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ARIZONA STATE SENATE
Fifty-Fifth Legislature, First Regular Session
TPT; prime contracting classification
Purpose
Replaces, retroactive to contracts entered into beginning July 1, 2021, the exemptions from the prime contracting classification of transaction privilege tax (TPT) and municipal tax on the gross proceeds of sales or gross income derived from a contract for the maintenance, repair, replacement or alteration of existing property with an exemption from the prime contracting classification of TPT and municipal taxation on the gross proceeds of sales or gross income derived from a construction contract with an owner of real property or the improvements to real property that does not exceed $100,000 per unit for a residential project or $1,000,000 for a nonresidential project.
Background
TPT is currently levied by the state for the privilege of conducting business in Arizona under 16 separate business classifications. TPT is imposed on the gross receipts of taxable businesses, with the exception of prime contractors. The tax base for the prime contracting classification is 65 percent of the gross proceeds of sales or gross income derived from the business and certain amounts must be deducted before computing the tax base.
A prime contractor is not subject to TPT on the gross proceeds of sales or gross income derived from a contract with an owner of real property for the maintenance, repair, replacement or alteration (MRRA) of real property if such contracts do not include modification activity.
Alteration is an activity or action that causes a direct physical change to existing property, with certain exceptions. Project elements may not be artificially separated from a contract to cause a project to qualify as an alteration. Replacement is the removal from service of one component or system of existing property or tangible personal property installed in existing property and the installation of a new component or system that provides the same, a similar or an upgraded design or functionality, regardless of the contract amount (A.R.S. § 42-5075).
Current statute prohibits a city, town or special taxing district from levying a municipal tax on the gross proceeds of sales or gross income derived from a MRRA contract with an owner of real property. The gross proceeds of sales or gross income derived from a de minimis amount of modification activity does not subject a contract to municipal tax (A.R.S. §§ 42-6004 and 42-6004, Version 2).
If replacing the exemption for MRRA contracts from the prime contracting classification of TPT with a new exemption based on a contract price threshold modifies which contracts would qualify for the exemption, there may be a fiscal impact to the state General Fund.
Provisions
Prime Contracting Classification of TPT and Municipal Taxation
1. Exempts, from the prime contracting classification of TPT and municipal taxation, the gross proceeds of sales or gross income derived from a construction contract with an owner of real property or the improvements to real property that does not exceed:
a) $100,000 per unit for a residential project; or
b) $1,000,000 for a nonresidential project.
2. Removes the exemptions from the prime contracting classification of TPT and municipal tax on the gross proceeds of sales or gross income derived from a contract with the owner of real property or improvements to real property for the maintenance, repair, replacement or alteration of existing property.
3. Applies the new prime contracting TPT exemption to all previous applications of the MRRA prime contracting TPT exemption.
4. Defines residential project as the vertical construction of a new home, apartment or other dwelling unit where an individual can regularly reside, other than a hotel or manufactured home, and the maintenance, repair or alteration of an existing dwelling unit, excluding related off-site construction, landscaping or grading or other site preparation.
5. Exempts, from the prime contracting classification of TPT and municipal taxation, a contract that primarily involves construction of any electricity generating facility or system including renewable energy systems installed on any commercial, residential or governmental property, including the repair, replacement or alteration of existing improvements of an electricity generating or distribution facility.
6. Requires only the contract price to be used to determine whether a contract exceeds the exemption threshold with no subtractions for amounts paid to subcontractors or any deductions or exemptions allowed from the prime contracting classification.
7. Allows tangible personal property that is incorporated or fabricated into a project to be subject to an amount equal to retail TPT due.
8. Prohibits project elements from being artificially separated from a contract to cause a project to qualify for the TPT exemption or the municipal tax exemption and assigns the burden of proving the artificial separation to ADOR.
9. Specifies that each contract is independent of any other contract, except that any change order that directly relates to the scope of work of the original contract must be treated the same as the original contract for TPT purposes, if the resulting total contract amount does not exceed the exemption threshold by more than 25 percent.
10. Subjects the original contract and all subsequent change orders to tax if a change order directly relates to the scope of work of the original contract and the resulting total contract price exceeds the exemption threshold by more than 25 percent.
11. Requires a change order to be treated as a new contract if the change order does not directly relate to the scope of work of the original contract.
Prime Contracting Administration
12. Requires, to satisfy the requirement that the prime contractor demonstrate that the job was within their control, a subcontractor or another person who performs modification activities to demonstrate acceptance of an Arizona Form 5005 or an equivalent successor form designated by ADOR to qualify for exemption from tax.
13. Raises the threshold, from $50,000 to $100,000 per residential unit for a residential project or $1,000,000 for a nonresidential project, that a construction contract must be below for an out-of-state contractor to qualify for the exclusion from the requirement to furnish a bond or securities in an amount equal to the contract price.
14. Removes the application of the prime contracting classification of TPT to contracts that primarily involve surface or subsurface improvements to land.
15. Modifies the definition of modification by removing the exclusion of any:
a) wreckage or demolition of existing property, or any other activity that is a necessary component of a MRRA project; and
b) mobilization or demobilization related to a MRRA project, such as the erection or removal of temporary facilities to be used by individuals working on the project.
16. Removes the definitions of alteration and replacement.
17. Removes the requirement for every person engaging or continuing in the business of prime contracting or dealership of manufactured buildings to present the purchaser with a written receipt of the gross income or gross proceeds of sales from the prime contracting activity which separately states the prime contracting TPT to be paid.
Retroactive Applicability
18. Applies the following provisions to contracts that were bid or entered into, or for any other binding obligation executed, between January 1, 2015, and July 1, 2021:
a) allows a person to treat the contract as a contract that is taxable under laws and the MCTC in effect prior to the effective date of this legislation;
b) requires a person to be held harmless from any additional tax, penalty and interest if ADOR determines under audit that the person's treatment of the contract as subject to, or excludable from, the prime contracting tax was incorrect; and
c) disallows a claim for a refund for any prime contracting tax:
i. paid under laws and the MCTC that was in effect prior to the effective date of this legislation; or
ii. excludable under laws amended by this legislation or under laws and the MCTC that was in effect prior to the effective date of this legislation.
Miscellaneous
19. Contains a technical conditional enactment.
20. Makes technical and conforming changes.
21. Becomes effective on the general effective date, retroactive to contracts entered into beginning July 1, 2021.
Prepared by Senate Research
February 15, 2021
MG/gs