The Arizona TPT Conundrum
By Richard Camp
Transaction Privilege Tax Defined
As defined by the Arizona Department of Revenue: The Arizona transaction privilege tax is commonly referred to as a sales tax; however, the tax is on the privilege of doing business in Arizona and is not a true sales tax. Although the transaction privilege tax is usually passed on to the consumer, it is actually a tax on the vendor.
On November 18th, 2014 the Department of Revenue (DOR) issued TPN 14-1 with the intention of clearing up a number of questions regarding the Transaction Privilege Tax. While the document does a good job defining Contractors, Sub-Contractors, maintenance, repair, replacement and alteration activities, the various scenarios presented were rather confusing for the Construction industry as a whole.
The Valley of the Sun CFMA took on the TPT at a special lunch meeting in November. In an effort to clarify some of the entanglements of the legislation, they provided some scenarios that addressed the taxable/non-taxable issues:
Scenario: A business that sells sheds for a single lump‐sum price provides the sheds to customers through a subcontractor that delivers and installs the sheds on customers’ sites. The subcontractor either delivers and installs a prefabricated shed or assembles and installs it onsite. In either case, the shed will be installed on a concrete pad or piers.
Result: If there is no preexisting concrete pad or piers at the customer’s site, the sale and installation of the shed will be subject to prime contracting TPT, with the setup site as the taxable situs under A.R.S. § 42‐5075(M)(1). If the subcontractor installs the shed on an existing pad or piers, however, the installation will constitute a nontaxable alteration activity, and retail TPT will be due on the sale of the prefabricated shed or materials.
Translation: Pour your own slab unless you want to be taxed and taxed again!
Clear as Mud?
Now, demolition and debris removal is subject to a 15% test to determine if an entire contract is subject to TPT. Even more confusing is the treatment of Change Orders. Under the “clarification rules”, each change order needs to be treated separately from the original contract to determine if the change order is subject to TPT. To add to the confusion, if the change order includes any demolition and debris removal, the de minimis test must be applied to EACH change order for the 15% threshold which decides TPT taxable or non-taxable, for that change order only!
Materials are another story, depending on whether you purchased them for taxable modification activities or non-taxable maintenance, repair, replacement or alteration activities. If you are using the same materials for the TPT taxable AND non-taxable activities, you need to keep a list of materials on hand as of 1/1/15 and report the retail TPT tax on them if you use them in non-taxable activities.
Estimating in the new environment will be WAY more difficult than previously. In addition to the determining jurisdictional taxes, and material taxes, estimators will also need to determine the demolition and debris removal threshold and the tax implication! If everyone bidding on a project interprets the notice and the law the same way, the playing field will be level; if not, bids will be apples and oranges!
Want more articles like this on a monthly basis? Sign up for The Ledger and get industry news, product promotions, and tips for Sage 100, Sage 300, estimating, and accounting.