Free guide for contractors
Do contractors charge sales tax in Arizona?
General information, not tax advice. Tax rules change and depend on the details of each job. Confirm how they apply to your business with your accountant or the state's revenue department before relying on them.
AZ Arizona
Depends on the jobIt depends on the kind of job. Arizona taxes new construction and large alterations under prime contracting; repair and maintenance contracts are not taxed.
Arizona taxes contracting through its transaction privilege tax (TPT), under the prime contracting classification. The tax base is 65% of the gross proceeds, and cities following the Model City Tax Code allow the same 35% deduction. The state rate for prime contracting is 5.6%, which includes a 0.6% education increment running through June 30, 2041.
A contract with the property owner for maintenance, repair, replacement or alteration (MRRA) is not taxed under prime contracting if it includes no modification activities. Modification means construction, grading and leveling ground, wreckage or demolition. An alteration becomes a modification when the contract is more than 25% of the property's most recent full cash value for residential property, or more than $750,000 for other property. Related change orders count, and splitting a project to stay under the threshold is not allowed. Maintenance, repair and replacement are never alteration, whatever their size.
On an MRRA job the materials are subject to retail TPT. The contractor pays it when buying them, or pays the MRRA amount at the project location's rate if it bought them tax-free. The Department of Revenue says the contractor should not show tax as a separate line on the invoice for an MRRA project.
On a prime contracting (modification) job, the Department's FAQ says a licensed contractor may, but need not, show the tax as a separate line. The statute says everyone in the business of prime contracting must give the purchaser a written receipt of the gross income from the work and separately state the tax. A subcontractor doing modification work is not taxed if it can show the job was under the control of a prime contractor who is liable for the tax. The Department says the prime contractor gives each subcontractor a Form 5005 for this, and the subcontractor keeps it to show it does not owe the tax.
It turns on: whether the job is modification (new construction, grading, demolition) or maintenance, repair, replacement or alteration; for an alteration, the contract amount against the property's full cash value, or $750,000 for non-residential property; whether the contractor is the prime contractor or a subcontractor; the job site's location, which sets the local rate.
Watch out for
- The statute and the Department's FAQ differ on whether a prime contractor must separately state the tax; showing it separately satisfies both (A.R.S. § 42-5075(F); ADOR, Contracting FAQs).
- A change order tied to the original scope counts toward the alteration threshold (A.R.S. § 42-5075(S)(1)).
- The speculative builder tax falls on the property owner who improves real property and sells it, not on the contractor's invoice (ADOR, Speculative Builder).
“the contractor should not include tax as a separate line item on the invoice to the customer for MRRA projects.”ADOR, Contracting FAQs