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We sell alarms below cost as we make money off the sale of contract. Currently, we are tax exempt as a prime contractor. Should we be paying sales tax?

Full Question: We typically sell alarm systems below our cost because we make our money off the sale of the 36 month contract. Currently, we are tax exempt from the vendor where we buy parts and we pay sales tax as a prime contractor with a 65/35 split. Since we are typically selling below our cost, should we be paying tax to the vendor where we buy the parts? If so, how should this be reported on the tax form when we report our revenue?

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Diane Yetter photoAs a prime contractor, you are correct in paying the Arizona transaction privilege tax ("sales tax") on 65% of the gross proceeds of sales or gross income from the job. Retail tax does not apply to the sale of materials to a prime contractor in Arizona if the materials are incorporated into a construction project. So you do not need to pay tax to the vendor for the parts, even if you sell the alarms below cost. The tax form you should use for reporting transaction privilege tax is the "Transaction, Privilege, Use and Severance Tax Return (Form TPT-1)".

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