Arizona Contractors: Top TPT Mistakes and How to Avoid Them

If you’re a contractor in Arizona, chances are you’ve heard of TPT, it’s short for Transaction Privilege Tax. Just because you’ve heard of it doesn’t mean it’s easy to understand.

At BluuPrint to Profit, we’ve seen firsthand how Arizona Contractors struggle with the TPT regulations. Unfortunately, if you mess up, a refund from the Arizona Department of Revenue can be difficult and time consuming. You will have to file an amended return, or send in a written request, and then the case gets assigned to a TPT auditor who reviews your supporting documentation. It’s a process!

Let’s talk about the most common mistakes Arizona Contractors make with TPT and how to avoid them.

Mistake #1: Getting a TPT License When You Don’t Need One

This is a big one. Many small contractors assume they have to get a TPT license to operate in Arizona, but that’s not always true.

If you only do MRRA work, that’s maintenance, repair, replacement, or alteration, it's excluded from the prime contracting classification, so you do not need a TPT license. You'll pay sales tax at the retail store when you buy your materials, and that's it. There is a caveat to this rule. If the alteration job is below 25% of the property's tax value (residential) or $750,000 (commercial) then yes, you don't have to file. If it exceeds these thresholds at the time the contract is bid or entered into, then you will need a TPT license, and you will need to file a TPT return.

If you get the license anyway, now you’re responsible for monthly or quarterly filings, even if you have zero taxable revenue. If you forget to file? That’s a $50 fine per missed return. It adds up fast.

Tip: Figure out what kind of work you actually do before applying. If it’s only MRRA, skip the license and save yourself the headache.

Mistake #2: Not Filing a Return, Even if You Made No Money

This is another costly error. Once you have a TPT license, you must file a return every month, quarter, or year (depending on what you selected). Even if you made zero dollars in taxable revenue, the state still wants that return.

Too many Arizona Contractors ignore this step. Missing a return triggers an automatic $50 penalty, and if you keep missing them, the fines rack up and can grow with interest.

If you are a new contractor, or a contractor with a history of noncompliance, you will be required to provide a bond to the Arizona Department of Revenue.

Tip: Set a calendar reminder or work with a bookkeeper to stay compliant, even in slow months.

Mistake #3: Misclassifying the Type of Job

This one can get tricky. In Arizona, the category your project falls under determines how it’s taxed and when you pay the taxes:

• MRRA (maintenance, repair, replacement, alteration): often doesn’t require a TPT license. Don’t forget, if the alteration exceeds the thresholds at the time the contract is bid or entered into, then you do need to file a TPT return.

• Modification: requires a license and regular filing. If a modification job is taxable for prime contracting TPT purposes, the tax base is 65% of the gross proceeds, after deductions are taken.

• Speculative Building: taxed when the property sells, often long after the work is done.

There are different forms you will also need based on the business activity your project falls under. For example, in a taxable modification project, the prime contractor will need to provide the subcontractor with an executed Form 5005. If you don’t know what type of job you’re working on, you may end up filing the wrong way, or worse, not filing at all.

Tip: Know your category and classify each job correctly. It affects everything from your deductions to your filing deadlines.

Mistake #4: Not Using Deduction Codes Properly

Arizona offers deduction codes that can reduce how much TPT you owe, but only if you know how to use them.

There are dozens of codes, and you only need a handful. The problem? Most TPT Arizona Contractors don’t even know these codes exist, let alone which ones apply to them.

Tip: Keep a cheat sheet of the allowed statutory deduction codes. If you work with a pro like us, we’ll build this into your monthly reports automatically.

Mistake #5: Paying More Taxes than Needed

Here’s a scenario we see a lot: You do a job in Scottsdale with an 8% tax rate but buy your materials at the Home Depot closest to your house in Goodyear, with a 9.8% tax rate. Each city has a different rate. If you charged your client the lower Scottsdale tax but paid the higher Goodyear rate at the store, you lose money, and you don’t get it back.

Tip: Be strategic about where you buy materials. Your return will report retail tax on the materials using the project’s location as the source for the tax rate.

Mistake #6: Trying to DIY Your TPT

We get it, you’re a smart business owner, but Arizona’s TPT system is unusually complex. Even seasoned contractors mess it up.

From figuring out deduction codes to knowing which form to send to subcontractors (like Form 5005), there are too many moving parts. The cost of doing it wrong is often more than just hiring someone to do it right.

Tip: Don’t go at it alone. Work with someone who knows the ins and outs of TPT that Arizona Contractors face daily.

What’s the Best Way to Stay Compliant?

If you’re feeling overwhelmed, you’re not alone. TPT in Arizona is confusing, and the penalties for mistakes are harsh. You don’t have to figure it out on your own.

At BluuPrint to Profit, we specialize in helping home builders and contractors stay compliant with Arizona’s TPT regulations. We even built a custom calculator to track cities, rates, deduction codes, and more, so you don’t have to.

Let us handle the paperwork, while you handle the projects. Contact us today to schedule your 30-minute complimentary consultation.