Prime Contractors engaging in taxable construction projects or activities are required to obtain a TPT license. New prime contractors and out-of-state prime contractors are required to post a bond with the Arizona Department of Revenue (ADOR). The Arizona Joint Tax Application (JT-1) used to apply for a TPT License (and other licenses) can be completed online and printed by clicking the link below.
Deduction Code 538
Deduction code 538, Solar Energy Devices, expired December 31, 2016 and is no longer available for a taxpayer filing under the following business codes:
- Construction contracting (business code 015)
- Speculative builders (business code 016) and
- Owner builders (business code 037).
However, a contractor may purchase a qualifying solar energy device from a registered solar energy retailer exempt from tax.
The installation of a solar energy device may be exempt under Arizona Revised Statues (A.R.S.) § 42-5075 (O). This statute states that maintenance, repair, replacement or alteration (MRRA) projects are excluded from the Prime Contracting classification provided these activities meet the definitions and criteria outlined in the statutes. See TPN 15-1 for more information on the distinction between MRRA and taxable modification activities.
Qualifying MRRA Project
If installed on a qualifying MRRA project, the installation of the solar energy device will not be subject to tax. Deduction code 500 would be used to deduct the gross receipts of any MRRA contract on Schedule A of Arizona Form TPT-2 from its gross income reported under the prime contracting classification.
Taxable Modification Project
If installed on a taxable modification project, the gross income from the contract will be included in the tax base subject to tax under the prime contracting classification.
- If a taxpayer determines they have filed incorrectly, they should file amended returns. Penalty abatement can be requested and will be granted based on the rules in place for abatement.
- Any taxpayers filing an amended return for any periods January 2017 and after, in which they took this deduction, will find that the deduction will be disallowed. The deduction code may be disallowed even if they are amending for reasons other than the deduction code. The tax system will no longer recognize deduction code 538 for business codes 015, 016 or 037 for periods January 2017 and after.
- The Solar Energy Devices deduction code 538 is available for the Retail classification for state and city utilizing business code 017 [A.R.S.§ 42-5061 M. and Model City Tax Code (MCTC) 465 (ll)]. Deduction code 538 remains available for the business classification, Rental of Tangible Personal Property utilizing state business code 014 and city business code 214 [A.R.S.§ 42-5071 B.2.(d) and MCTC 450 (c) (11)].
As of Jan. 1, 2015, contractors who only enter into contracts with owners of real property to maintain, repair, replace or alter their property (“MRRA projects”) are not required to obtain or renew an existing TPT license. These contractors, however, are required to pay all state and local taxes when purchasing materials that will be incorporated into a MRRA project. The following Arizona Transaction Privilege Tax Notice provides guidance regarding taxable prime contracting projects and nontaxable MRRA activities:
During the 2013, 2014, and 2015 legislative sessions, the legislature made significant changes to how the Arizona TPT applies to contracting activities involving real property. More specifically, it provided a definition of MRRA projects and how those projects should be treated for TPT purposes. Laws 2018, Chapter 341, subsequently amended the Prime Contracting classification effective from and after December 31, 2018 to change the definition of MRRA alteration projects. For bids submitted or contracts entered into, or any other binding obligation executed prior to December 31, 2018, the contractor shall treat such contracts or obligations in a manner consistent with the tax requirements prior to December 31, 2018. See TPN 15-1 for tax treatment prior to January 1, 2019.
If a TPT-licensed prime contractor hires a MRRA contractor (who does not have a TPT license) as a subcontractor on a taxable project, the prime contractor may complete an Arizona Form 5009L to allow the unlicensed MRRA contractor to purchase materials for the project exempt from tax. Arizona Form 5009L must first be submitted to ADOR for approval.
Separately, a MRRA contractor who does not have a TPT license needs to purchase materials for a nontaxable MRRA project in which a statutory exemption exists (such as statutorily tax exempt repair parts for manufacturing equipment). The unlicensed MRRA contractor may use Arizona Form 5000M to purchase the exempt repair parts.
Other Certificates Used ONLY by TPT-Licensed Prime Contractors:
Other certificates used only by TPT-licensed prime contractors include the following:
Instructional online videos are available to explain the statutory prime contracting changes that went into effect Jan. 1, 2015, and to also provide a discussion of licensing and filing requirements for contractors. These videos also help understand how TPT will apply to a business in the future, and provide guidance about reporting contracting income on Form TPT-2.