MRRA Contracting


Maintenance, Repair, Replacement and Alteration construction activities, collectively referred to as MRRA activities, are specifically excluded from the prime contracting classification.

MRRA activities entail contracting activities on existing property.  Existing property is real property that already includes some type of construction activity and on which some type of additional construction activity (adding to, changing, maintaining etc.) will take place. For example, a homeowner decides to build a new block wall (no prior existing structure, so not existing property). A month later, the homeowner hires a different contractor to stucco and paint the wall. The second contract now involves existing property. (See TPN 18-1, Scenario 9).

Generally, MRRA contractors are required to pay retail TPT on their materials (whether at the point of sale or after) unless a statutory deduction applies. The invoice to the property owner (or general contractor) will not separately include tax as a line item on the invoice (if tax is included as a line item on the invoice, it must be remitted to the Department).  Rather, the tax paid on the materials should be treated as an ordinary cost of doing business.


Contractors who do both MRRA and modification will likely find it beneficial to purchase all materials tax exempt and then remit the retail equivalent on the cost of materials used in MRRA projects. See below for a detailed discussion.


"MRRA" Activities Defined

Maintenance: The upkeep of property or equipment. For example, topping off fluids in an HVAC system, re-staining a wood deck, or refinishing hardwood floors. (See TPN 18-1, A2).

Repair: Returning existing property to a usable state from a partial or total state of inoperability or non-functionality. For example, fixing a leaky bathtub or shower (See TPN 18-1, A2) or repairing windows and roof tiles due to hail damage by replacing them.

Replacement: Removal from service of existing property that is a: (i) component; or (ii) system; or (iii) type of tangible personal property and replacement with another one that provides the: (i) same; or (ii) similar; or (iii) upgraded design or functionality.  For example, removal and replacement of a roof, flooring, a sprinkler system or HVAC unit. (See TPN 18-1, A2). Note, that the existing component or system or existing tangible personal property that is being replaced need not be physically removed from the existing property as long as it remains non-operational and it simply makes no sense or is not possible to remove it. More than one replacement may be included in a contract.

  • Component: One of the parts of a compound or complex whole, helping to make up the whole of something. A component may be part of a system. For example, replacing faucets of a sink or replacing a sink in a bathroom.
  • System: A regularly interacting or interdependent group of items (or components) forming a unified whole. For example, a roofing system includes shingles, lining, nails, etc., an HVAC system includes the heating/cooling unit, air filtration, furnace or boiler, ducting, etc., or a plumbing system includes sink bowls, handles, faucets, pipes, etc.
  • Tangible personal property installed in existing property: Property affixed or installed into existing real property that can still be identified after installation, which does not lose its character and can be removed in essentially the same form. For example, machinery and equipment that is attached to the property.


Alteration: An activity or action that causes a direct physical change (e.g., adding or expanding square footage) to existing property that cannot be classified as maintenance, repair or replacement and where the alteration amount is below the following thresholds:

  • 25% of the property’s tax value (residential property); or
  • $750,000 (commercial property).


If the alteration amount exceeds the thresholds at the time the contract is bid or entered into, then it is considered modification contracting.

Note – 25% “Cushion”:

A project remains an alteration contract as long as it does not contain Maintenance, Repair, or Replacement elements at the time the contract is bid or entered into and subsequent increases to the contract are not exceeded by more than 25% at completion.

On the other hand, if a project that contains elements of Maintenance, Repair, Replacement, as well as, Alteration and subsequent increases to the Alteration portion of the contract cause the project to exceed the Alteration threshold by more than 25% before completion of the project, will need to be reevaluated. Please use the Evaluating Mixed Construction Contracts worksheet to analyze if the project continues as a MRRA contract or has become a modification.

If after analysis the contract becomes modification, then the prime contractor should provide the subcontractor(s) with a completed Form 5005 and require that all subcontractors provide the contractor who hired them with a completed Affidavit of Retail TPT Equivalent Paid by the Subcontractor. This is to obtain a credit on the taxes paid on the cost of  materials used in the project tax on the cost of the materials and apply it to the modification project. This should be completed within six (6) months of the alteration project turning into a modification.

