AZDOR Transaction Privilege Tax: Contractors – Update
Posted Jan 15, 2015
Share Online:
AS OF APRIL 2015, PLEASE NOTE, THE BELOW ARTICLE (AND ITS ACCOMPANYING SUPPORT OF ADOR TPN 14-1) IS HEREBY SUPERCEDED BY AZ TPN 15-1, FOUND HERE:
Do not rely on the below article as the recent revision and issuance of TPN 15-1 changes a large amount of what was originally reported in 14-1.
______________________________________________________________________________________________________
On December 30th, we attended a seminar conducted by the Arizona Dept. of Revenue regarding the new “simplification” rules for transaction privilege tax on contractors. It was very informative and answered a lot of the questions I have been fielding from clients. As seems to be the norm with our state legislature, the new law is written in fairly vague terms and is open to interpretation. It appears that ADOR is trying to be proactive in getting the word out and clarifying how jobs are to be taxed.
The contracting category has been split into two categories, prime contracting and “service” or MRRA (maintenance, repair, replacement or alteration) contracting.
Prime contracting is new construction and/or modification of real property. ADOR’s definition of modification is “…to construct, improve, move, wreck or demolish”. “Improve” is taking unimproved land and improving it. Improving can include an addition to a building if it is being expanded onto unimproved land.
MRRA contracting consists of maintenance – the upkeep of real property or equipment, repair – returning real property or fixtures/equipment to a usable state from an unusable or partially usable state, replacement – replacing something that exists with something else (includes a betterment), and alteration – making a physical change to real property without changing the identity of the property.
A job can contain elements of both contracting types. An example would be tenant improvements. A contractor could be hired to make tenant improvements within an existing shopping center. Part of the contract would entail the demolishment of the existing tenant space and the remainder would be to improve that space. Demolishment falls under the prime contracting category but the improvements to the existing space would be MRRA since they would be replacement or alteration. In this case, if the job is all done under one contract, the contractor must look at the ratio of the prime contracting portion of the job to the MRRA portion of the job. If the prime contracting portion is 15% or less, then the job would all be MRRA. If it is more than 15%, then the entire job would be prime contracting.
Prime contracting jobs are reported and paid by the prime contractor on 65% of the total contract. This is the same as it has been in the past. On MRRA jobs, the contractor is required to pay tax on the materials as they are purchased. MRRA contractors will not pay any additional tax on these jobs and will not report them on the TPT return.
On the following page I have put together a list of the questions and answers from the seminar. I think that they will answer most of the questions I have been asked in the last month. In addition, we are sending you ADOR’s Q & A “Arizona Transaction Privilege Tax Notice TPN 14-1”.
If you have more questions, please call or email me at dorisl@hblcpa.com and I will do my best to answer your questions or I will get answers from ADOR. You can also contact Lori Beine, lorib@hblcpa.com or George Palomarez, georgep@hblcpa.com .
Sincerely,
Doris Lafave
To review some frequently asked questions on this topic as fielded by our firm, please read TPT FAQs – HBL.
To review ADOR’s Frequently Asked Questions on this topic, please click here.
As a general disclaimer, the information provided above is very general and broad in nature, is not represented as complete, and may not apply to taxpayers’ individual situations. We advise all taxpayers to consult a professional tax advisor regarding their own specific tax needs.
Posts You Might Also Like:
