Construction Tax Compliance: AZ TPT vs Sales Tax

If you’re a contractor doing business in Arizona, chances are you’ve heard of something called the Transaction Privilege Tax, or TPT for short. While most states have a regular sales tax, Arizona does things a little differently, and it can get pretty confusing if you’re new or just starting your construction business. We break it all down so you can stay on top of your construction tax compliance in AZ and avoid some of the common mistakes that trip up contractors.

What’s the difference between TPT and sales tax?

In most states, you charge your customer sales tax at the time of purchase, and you pass that money along to the state. Pretty simple.

In Arizona, it’s called Transaction Privilege Tax (TPT), and it works a little differently. TPT is a tax on the business itself for the “privilege” of doing business in the state. That means you, the business owner, are responsible for the tax, not the customer.

Even though it functions kind of like sales tax, it’s important to know that TPT is your responsibility. You still might collect it from your customer, but at the end of the day, you have to get the numbers right and file correctly.

Why is Arizona’s tax system more complex?

One of the biggest reasons contractors struggle with construction tax compliance in AZ is that the state doesn’t stop at just one tax rate. You’re dealing with three levels of tax: business activity, county, and city. The total tax rate can vary depending on what you’re doing and where the job is located, even within the same county!

Unlike other states that have just one flat rate, Arizona’s layered system means you need to know exactly where your job is happening, and which city regulations apply.

Why is this extra tricky for contractors?

Contractors often wear many hats, and that can affect how they’re taxed. In Arizona, your TPT obligations depend on what type of work you’re doing and what role you’re playing in that job.

For example, are you:

• Building a home from the ground up?

• Doing a remodel?

• Making improvements to a commercial space?

• Acting as a general contractor or subcontractor?

The answers to these questions matter a lot. Different types of work and roles are taxed differently. Some fall under a category called MRRA (Maintenance, Repair, Replacement, Alteration), while others are treated like new construction. You have to understand your classification before you can figure out how to file your taxes.

Prime vs. Subcontractors: What’s the difference?

Prime contractors and subcontractors don’t have the same rules.

Let’s say you’re a prime contractor remodeling a house. You may have the option to use something called "tax factoring" and it's convenient when you don't want to separately state your tax but instead, charge your clients a flat rate.

If you’re a subcontractor, you can’t use factoring. You either pay sales tax at the point of purchase for materials or purchase materials exempt and file and pay at the end of the period. Again, your role in the job really matters, and making the wrong call can lead to overpaying or underpaying your taxes.

How do I register and file for TPT?

If your construction business is required to have a TPT license, you’ll need to:

1. Apply for the license using the Joint Tax Application, or JT-1, with the Arizona Department of Revenue.

2. New contractors and contractors with a history of noncompliance are required to provide a bond to the Department of Revenue.

3. Choose how often you’ll file (monthly, quarterly, or annually), which is based on your project revenue.

4. File even if you had $0 in revenue, yes, really.

5. Make sure you’re collecting and remitting the correct tax amount for each job site.

This is where a lot of contractors get into trouble. If you forget to file, or if you calculate the wrong rate, you’re still responsible. Even worse, the penalties start at $50 and go up from there, with added interest.

Here’s the kicker: If you undercharge your customer, you still have to pay the full amount to the state. Overcharge them? You owe the excess tax to the state, too.

Best practices for managing TPT

To make sure you’re following the rules and keeping your records clean, here are some smart steps:

• Know your role: Are you working for the general contractor, property owner, or another subcontractor?

• Understand the type of work: Classify it correctly. Is it MRRA, new build, or modification?

• Use the right forms: AZ Form 5000 or 5005 may apply depending on the job. These help document who’s responsible for the tax.

• Stay organized: Track each job separately and keep tabs on the tax rates for each city.

These steps will help you stay ahead of deadlines and avoid unpleasant surprises at tax time.

Pro Tip: Every year, review what cities you’re licensed in before you renew your license in December to avoid renewing for cities that you no longer have jobs in. Close your license for any inactive cities so you don’t have the burden of filing for that location - and do it well before the renewal deadline! The fee for a late renewal is $50 plus 50% of each city’s renewal fee. It adds up!

Out-of-state contractors, listen up

If you’re from out of state and coming into Arizona to work on a project, the same TPT regulations apply to you. You’ll need to register for a TPT license after providing a bond to the Department of Revenue and pay Arizona tax on any revenue earned from Arizona jobs.

Arizona wants its cut, no matter where you’re based.

When should you stop DIY-ing and call in a pro?

Filing your own TPT returns might seem manageable at first. There are red flags that mean it’s time to call in a professional:

• You feel overwhelmed or stressed every time you need to file.

• You’re not sure how to classify your job or role.

• Your collected taxes don’t match what you owe.

• You’re getting penalty notices or letters from the Arizona Department of Revenue.

It’s better to get help early than to fix costly mistakes later. Plus, once you understand how Arizona’s system works, you can actually benefit from how it’s structured, it’s just a matter of knowing the rules.

Final Advice on Construction Tax Compliance in AZ

TPT might sound intimidating, but it doesn’t have to be. Arizona’s system is unique, and yes, it takes time to learn. Once you do, it becomes easier to manage, especially if you see the same types of jobs and deductions over and over again.

Pro Tip: Get really familiar with your job activities and the categories they fall under, and the state forms required for each type. That’s going to make things so much easier.

Need help with Construction Tax Compliance in AZ? Contact us today to walk you through the maze and make sure you’re filing right, every time. Don’t guess, get it right the first time.