Arizona Prime Contracting Tax: How Contractors Are Taxed on Construction Projects

If you run a construction job in Arizona, the tax question is rarely "do I owe income tax?" It is "who is the prime contractor on this job, and who reports the Transaction Privilege Tax (TPT) on the contract?" Arizona answers that with a classification called prime contracting. Get the classification right and the tax is collected and reported once, by the right party. Get it wrong and you can pay twice, or collect tax you never remit.

This guide explains how prime contracting works under A.R.S. 42-5075, what the tax base is, how subcontractors and design professionals fit in, and which pieces you still need to confirm with the state and your city.

Disclaimer: This is informational content, not legal or tax advice. Tax treatment depends on the facts of each contract. Talk to a qualified CPA and an attorney before you rely on any of this for a specific project.

What prime contracting means in Arizona

Prime contracting is a TPT classification under A.R.S. 42-5075. It applies to the prime contractor, which is the business that supervises or coordinates the construction project and is responsible for completing the contract. The prime is the party that contracts with the owner and answers for the whole job, even when most of the physical work is done by subcontractors.

That is why the classification matters. The prime is the party liable for the tax on the project. The rules below determine when subcontractors are taxed separately, when they are excluded, and which amounts stay out of the base entirely.

The tax base: 65% of gross

For prime contracting, the tax base is 65% of gross proceeds of sales or gross income, after the deductions listed in A.R.S. 42-5075(B). In practice, the prime does not pay tax on the full contract price the way a retailer pays tax on a sale. The taxable amount is 65% of the qualifying gross, after the statutory deductions come off.

Two things must be confirmed on every job: which deductions apply to your contract, and which rates apply. Arizona's state rate and the city rates both apply, and the rates change. The state's combined general rate on most taxable classifications is 5.6%, but that figure is for general classifications and is not a settled figure for prime contracting. Confirm the rate for prime contracting with the Arizona Department of Revenue (ADOR) at azdor.gov before you set up billing.

Here is an illustration only, using the general 5.6% rate and a hypothetical $500,000 contract with no deductions. The taxable base is 65%, or $325,000. At 5.6%, the state portion would be $18,200. City tax would be added on top. Use the rates you have confirmed, not these numbers, when you bid a job.

Subcontractors and the liability rule

A subcontractor working under a prime contractor is not taxed on that work if the prime contractor is liable for the tax. That rule is in A.R.S. 42-5075(D). The practical effect is that the tax is paid once, by the prime, rather than by every trade on the job.

The prime can also exclude amounts received from a contractor who gives it a certificate stating that the contractor is a prime and is liable for the tax, under A.R.S. 42-5075(E). When a contractor you pay says it is a prime contractor liable for the tax on its portion, get that certificate and keep it on file. Without it, you have no documented basis for excluding the amount from your own base. Store certificates with the job file, not in someone's inbox.

Work that is not prime contracting

Under A.R.S. 42-5075(P), contracts with the owner solely for maintenance, repair, replacement or alteration of existing property are not prime contracting, provided there is no modification of the property. This is where many contractors get confused. Work that replaces something in an existing building can fall outside prime contracting, but only if the job does not modify the property. A remodel that changes the structure, layout or the property itself does not fit the exclusion.

Read your scope of work closely before you assume a job is maintenance. If the line is unclear on a particular project, confirm the treatment with ADOR before you invoice.

Design and professional services

Under A.R.S. 42-5075(O), design and professional services are excluded when they are stated separately in a written contract. The key requirement is separate statement. If an architect's or engineer's fee is folded into one construction price, the exclusion may not hold.

Write design and professional services as their own line items in the written contract. Keep the scope of those services distinct from the construction scope so the separation is clear on paper if anyone asks later.

Receipts and showing the tax

A.R.S. 42-5075(F) requires the prime to give the purchaser a receipt that states the tax separately. Do not bury TPT inside the contract price. Your invoice or receipt should show the taxable amount, the tax, and the total, and it should be consistent with the contract. Keep copies of every receipt with the job file.

Owner-builders and speculative builders

Owner-builders and speculative builders have special rules under the prime contracting classification. This guide does not set out those rules because they depend on the specific facts of the project and the parties involved. Check with ADOR before you start a project in either category, and do not assume that the standard prime contractor treatment applies without confirmation.

City taxes and local rates

The state is only part of the bill. Cities and towns levy their own TPT rates on top of the state rate, and those rates differ from city to city. Confirm which city's rate applies to the job site, then check that city's tax code for the current rate. Check azdor.gov as well, because state and local rates change.

Do not assume that your office location determines the local rate. Confirm the rule for the job site.

Licenses and filings you need

Arizona has no general state business license. Most businesses that sell or perform taxable work need a TPT license from ADOR. That license is a tax license, issued at $12 per location, and you can apply through the ADOR page at azdor.gov/business/transaction-privilege-tax/tpt-license.

Several other authorities are separate from the TPT license:

• Registrar of Contractors (ROC). The ROC licenses contractors. Contractor licensing is a separate requirement from the tax license, and the ROC licensing guide explains the classifications and requirements. Find it at roc.az.gov.
• City or town. Many cities require their own business license on top of the state TPT license. Counties issue no general business license.
• Arizona Corporation Commission. It files LLC and corporation documents. An LLC files Articles of Organization with a $50 filing fee and does not file an annual report. A for-profit corporation files an annual report at $45.
• Arizona Secretary of State. Trade names are registered here, not at the Corporation Commission. Trade name registration is optional in Arizona.

If you form an LLC, note that the LLC must publish notice unless its statutory agent's county is Maricopa or Pima. Build that step into your formation timeline so it does not delay your first bid.

Common mistakes

• Treating new construction as maintenance because the property already exists. The statute's exclusion requires that there be no modification.
• Lumping design fees into the construction price without a separate written line item.
• Paying a subcontractor without a certificate when that subcontractor says it is a liable prime.
• Leaving TPT off the receipt or merging it into the total price.
• Setting one rate for every job without checking the city where each site sits.
• Guessing on owner-builder or speculative work instead of asking ADOR first.

Setup checklist

1. Form or confirm your entity, and file any required documents with the Corporation Commission. Register any trade name with the Secretary of State if you use one.
2. Confirm your ROC license classification for the work you perform.
3. Apply for the TPT license at ADOR. The fee is $12 per location.
4. For each job site, confirm the city, its TPT rate, and whether a local business license is required.
5. Build your contract template with separate line items for design and professional services.
6. Set up a certificate process for every subcontractor that says it is a liable prime, and store the certificates with each job file.
7. Set up invoices that show the tax separately, as A.R.S. 42-5075(F) requires.
8. Call ADOR before any owner-builder or speculative project.

Confirm these with the agencies

Several figures in this area change or depend on your facts, so verify them directly before you rely on them:

• The state rate that applies to prime contracting, and the city rate for each job site, at azdor.gov and the city tax code.
• Which deductions under A.R.S. 42-5075(B) apply to your contract.
• Owner-builder and speculative builder treatment, with ADOR.
• Whether a given remodel or repair counts as maintenance under A.R.S. 42-5075(P).

When to get professional help

Prime contracting is manageable once your contract templates, invoices and subcontractor paperwork match the statute. The costly mistakes usually come from guessing about classification on one unusual job. If your project involves an owner-builder, a speculative build, a mix of maintenance and new work, or a complex sub structure, have a CPA review the tax treatment and an attorney review the contract language before you bid. This guide is a starting point, not a substitute for that review.