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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:
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.
|Taxpayer Bond for Contractors||Form 74-4023|
|Bond Exemption Application||Form 10205|
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.
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
Although generally MRRA activities are excluded from prime contracting TPT, there are certain occasions when MRRA activities are still taxed as prime contracting.
Please see A.R.S. § 42-5075 for details regarding these exceptions or submit inquiries to [email protected].
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||557|
|Design phase services or professional services (does not apply to cities)||690|
|Taxes factored(or collected)||551|
|35% reduction from gross receipts||502|
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||550|
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, expired December 31, 2016 and is no longer available for a taxpayer filing under the following business codes:
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.
Calculating a Return on Modification Contracting