A previous article, “Arizona Transactional Privilege Tax”, outlines some of the changes that occur because of the TPT. The AZDOR has put in circulation a helpful FAQ Sheet that summarizes A.R.S. §§ 42-5009 and 42-5075. There are two main questions that most contractors currently have: 1) Do I have to get a TPT license, and 2) when do I pay TPT tax vs. retail tax? When paying retail tax, a contractor is only required to pay tax on the materials at the time of purchase, but when paying a transactional privilege tax the contractor is required to pay taxes on the total receipts of the project including services at the end of the project.
1) A Prime Contractor TPT license is required when a contractor performs/supervises/coordinates any type of modification work. A contractor is not required to get a Prime Contractor TPT license if it performs maintenance, repair, replacement, or alteration of existing property with owners of real property or the owners of the improvement to real property.
a. Modification: new construction, new improvement, new movement, wreckage, or demolition;
b. Maintenance: upkeep of the property;
c. Repair: return existing real property to a usable state from an inoperable state;
d. Replacement: replacing an existing system with an upgraded system; and,
e. Alteration: cause direct physical change without changing the identity of the property.
2) When working on a modification project, TPT is paid at the end of the project on the total receipts. When working on a maintenance, repair, replacement or alteration project, then retail tax is paid at the time of purchasing the materials.
a. Subcontractors Purchasing Materials: if a TPT licensed Prime Contractor wishes for subcontractors to purchase materials free of retail tax on a modification project, then the prime contractor must provide the contractor with a project specific tax exemption, Form 5009L, approved in advance by the Department of Revenue. A vendor must receive a Form 5000 from a purchaser of materials in order to waive retail tax at the time of purchase.
b. Change Orders: change orders are considered separate contracts and do not impact the taxability of the original contract.
c. Mixed Projects: when a project has both modification and maintenance/repair/replacement/alteration, then if the modification is at least 15% of the total receipts from the contract, then the contract is subject to Prime Contracting TPT.
d. Mixed Contractors: Contractors who both perform both modification and maintenance/repair/replacement/alteration projects must keep separate books for materials purchased for these projects. as Prime Contractors and as subcontractors have the obligation of keeping separate books for materials purchased for each project, whether a modification.
There are several scenarios not discussed in this article such as purchase of materials prior to January 1, 2015 and change of status from a TPT licensed Prime Contractor to an unlicensed contractor. While there is still uncertainty in application of the new TPT laws, please do not hesitate to contact an attorney at Udall Shumway PLC if you have any questions.
This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice, please feel free to contact Timothy F. Coons at 480.461.5370, log on to udallshumway.com, or contact an attorney in your area.