In Arizona, contractors do not pay transaction privilege (sales) tax on the materials that they purchase. Instead, transaction privilege tax is calculated on the gross proceeds of the sales or gross income derived from the job, including labor. All construction contracting gross income subject to the tax is allowed a 35% standard deduction. Speculative builders are allowed a land deduction at the fair market value of the land if they own the land. In lieu of undocumented fair market value, a deduction of 20% of the gross selling price is allowed.
Retail or rental tax does apply to construction machinery or any other item that is not incorporated into the project. Retail tax also applies to materials purchased directly by an owner/builder.
Taxable Contracting Activities
All contractors are considered to be prime contractors and must have a transaction privilege license. This includes general contractors, subcontractors and specialty contractors. The determination of whether a contractor is a taxable prime contractor or a nontaxable subcontractor depends on the facts surrounding each individual project.
Examples of taxable contracting activities include, but are not limited to:
Construction for government agencies (Federal, state and local)
Construction for schools, churches and non-profit organizations
Construction or demolition of a building
Installation of permanently attached equipment
You may choose to include sales tax in the price of the contract, rather than show the tax separately. If so, use the following method (factor) to "back into" the tax. See construction factoring for a step-by-step work sheet on factoring (PDF).