A bill signed by Arizona Governor Jan Brewer in June 2013 to reform Arizona sales tax law includes a substantial change to the way construction contractors will pay sales taxes beginning January 1, 2015.

While the new law has been touted by many as simplification, the Arizona Department of Revenue has done very little to inform construction contractors how the law will affect the way they do business.

Under current law, construction contractors are subject to tax under the prime contracting classification and are entitled to purchase materials tax free because they are required to charge and pay sales tax on 65% of their gross receipts from the contract. Even trade contractors that perform small jobs fall under this classification.

The new law is broken down into two categories. New construction will continue to be taxed under the existing rule where the contractor will purchase materials tax free and charge and pay sales tax on 65% of their gross receipts from the contract. A second category is for contractors who contract with an owner of real property to repair, maintain, replace or alter the property. Under this second category, the contractor will pay sales tax at the point of purchase of materials and will not pay sales tax on the contract receipts. Some contractors will have contracts that fall into both categories.

A grey area exists between what is considered new construction and what is considered repair, maintenance, replacement or alteration of property and the Arizona Department of Revenue has not yet addressed it. It is hoped that the Department will post more information on the subject as the effective date approaches. We recommend checking the website frequently for updates here.

The text of HB 2389 which outlines the changes, specifically pages 34 through 45, can be found at http://www.azleg.gov/legtext/51leg/2r/laws/0263.pdf

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