Prior to the end of last year, the Arizona Department of Revenue a tax notice explaining changes to how contractors will pay tax on materials.
On January 1, 2015 the structure of prime contractor classification of the Transaction Privilege Tax (“TPT”) changed. This changed how and when tax is paid on materials purchased by contractors.
Under the new law, a “prime contractor” is a person or organization that undertakes to or offers to undertake to, or purports to have the capacity to undertake to, or submits a bid to, or does personally or through others, modify any building, highway, road, railroad, excavation, manufactured building, or other structure, project, development or improvement, or do any part of such project, including scaffolding or other structure or works in connection with such a project, and includes subcontractors and specialty contractors. Taxable modification activities encompass construction, improvement, movement (including removal), wreckage, or demolition activities, to the extent that they cannot otherwise be characterized as maintenance, repair, replacement, or alteration activities. Modifications do not include maintenance, repair, replacement, or alteration activities.
A prime contractor will be able to purchase materials for modification contracts tax-free. These materials will be subject to tax at the time of use instead. However, materials purchased to complete maintenance, repair, replacement, and alteration contracts will be subject to sales tax at the time of purchase. A prime contractor that hires subcontractors without TPT licenses on a modification project will be able to get a project-specific exemption certificate for those sub-contractors. This will allow those sub-contractors to buy materials and pay tax as if they were prime contractors.
If a contract has “de minimis” modification activities, Arizona will treat the contract like a maintenance contract. For these contracts, the contractor will pay tax on the purchase of materials rather than the use of the materials. Modification activities are “de minimis” if the receipts from those activities are less than 15% of the total receipts from the contract. Change orders do not change the taxability of the original contract because they are considered separate contracts.
Prime contractors must get TPT licenses under the prime contracting classification. This license will allow the holder to purchase materials without paying sales tax. A contractor who does not perform any modification projects is not required to get a TPT license.
For a full copy of Arizona TPN 14-1 download the document at: http://www.legacytaxresolutionservices.com/tax-resources/tax-guides-and-downloads/