By Matt Meaker for Sacks Tierny P.A.
During its 2015 session, the Arizona legislature made a number of substantive changes to a law that went into effect just three months earlier. What does construction TPT look like, now that the dust has settled?
Arizona’s attempt to “simplify” its TPT structure – with the January 1, 2015, implementation of a new law – ultimately resulted in a lot of confusion for almost everyone it affected. By the time the law was implemented, efforts had already been well underway to “fix” a number of glaring problems with the new law. And while the fix bill signed on February 18, 2015, is not perfect, it does provide a great deal of clarification for nearly everyone associated with Arizona’s construction industry.
Below is a breakdown of the key fixes. If you have questions on the law and how it impacts how you do business, you should contact an attorney, tax professional or other trusted advisor who is knowledgeable about the changes.
- Contractors can purchase ALL of their materials on a tax-exempt basis. This means that contractors can issue blanket 5000 forms to their suppliers, as they previously had for both MRRA (maintenance, repair, replacement or alteration) and prime contracting work. This is not necessarily true if the contractor has cancelled its TPT license.
- Contractors cannot be required by cities, towns or counties to hold a TPT license as a prerequisite for the issuance of a building permit. However, a city or town – but not a county – can require that a contractor hold a business license.
- Contractors no longer will need to hold a TPT license in order to apply for or renew their license with the Arizona Registrar of Contractors.
- Out of state purchases? If tax was not paid to the vendor, all materials purchased out of state that are incorporated into an MRRA project are subject to Retail TPT at the job location. Use tax will not apply.
- How is inventory to be handled? If the contractor cancelled its TPT license (or is doing only MRRA work moving forward), the contractor will be required to pay tax on materials on hand as of 12/31, as they are (a) incorporated into a project (or otherwise consumed) where tax would be required on the materials, or (b) sold or disposed of.
- There may be a transition period that applies to you.
- If the materials were incorporated into an MRRA project, sourcing of taxes will be the project location. Otherwise, sourcing is the principal office location.
If the contractor retained its TPT license and does both MRRA and modification work, the contractor needs to determine the value of December 31, 2014, inventories and any materials used moving forward on an MRRA project will need to be reported and taxes paid as they are used (based upon the project location).
Contractors maintaining their license moving forward, who will be doing both MRRA and modification, are permitted to either:
- Pay TPT at point of sale (in which case the tax rate is at seller location) or
- Purchase exempt and then report taxes when utilized on the MRRA project (in which case the tax rate is based on the project location).
- Clarification of the definition of “modification.” The new definition excludes MRRA activities, mobilization and demobilization and removes from the definition such terms as “improvement” and “movement.”
- Significant change to the definition of “alteration.”
Residential: If the contract for the project is more than 25% of the most recent Full Cash Value of the property, as determined by the County Assessor, then the project is prime.
Commercial: The project will be prime if ANY of the following is true:
- The contract for the project is more than $750,000.
- The scope of the work directly relates to more than 40% of the existing square footage of the existing property.
- The scope of the work involves expanding the square footage by more than 10% of the existing property.
Buffer: If the parties reasonably believed it to be an alteration at the beginning but, at project completion, the project exceeds the thresholds above by no more than 25%, no tax treatment change is required. If one of the above is exceeded, then the entire project will be taxed as prime.
- What is the purpose of Form 5005? This form will be used by the General Contractor to advise licensed subcontractors as to the tax treatment for the project. This may be issued as a blanket or job-specific.
- What about Form 5009L? This is to be used only on rare occasions, i.e., when the project is subject to prime contracting and the subcontractor does not have a TPT license.
- Change orders? Now each change order is to be evaluated as to its relationship to the original contract. If the change order is “directly related” to the original contract, it will be taxed the same as the original contract. If not, then an independent determination as to how the change order will be taxed will be made.
- What if I am audited, and an MRRA project is deemed prime? If tax was paid for the materials at point of sale, that will be deemed an offset on the prime contracting tax assessment.
- Certain roadway and other heavy highway contracts will be excluded from MRRA treatment.
- Any projects and/or materials (including hospitals, Native American projects directly for the tribal government, etc.) that were previously exempt from MRRA treatment will continue to be exempt.
- “Safe harbor”? What does that mean? For bids submitted or contracts entered into prior to May 1, 2015, a contractor acting in good faith can designate a project as either MRRA or prime.