AMENDED

FACT SHEET FOR H.B. 2749

TPT; prime contracting; exemption; alterations

Purpose

Effective January 1, 2023, modifies the definitions of alteration and modification for the purposes of the prime contracting classification and narrows the application of the residential alteration contract value cap to only existing property that is not under the roof of the existing residential structure.

Background

Transaction privilege tax (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 of real property if such contracts do not include modification activity. Modification is construction, grading and leveling ground, wreckage or demolition.

Alteration is an activity or action that causes a direct physical change to existing property and does not include maintenance, repair or replacement. For a residential project contract to qualify as an alteration, the contract amount may not exceed 25 percent of the most recent full cash value (FCV) of the property as of the date of any bid for the work or the date of the contract, whichever value is higher. If a project, at the inception of the contract, would be treated as an alteration based on the project cost and, on completion of the project, the project exceeded the statutory contract cost cap by up to 25 percent of the cap (contract cushion), the work performed under the contract qualifies as an alteration. Project elements may not be artificially separated from a contract to cause a project to qualify as an alteration and the Arizona Department of Revenue (ADOR) has the burden of proving that project elements have been artificially separated (A.R.S. § 42-5075).

The Joint Legislative Budget Committee (JLBC) fiscal note states that due to a lack of detailed contracting data, JLBC is not able to determine the fiscal impact of H.B. 2749. The fiscal note contains example scenarios but JLBC cannot determine in advance whether the aggregate net impact to the state General Fund would be positive or negative (JLBC fiscal note).

Provisions

1. Adds, to the definition of alteration, the criteria that the activity or action does not increase the square footage of the existing residential structure under the roof.

2. Decreases the residential contract value cap to 15 percent of the most recent FCV for a project to qualify as an alteration and narrows the application of the cap to existing property that is not under the roof of the existing residential structure.

3. Includes, in the definition of modification, other activities or actions that increase the square footage of an existing residential structure under the roof.

4. Narrows the application of the contract cushion to existing commercial project contracts.

5. Narrows the prohibition on project elements being artificially separated from a contract to cause a project to qualify as an alteration to existing commercial project contracts.

6. Narrows the application of the requirement that a change order directly relating to the scope of work of the original alteration contract be treated as part of the original contract to only commercial project contracts.

7. Applies the modified definitions of alteration and modification and the narrowed application of contact requirements to contracts, bids or other binding obligations entered into beginning January 1, 2023.

8. Makes technical changes.

9. Becomes effective January 1, 2023.

Amendments Adopted by Committee

1. Reinserts and decreases the residential contract value cap and narrows the application of the cap to existing property that is not under the roof of the existing residential structure.

2. Reinserts the project element prohibition and the contract cushion and narrows the application of the prohibition and contract cushion to commercial project contracts.

3. Narrows the application of the change order requirement to commercial project contracts.

4. Defines residential.

5. Makes technical and conforming changes.

House Action Senate Action

WM 2/16/22 DP 7-2-1-0 APPROP 3/29/22 DPA 6-3-1

3^rd Read 2/24/22 42-17-1

Prepared by Senate Research

March 30, 2022

MG/slp