Beginning January 1st of 2015, a new Arizona tax law took effect that changes the way contractors will pay tax on materials they use for modification projects. The law stems from House Bill 2111 signed by Governor Jan Brewer on June 25, 2013. The law itself went through several modifications itself along the way. Its primary purpose is to simplify sales tax and how they collect from contractors.
The biggest change will be in how and when paying taxes on materials contractors use in modification projects. To understand how the law works, it is important to understand some key terms in the bill.
Prime Contractor – A person who performs, coordinates, or supervises other contractors involved in modification projects.
Contractor – A person or organization that has agreed to modify a building or structure for improvement or development. This includes any subcontractors and specialty contractors involved in the project.
Modification – Any construction, improvement, movement, demolition, or wreckage activity that does not include maintenance, repair, replacement or alteration activities.
According to the law, a prime contractor is now able to purchase materials needed for a modification contract tax-free. The materials will be subject to tax at the time of use instead of at the time of purchase. Sales tax will, however, still be charged at the time of purchase for any materials purchased to complete contracts that include maintenance, repair, replacement, or alterations.
Additionally, when a prime contractor hires a subcontractor to complete a modification project, the prime contractor will be able to provide an exemption certificate for those subcontractors that is project specific. This essentially allows subcontractors to pay tax on purchased materials in the same manner as the prime contractor.
When modification activities are minimal, they consider them a maintenance contract rather than a modification. This means materials purchased will be subject to sales tax at the time of purchase rather than the time of use. Many refer these smaller modification activities as “de minimis” and consider them so when a receipt from the project is less than 15% of the total receipts from the contract.
In order for prime contractors to avoid paying sales tax at the time of purchase for materials needed for a modification project, they must have a Transaction Privilege Tax (TPT) license. It is important to note that contractors who do not perform modification projects do not require having a TPT license.
Have Questions About Sales Tax Rules?
Need more information on how these new tax laws might impact your business? Contact Hacker Accounting today at 602-375-5251. We understand that, when it comes to your finances, each and every detail counts.