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Contractors: Watch Out for Arizona Tax Changes

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Beginning this year, Arizona’s sales and use tax laws have changed significantly, particularly with respect to construction contractors. (Note: the official name of Arizona’s sales tax is the “transaction privilege tax,” commonly abbreviated as TPT. I’ll continue to refer to it as sales tax, however, in an attempt to minimize confusion.)

Arizona laws affecting contractors have always been different from those of other states, and they've generated frequent questions from our readers. Accordingly, it’s especially important for contractors operating in the state to make themselves aware of the new law.

The state’s statutes have always assigned contracting activities to the “prime contracting” classification, a subcategory of sales and use tax law that is unique to Arizona. Activities within this classification are taxed upon 65 percent of the gross proceeds derived from each job. Thus, Arizona contractors are considered retailers rather than consumers of materials or fixtures that they install pursuant to “prime contracting” jobs, and they may buy such items without tax by giving their vendors exemption certificates.

As of January 1, 2015, the new law removes a significant number of activities from the “prime contracting” classification and reclassifies them to exempt services. The reclassified activities are repairs, replacements, and alterations to real property. Any such transactions completed before 2015 will continue to be regarded as prime contracting.

Contractors making repairs, replacements, and alterations to real property should no longer charge sales tax to their customers and instead should pay tax to their vendors when purchasing any materials or fixtures required. Further, if the contractors’ activities are restricted to providing these kinds of services, they will no longer be required to hold a transaction privilege tax (TPT) license.

Transactions that remain within the prime contracting classification are still subject to sales tax on 65 percent of gross proceeds. The new law refers to such transactions as “modification,” which it defines as real property construction, addition, subtraction, improvement, movement, wreckage or demolition. Unfortunately, distinguishing “modification” from “repairs, replacements, and alterations” can be difficult and counter-intuitive.

Readers are advised to download the state’s publication, Arizona Transaction Privilege Tax Notice TPN 14-1, November 18, 2014, which provides voluminous details pertaining to the new legislation along with several examples. The publication is available at the Arizona Department of Revenue’s website,

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