Please see the MRRA Credit Request Procedure page for more information on requesting a credit.


Retail TPT on Materials

MRRA is not taxable for prime contracting TPT purposes.  However, unless otherwise exempt or deductible, the materials utilized in an MRRA project remain subject to “retail TPT” or equivalent of retail TPT.  Retail TPT applies either at the point of purchase or, if the contractor has a TPT license, they may purchase the materials tax exempt and then remit the retail equivalent with their TPT return (when the materials are used).  Contractors who perform only MRRA work need not have a TPT license.  In that case, they would pay retail TPT at the time of purchase of the materials.

A contractor who maintains their TPT license can provide their materials vendor with a Form 5000 exemption certificate to purchase materials tax exempt. They will then report the retail TPT equivalent when the materials are used using the project location as the source for the tax rate.

Remitting the Retail TPT Equivalent.  If the MRRA materials are purchased tax exempt, then the contractor must remit the retail TPT equivalent on the cost of the materials.  Use business code 315 to report the gross cost of the materials (markup is not included). The tax rate is sourced to the job site.  This should be reported in the tax period in which the materials are used in the MRRA job.


MRRA contractors have the option of paying tax when purchasing materials or remitting the retail equivalent (the latter option is available to licensed contractors only). However, licensed contractors that are working on projects whose alteration values are close to the threshold (where it is conceivable that change orders could increase the value over the threshold), are advised to purchase materials tax exempt and remit retail equivalent. This way, if the project turns from nontaxable MRRA into a taxable modification, the contractor may easily amend returns to reflect the change in status.

If the contract changes from MRRA to Modification, a contractor and any of their subcontractors may need to complete the Affidavit of Retail TPT Equivalent Paid by the Subcontractor for the cost of any materials incurred by their subcontractors that paid tax on the materials to their vendors or the retail equivalent to the state.

Please see the Procedure for MRRA Credit Request page for more information on requesting a credit.


Exemption from Retail TPT on Materials

All TPT licensed contractors may claim an exemption from tax on the purchase of materials that are to be incorporated into real property by providing the vendor with a Form 5000.

Materials incorporated into real property and sold to a contractor A.R.S. § 42-5061(A)(27)


Non-TPT licensed MRRA contractors may also purchase materials exempt from tax under certain limited circumstances by providing the vendor with a Form 5000M.  Those circumstances are where a statutory deduction otherwise exists for the tax exempt purchase of the materials and those materials will be used in an MRRA project.  Below are some examples of purchases an unlicensed MRRA contractor working on an MRRA project can make:

Materials purchased for a nonprofit hospital, a qualifying health organization, qualifying community health center. A.R.S. § 42-5061(A)(25)
Computer Data Center equipment A.R.S. § 42-5061(B)(23)
Solar energy devices A.R.S. § 42-5061(M)
Exempt machinery and equipment A.R.S. § 42-5061(B)
MRRA project on Native American reservation for tribe or registered member A.R.S. § 42-5061(A)(58); A.R.S. § 42-5122(4)


In order to fully understand when these exemptions may be applied, please email [email protected] for further information.


Federal Government

The retail exemptions for sales of materials to the federal government are not available to contractors hired by the federal government to perform MRRA activities (these exemptions are only available when the federal government itself purchases the materials). Specifically, A.R.S. § 42-5061(I) and (J) provide that sales of building materials are only exempt when the federal government itself is the purchaser. As a result, contractors will pay taxes on materials used in MRRA jobs for the federal government. However, the courts have established that it is not a violation of the Supremacy Clause to recoup taxes paid on materials. Arizona State Tax Commission v. Garrett Corp., 79 Ariz. 389, 291 P.2d 208 (1955); see also United States v. California, 507 U.S. 746 (1993); United States v. New Mexico, 455 U.S. 720 (1982). These taxes may be recouped as a direct cost and should not be separately itemized on an invoice (if tax is itemized on the invoice, then it must be remitted to the Department).