that the issuing contractor is responsible for the transaction privilege tax (TPT) on a contracting project. However, a Form 5000M together with a Form 5005 allows an unlicensed contractor to purchase materials tax exempt and at the same time demonstrates to the vendor that a prime contractor will be responsible for the TPT.

Yes. When you purchase materials for a modification/prime contracting project, you should provide the vendor with a properly completed Form 5000 at the time of purchase.

Yes. If you are a licensed contractor you may purchase materials tax free by providing the vendor a properly completed Form 5000 at the time of purchase.

Yes.  When the materials are purchased tax exempt and used in an MRRA project, the retail equivalent TPT on materials must be remitted to the Department based on the location of the project unless a statutory deduction applies. The retail equivalent TPT is reported using business code 315.

Yes, materials may be purchased tax exempt. You may use the Form 5000 and under section D entitled Reason for Exemption, you would check off box number two stating “Tangible personal property to be incorporated into a taxable contracting project, or a maintenance, repair, replacement or alteration project.”

Yes, you may purchase the manufacturing equipment for incorporation into a project you are working on tax exempt. You would use a Form 5000 (see completion instructions above). When your report your gross receipts the amount paid for the machinery and equipment that qualifies for the manufacturing deduction is deducted from the gross receipts using deduction code 522.

Yes, a TPT licensed contractor that cancels their license but still possesses materials which were purchased tax exempt must pay tax on those materials to the Department. The contractor will remit the retail equivalent tax on the cost of the materials, subject to tax rates based upon the contractor's principal place of business. The contractor should amend its TPT return for the period immediately prior to the cancelation to pay the tax.

No, the hiring of an unlicensed contractor for a MRRA project will not affect its taxability or carry any further reporting requirements. The project will still be considered a MRRA project, and Arizona tax will still need to be paid on materials which will be incorporated into the project, whether to the vendor at the time of purchase or by remitting the retail TPT equivalent to the Department as the materials are used in the project.

Yes. You must submit a completed Form 5009L along with other documentation to the Department for approval. Please follow the instructions contained within the form when filling out the form. When submitting this form to the Department, please include the contract between you and the unlicensed contractor. After it has been reviewed, approved and sent back to you, you may provide copies to the unlicensed contractor(s).

The prime contractor can download the Form 5009L. Please follow the instructions contained within the form when filling out the form. Then either mail or email it to the Department. Please make sure you provide a copy of the contract between you and the unlicensed contractor. Note that a Form 5009L is valid for the term of the project as specifically stated on the certificate.

Yes. If the prime contractor provided you with an approved Form 5009L, you may purchase materials tax free. You must provide a Form 5009L, not a Form 5000 (exemption certificate) because you do not have a transaction privilege tax license and a vendor would not be able to accept an incomplete Form 5000 in good faith. Please provide a copy of the approved Form 5009L to the vendor as it is documentation for the exemption of the materials purchased.

Generally, no. However, there are limited circumstances where materials purchased for a MRRA project may be statutorily exempt from retail TPT and, thus, eligible for purchase tax exempt by an unlicensed contractor. For example, materials purchased for a qualifying hospital, a qualifying health sciences educational institution, or a MRRA project located on a Native American reservation, may be statutorily exempt from tax.  Form 5000M will be used by unlicensed contractors when making such purchases.

A statutory deduction is available for a qualified hospital purchasing materials, so the unlicensed MRRA contractor may complete and submit a Form 5000M to the vendor to make the exempt purchase.  You must provide a Form 5000M because you do not have a transaction privilege tax license and a vendor would not be able to accept an incomplete Form 5000 (exemption certificate) in good faith.

A Form 5000 is an exemption certificate that a retailer should keep to document a statutorily exempt retail purchase.  Once the form is properly completed you may accept the Form 5000 in good faith.

NOTE: An unlicensed contractor cannot complete this form properly as they would need a transaction privilege tax license. Other forms may be available for an unlicensed contractor, see below.

A Form 5009L is an exemption certificate for unlicensed contractors who are hired by a licensed contractor to purchase materials for the project tax free.  As the unlicensed contractor does not have a transaction privilege tax (TPT) license, they cannot otherwise purchase tax exempt materials.  This form should be kept by you to show why the sale was exempt from TPT.

This form allows an unlicensed contractor to purchase materials that are statutorily exempt from the transaction privilege tax (TPT).  You should keep this form to document why the sale was exempt from TPT.

A Form 5000M together with a Form 5005 allows an unlicensed contractor working under the control of a prime contractor on an MRRA project to purchase materials exempt.  It also demonstrates to the vendor that the prime contractor will be responsible for any retail equivalent transaction privilege tax due on the project.

