Contracting Guidelines

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This guidance is intended to assist the construction industry with direction on (a) applying the transaction privilege tax (TPT) to the streams of revenue earned in Arizona under prime contracting or speculative builder classifications and (b) applying TPT to purchases of materials utilized during construction, if any. If revenue is derived from construction activities, the contractor needs to understand whether:

  1. "contracting TPT" applies, or does not apply, to its activities, and
  2. if not, whether the "retail TPT" is paid or properly remitted on purchases of materials.

Construction contracting activities, in simple terms, are any contracting changes to real property. Real property consists of the land, land improvements (roads, highways, railroads, bridges, etc.), and various structures or buildings affixed to land.

Construction contracting is generally divided into three broad categories referred to as "MRRA" (maintenance, repair, replacement or alteration), "Modification" and Speculative Building (taxable by cities only).

  • "MRRA" Contracting
    • Covers a limited set of contracting activities generally related to enhancements made to existing buildings or structures.
    • Includes contracting activities such as maintenance, repair, replacement, and alteration (under the threshold) made to existing buildings or structures.
    • TPT license is not required if all contracting activities are MRRA; contractor simply pays tax on the materials at the time of purchase and does not include a tax line on the invoice to the customer because the MRRA project is not taxable for prime contracting TPT purposes.
    • If a MRRA contractor has a TPT license, the contactor has the option of paying Arizona tax on materials to be incorporated into the project at the time of purchase, OR purchase the materials to be incorporated into the project tax exempt and report the cost of the materials under business code 315 in the jurisdiction in which the project is located at the time they are used, and remit the requisite retail equivalent tax.
    • If a MRRA only contractor does not have a TPT license, then the contractor must pay Arizona TPT at the time of purchase of materials to be incorporated into the project.
  • "Modification" Contracting
    • Generally refers to all construction activities (including new construction) other than MRRA, and includes alteration over the threshold.
    • TPT license is required even if some contracting activities are MRRA.
    • A TPT licensed prime contractor on a modification project should purchase materials incorporated into the project tax-exempt.
  • Prime contractors should provide their subcontractors with Form 5005 which tells the Subcontractor the scope of the project and who is responsible for the tax. Subcontractor is allowed to purchase his materials to be incorporated into a modification project tax exempt.
  • Speculative Builders
    • Generally, the owners or a contractor/owner of the real property who improves the property and intends to sell the real property upon completion. The speculative builder tax is imposed only at the city level.
    • The speculative builder tax is due at the time of sale of the property. However, all prime contracting TPT (state, county and city) must be paid throughout the construction of the property with a credit for city taxes paid and deduction for state and county taxes paid when the speculative building tax is eventually remitted to the city.
    • Contractors other than the owner may purchase materials to be incorporated into the project tax exempt. However, the owner is not permitted to do so.

NOTE: If you are an out-of-state contractor performing construction contracting activities in Arizona, you are subject to TPT because you have physical nexus. The economic nexus rules and thresholds (applicable to retail sales) do not apply to streams of revenue from such contracting activities. Out-of-state contractors performing prime contracting work in Arizona will generally be taxable under one of the categories listed above.

Contractors engaging in taxable construction projects or activities are required to obtain a TPT license. New contractors and out-of-state contractors are required to be licensed with the Registrar of Contractors and, in most cases, must post a bond with the Arizona Department of Revenue (ADOR). Because of the bonding requirements for a new contractor, the online application is not allowed. This applies to all types of contracting requiring a TPT license including speculative builders. The Arizona Joint Tax Application (JT-1) used to apply for a TPT License (and other licenses) may be accessed by clicking the link below.

Arizona Joint Tax Application (JT-1) Form (PDF)

Taxpayer Bond for Contractors

For questions regarding any content provided on this page, please contact Tax Policy at [email protected].

For questions regarding bonds, please contact the Bond Exemption Team at [email protected].

 

Glossary of Terms

Contractor: Similar to a builder and means any person who participates in a construction project that relates to real property. This includes both subcontractors and specialty contractors. Activities include, but are not limited to modifying any building, highway, road, railroad, excavation, manufactured building, or other structure, project, development, or improvement.

Prime Contractor: A person who performs, coordinates, or supervises modification contracting activities. This includes contracting activities performed with or by subcontractors. The prime contractor is the person responsible for the completion of the contract. Additionally, the prime contractor is subject to prime contracting TPT on income derived from non-MRRA projects, regardless of whether the contractor furnishes only labor or both labor and materials in the performance of modification contracting activities. Prime contractors must obtain a TPT license if working on a modification project.

Owner: The person who holds title to the real property or improvements to real property that is subject to the work, as well as an agent to the title holder and any person with the authority to perform or authorize work on the real property or improvements, including a tenant and a property manager. A person who is hired by an owner, or a subcontractor of a general contractor that is hired by an owner, is considered to be hired by the owner.