I will preface this post by saying that I am neither an accountant nor a tax attorney. If you have specific questions or concerns about Arizona’s new transaction privilege tax laws, please talk to your accountant.
Having said that, I hope everyone in the construction industry is aware that, effective January 1, 2015, Arizona’s transaction privilege tax (“TPT”) laws changed substantially for contractors. These changes are the result of a “TPT Simplification Bill,” signed by Governor Brewer in 2013 and amended in 2014.
Generally speaking, the TPT Simplification Bill creates a new exemption under the prime contracting classification. For new construction (or “modification” work), the structure of the prime contracting classification remains intact. That is, prime contractors are still taxable on 65% of their gross receipts and sales of building materials to prime contractors and subcontractors are exempt at the time of purchase. However, those who contract with owners of real property for the maintenance, repair, replacement, or alteration of the property are now exempt from the prime contracting classification. Materials purchased for use in these types of “service contracts” will generally be subject to retail TPT at the time of purchase (unless such purchases are otherwise exempt from retail TPT). The TPT Simplification Bill also requires that an online portal established by the Arizona Department of Revenue serve as a single point of contact for taxpayers to: (1) obtain all state and city tax licenses; (2) file a single return for state, county, and city taxes; and (3) pay all state, county, and city TPT’s.
Unfortunately, the TPT Simplification Bill has left contractors with many unanswered questions. Among other things, the new laws lack clarity as to: (1) the difference between new construction and service work; (2) contracts that involve both new construction and service work; and (3) tax exempt materials purchased by service contractors prior to the TPT Simplification Bill’s effective date. Moreover, the Department of Revenue’s online portal (which should benefit contractors) was not operational by January 1, 2015, as planned. Instead, the portal will not be fully functional until January 1, 2016 “[d]ue to the complexity in incorporating the City’s [sic] requirements into the Department’s information technology system.” In short, Arizona’s TPT Simplification Bill has been anything but simple for contractors.