Transaction privilege tax (TPT) on invoices in Arizona

Arizona’s transaction privilege tax (TPT) is a tax on your business. For contractors, MRRA work (maintenance, repair, replacement or alteration of existing structures) gets no tax line on the invoice, while modification work, typically building from the ground up, is taxed to the prime contractor on 65% of gross receipts.

TPT license and who owes the tax

Though often called a sales tax, TPT taxes the vendor for the privilege of doing business in Arizona. If you sell a product or service subject to TPT, you likely need a license from the Arizona Department of Revenue (ADOR), at $12 per location, and may need a city TPT or business license. ADOR collects county and city TPT too.

MRRA or modification: the project decides

• MRRA: generally not subject to prime contracting TPT. Your labor isn’t taxable, but your materials are generally subject to retail TPT.
• Modification (prime contracting): the prime contractor is taxed on 65% of gross receipts, after the deductions the statute lists, whether it supplies labor only or labor and materials, and it can’t deduct what it pays subcontractors. It must hold a TPT license.
• Subcontractor on a modification job: you aren’t subject to prime contracting tax if you can show the job was under the control of a prime contractor who is liable for the tax on it. When the prime contractor gives you Form 5005, don’t charge it TPT on your portion of the project. If you’re licensed, you still report those receipts, then deduct them (deduction code 550).

By statute, a contract with the owner to maintain, repair, replace or alter existing property isn’t subject to prime contracting tax if it includes no modification work, or only a de minimis amount. ADOR treats modification as de minimis when it’s 15% or less of the total receipts from the contract. The owner includes anyone with authority to perform or authorize the work, such as a tenant or property manager, and if you’re hired by a general contractor the owner hired, or you’re a subcontractor of that general contractor, you count as hired by the owner. Some public contracts that mainly improve the surface or subsurface of land are the exception: they’re taxable as prime contracting, and the agency’s request for proposals must say so.

If you do only MRRA work, you need no TPT license and pay retail TPT when you buy materials. If you’re licensed and buy MRRA materials tax exempt, you remit the retail TPT equivalent on their cost, without markup, at the job site’s rate.

Taxable activities: a listed set

TPT applies to a listed set of activities, including retail sales, contracting, commercial leases, personal property rentals, amusements, utilities and telecommunications. ADOR’s list doesn’t name services as a category.

Tax line on your invoice

• MRRA job: your invoice to the property owner or general contractor has no tax line. If it shows one, you must remit that amount to ADOR. Treat the tax you paid on materials as a cost of doing business.
• Modification job (prime contractor): A.R.S. §42-5075 says a prime contractor must give the purchaser a written receipt that states the tax separately. ADOR’s guidance says a licensed contractor may, but need not, show the tax as a separate line on its invoice, because contractors may factor the tax, which means working it out of their receipts when they report. Any prime contractor may factor TPT and county excise tax.
• Subcontractor with a Form 5005 from the prime contractor: don’t charge the prime contractor tax; your invoice to it has no tax line.

Local tax: job site, county and city

You report prime contracting revenue at the job location. On MRRA jobs, if you didn’t pay retail TPT on materials when you bought them, you report the equivalent to the job location’s jurisdiction, unless a statutory deduction applies. Rates vary by business activity, city and county; ADOR’s Arizona Tax Rate Look Up shows them by address or ZIP code. Cities follow the Model City Tax Code, but each picks its own options, so what’s taxed and exempt can differ by city.

Starting October 1, 2026, the Town of San Tan Valley imposes a local TPT. Construction contracts in effect before that date may qualify for pre-existing contract treatment; check with the Town.

Landscaping and lawn maintenance

• Landscaping is taxed as prime contracting. It includes installing lawns, grading, planting trees and plants, removing stumps and installing underground sprinklers. The exception is MRRA work on existing property under a qualifying contract with the owner.
• Lawn maintenance isn’t subject to prime contracting tax when the contract includes no landscaping. It covers work such as mowing, weeding, repairing sprinkler heads, pruning and applying fertilizer.

HVAC, roofing and plumbing: MRRA examples

ADOR gives these as examples of MRRA work on existing property. When the contract qualifies, they aren’t prime contracting, and your invoice has no tax line:

• Topping off fluids in an HVAC system (maintenance).
• Fixing a leaky bathtub or shower, or replacing roof tiles damaged by hail (repair).
• Removing and replacing a roof or an HVAC unit (replacement).
• Replacing a sink’s faucets or a bathroom sink (replacing a component).

Alterations over the threshold become modification

An alteration, such as adding square footage, is MRRA only if the contract amount is no more than:

• Residential property: 25% of the property’s most recent full cash value (its tax value), as of the bid date or the contract date, whichever value is higher.
• Any other property: $750,000.

If the alteration amount is over that when the contract is bid or entered into, the job is modification contracting. There’s one cushion: if you and the owner reasonably believed at the start of the contract that the job was an alteration, and on completion it’s over the threshold by no more than 25% of that threshold, for any reason, it still counts as an alteration. Ask ADOR if you’re unsure which kind of job you have.