Modification activities encompass “ground up” construction, grading and leveling ground, and wreckage or demolition, or other new contracting activity where none previously existed to the extent such activity cannot otherwise be characterized as maintenance, repair, replacement or alteration (MRRA) (see TPN 18-1, A3); for example, building a new home. Note: Alteration activity exceeding certain thresholds (see above) is categorized as modification activity.
Modification contracting activities include, but are not limited to, the following:
- Building a new structure;
- Constructing a new road;
- Laying a new pipe network;
- Removing stumps in preparation for construction of a new structure; and
- Grading a new lot to prepare for construction of a new structure.
New contractors, out-of-state contractors without a principal business location in Arizona, and contractors who have displayed a history of TPT noncompliance are generally required to provide a bond to the Department to ensure payment of taxes. A principal place of business is defined by statute to mean that in the preceding 12 month period a contractor has maintained a facility in Arizona with at least one full-time employee.
- A.R.S. § 42-5006 requires a contractor to maintain the bond for at least two years if the contractor conducted business for less than one year in Arizona, or if the contractor’s principal place of business is outside of Arizona. The bond amount ranges depending on the type of contracting being performed. Those amounts are available in A.C.C. R15-5-601(B).
For taxpayer bond information, call (602) 716-6056 or write to:
Arizona Department of Revenue
Taxpayer Information & Assistance
1600 W Monroe Phoenix, AZ 85007
Email: [email protected]
Contractors hired by the federal government to perform modification activities are taxable on those jobs (any statutory deduction or exclusion may be applied). Contractors may pass the economic burden of the tax to the federal government. The courts have established that because TPT is imposed on the contractor and not the federal government, it is an indirect tax and not in violation of the Supremacy Clause. See Arizona State Tax Comm’n v. Garrett Corp., 79 Ariz. 389 (1955); see also United States v. California, 507 U.S. 746 (1993); United States v. New Mexico, 455 U.S. 720 (1982).
Please note, modification activities performed on a Native American reservation where the federal government is the customer are taxable (A.R.S. § 42-5122 requires that to exempt the customer must be the Native American tribe, a tribal entity or a member of the tribe). The exception is when the contracting activities are performed on the reservation by the reservations tribe, a tribally owned business or an affiliated Native American.
Prime Contracting Exclusions
Maintenance, repair, replacement and alteration (MRRA) activities are typically excluded from the prime contracting TPT, however, the retail TPT is due on all materials used in MRRA projects unless otherwise exempt. Click Here
Exceptions to Nontaxable Prime Contracting Activities
Although generally MRRA activities are excluded from prime contracting TPT, there are certain occasions when MRRA activities are still taxed as prime contracting.
- Surface and Subsurface Contracts - including vertical improvements - Subject to the Procurement Process.
- Alteration Activities Exceeding the Statutory Threshold
Please see A.R.S. § 42-5075 for details regarding these exceptions or submit inquiries to [email protected].
Prime Contracting Deductions
Certain deductions may be applied by construction contractors taxable for prime contracting TPT purposes. Please note, all statutory deductions should be applied before computing the 35% reduction, see example below, from the gross receipts.
A prime contractor's common deductions, and their codes, include:
|Actual direct costs of providing architectural and/or engineering services
|Design phase services or professional services (does not apply to cities)
|Taxes factored(or collected)
|35% reduction from gross receipts
A subcontractor, working for a prime contractor (and not contracted directly with the property owner), should deduct the full amount of an invoice paid to them by their prime contractor:
|Subcontractors working under control of prime
This is not an exhaustive list. Please review A.R.S. § 42-5075 for a full list of deductions or the TPT Deduction Code Listings.
Additional questions should be referred to [email protected].
Deduction Code 538 Solar Energy Devices
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)].
Calculating a Return on Modification Contracting