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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:

• 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.

 

Bonding Requirements

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).

 

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]

 

Federal Government

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.

1. Surface and Subsurface Contracts - including vertical improvements - Subject to the Procurement Process.
2. 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:

Development fees	560
Actual direct costs of providing architectural and/or engineering services	557
Design phase services or professional services (does not apply to cities)	690
MRRA projects	500
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].

 

 

Example

Calculating a Return on Modification Contracting

 

 

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