TPT: What Construction Owners Must Know

If you’re a contractor in Arizona, you’ve probably heard the term “Transaction Privilege Tax” and wondered what it really means. Is it sales tax? Do you have to pay it? How does it affect your construction business?

Let’s break it down in plain English.

What is Transaction Privilege Tax (TPT)?

Most states have a statewide “sales tax” on only goods, and in other states, all services are taxed (and in other states, there are no general sales tax at all). In Arizona, things are different. Instead of a state-wide sales tax regulation, Arizona charges a Transaction Privilege Tax (TPT), which is a tax on the seller for the privilege of doing business in the state, and the rates vary.

TPT is not just for goods or retail stores. Various business activities are subject to TPT with one of them being the construction industry, and it’s a bit tricky.

How TPT Applies to Construction

When it comes to Transaction Privilege Tax for construction, Arizona has its own playbook. TPT for construction activities falls into two main categories: contracting and retail. Depending on the work you do, you could be taxed under one or both.

There are also three key activities of contracting:

• MRRA (Maintenance, Repair, Replacement, Alteration)

• Modification

• Speculative Building

Each of these activities has its own rules and deduction codes and yes, it gets complicated fast!

For example, if you’re doing MRRA work (like handyman services or renovating a kitchen) you may not need a TPT license at all. You just pay taxes at the point of sale when you buy materials.

If you’re doing larger-scale modifications or building homes for sale, then you do need a TPT license, and you’ll be responsible for calculating and filing TPT returns.

Is TPT Only in Arizona?

Yes. TPT is unique to Arizona. Other states use more straightforward sales tax systems. Arizona's TPT is complex because it involves:

● Business activity knowledge

● County tax rates

● City tax rates

You could be dealing with three different layers of tax on one job, depending on what activity you’re doing and where the work is performed.

How to Know if You Need to Pay TPT

Ultimately, understand your role. Are you a:

● General Contractor doing prime contracting modifications?

● Subcontractor just installing or remodeling?

● Handyman offering MRRA services?

If you only do MRRA work, you don’t need a TPT license. If you fall into the other categories, you probably do, and you’ll need to file returns regularly, even if it’s just to report zero taxable revenue.

How to Get a TPT License (and Stay Compliant)

If you find out you need a license, go to the Arizona Department of Revenue website and download, print, execute and mail a completed Joint Tax Application (JT-1). It costs $50 for the license, plus additional fees for every city you operate in.

New contractors and contractors with a history of noncompliance are required to provide

a bond to the Department of Revenue in order to obtain their license.

Once you have it, you’ll need to file TPT returns monthly, quarterly, or annually depending on how much revenue you generate. Newer or smaller businesses should choose annual filing if possible because it’s less paperwork.

Here’s the catch: even if you make no money that month, you still have to file a return. Missing a filing gets you a $50 fine, and that fine grows with interest if ignored.

Materials vs. Labor: What’s Taxed?

TPT is not assessed on labor, only on materials. If you're a prime contractor on a modification project and your client is a property owner, make sure that you issue your subcontractors the Form 5005 and that they separate labor and materials on their invoices to you. That way, you have support for what you report on your TPT return for the retail tax on materials.

Also, know where you’re buying your materials. If your job is in Scottsdale with an 8% tax rate, but you bought supplies in Goodyear with a 9.8% tax rate, you may end up losing money if you didn’t factor the tax correctly.

How to Manage TPT Without Losing Your Mind

TPT filing is not something most contractors want to do themselves, and they shouldn’t. It involves:

● Knowing what business activity your project falls under

● Knowing which deduction codes apply to your jobs

● Understanding local tax rates for each county and city

● Keeping careful records of your jobs and receipts

● Filing on time and correctly every single time

At BluuPrint to Profit, we use a custom-built TPT calculator to help our construction clients get it right. Most business owners don’t need that level of complexity on their plate. They just need someone who understands TPT for construction activities, inside and out.

Final Thoughts on Transaction Privilege Tax

TPT can feel overwhelming, but with the right guidance and tools, it doesn’t have to be.
Whether you’re just starting out or have been in business for years, understanding where your business fits in Arizona’s complex tax system is the first step. If you're unsure, reach out and schedule a 30-minute complimentary meeting.