Licensed contractors are permitted to purchase materials from an out-of-state vendor tax exempt, so you may present the Form 5000 and purchase materials tax exempt.  However, the gross receipts from the modification project is subject to the prime contracting TPT just like any other modification project.

Licensed contractors are permitted to purchase materials from an out-of-state vendor tax exempt, so you may present the Form 5000 and purchase materials tax exempt.  However, the gross receipts from any modification project located is subject to the prime contracting TPT just like any other modification project.

You do not get a credit or deduction for taxes paid on material purchase out of state.  You strongly advised to purchase the materials tax exempt because there is no statutory allowance for it.

Licensed contractors are permitted to purchase materials from an out-of-state vendor tax exempt.  However, the cost of materials used in the MRRA project is subject to the retail equivalent TPT just like any other MRRA project.

No, you do not owe the TPT and you are not required to report anything.

No, the prime contractor must include all gross receipts received from a project in its tax base and only deduct those amounts permitted by statute.

Yes, a licensed subcontractor should report gross receipts under business code 015 and deduct the amount from the prime contractor out using deduction code 550 (subcontracting income).  Note that the prime contractor should not deduct amounts paid to subcontractors from their gross receipts.

Yes, if you are a licensed contractor, report your gross receipts under business code 015 and deduct them out using deduction code 550.

As a licensed subcontractor all gross receipts must be reported and if some of the gross receipts was attributable to an MRRA contract that will be reported by the prime contractor, then you can deduct it from your gross receipts using deduction code 550.

No, as an unlicensed contractor you would not be required to report gross receipts when you are provided a Form 5005 from the prime contractor.  The contractor will report any relevant transaction privilege tax on the project.

No, as an unlicensed contractor you would not be required to report gross receipts when you are provided with a Form 5005 from the prime contractor for a MRRA project.  However, you should provide the prime contractor with receipts from all purchases you made so they may accurately report the retail equivalent transaction privilege tax.

Yes, the rental of equipment by a contractor for use in their own business is taxable, unless a statutory deduction applies.  As TPT is a tax on specific business activities, the lessor of the equipment is responsible for the tax, but they may pass the economic expense of the tax to the contractor.

If you provide the flooring and arrange to have it installed, you are no longer a retailer but you will be considered a contractor. Your business activity is now classified under the construction contracting business classification and new rules apply. The amount paid for the flooring and the installation would be subject to tax in the business classification construction contracting. Certain activity in this business classification may fall under the maintenance, repair, replacement or alteration rules, please review those rules.

When you sell the flooring without arranging for the install, meaning you do not receive payment for the installation of the flooring, you are considered a retailer.

Although you might think that you are a retailer because you have samples of materials in your showroom, you are a contractor when you sell and install the materials into real property.

A person that sells tangible personal property and installs into property such as a car or an RV (tangible personal property as opposed to real property), is subject to TPT under the retail classification. The installation if kept separate from the retail sale on the invoice through the books and records would be considered a service rendered in addition to the retail sale, which is exempt under the retail classification.

Please note if you were installing on real property, (e.g. land and/or building), the installation may be subject to TPT under the prime contracting classification.

A: An Annual Bond Exemption serves as documentation to city building authorities that contractors have met the bonding requirements under A.R.S. 42-5007 for projects valued at $50,000 or more.

A: To qualify for an annual exemption you must meet all of the following criteria:

1. Start date of transaction privilege license must be at least one year prior to the current date.
2. Cannot have more than two delinquencies in the past 12 consecutive months.
3. No more than $500 in tax liabilities currently due.
4. Mailing or physical address must be an Arizona address.
5. A minimum of $10.00 paid in tax liability for the past 12 consecutive months.

A: You can email [email protected] or contact the city building authorities as they have access to the list of qualified contractors.

A: No. Annual Bond Exemption Certificates are no longer mailed out. 

A: You can email [email protected] to determine if you did not qualify for the Annual Bond Exemption list and the reason(s) why.

A: All building authorities will have access to a list of qualified Annual Bond Exemption recipients.

A: Contractors that did not qualify for the Annual Bond Exemption would need to submit a one-time bond exemption request to [email protected].

This request must include:

1. Company Name
2. Company TPT License Number
3. Project Address
4. Value of Contract
5. Estimated completion date of the project
6. Business contact name and phone number

A: No. The Annual Bond Exemption list is only run once a year.

A: The Annual Bond Exemption expires on July 31 of each calendar year.

A: The effective date of the Annual Bond Exemption is August 1 of each calendar year.

A: Yes. On August 1 when the list is run, if the contractor meets all the qualifying criteria, the contractor will be placed on the list.