How Arizona's New Tax Rules Will Help Small Business Contractors

Date: April 14, 2015

What it may mean for your small business.

Contractors in Arizona should have an easier time figuring out sales taxes now that the state has clarified its transaction privilege tax.

“Without passage of Senate Bill 1446, small businesses in Arizona would have been in the unacceptable position of guessing who was involved in a construction project transaction [and who] is legally responsible for paying or collecting sales tax,” says NFIB/Arizona State Director Farrell Quinlan. “They would have been wide open to audits and heavy penalties and interest payments.”

Previously, under rules that went into effect Jan. 1, 2015, contractors complained that it was unclear when they had to pay taxes on building materials and when they could buy building materials tax-free, but had to pay the state’s prime contracting tax on 65 percent of their gross receipts.

Under the new rules, which were made retroactive to Jan. 1 of this year, contractors pay taxes on materials for the maintenance, repair, replacement or alteration (MRRA) of property. Bigger projects that don’t fall under MRRA, such as new construction, are taxed as prime contracting projects. The law specifically defines “replacement” and “alteration.”

While the new rules are easier, even the legislature understands they’re still complex. The Senate bill mentions the possibility of eventually repealing the prime contracting classification entirely.

James G. Busby Jr., a tax attorney at The Cavanagh Law Firm in Phoenix who has written about the issue, says contractors who do both new and specialty construction have the most complex tax situation.

“They have to report tax both ways based on the jurisdiction of where they performed those services,” he says.

Mark Giebelhaus, president of Marlin Mechanical Corporation in Phoenix, admits that’s a nightmare.

“Now we have to monitor it in different ways and make sure that we’re doing it the correct way in both types of projects,” he says.

Giebelhaus says one thing that’s a huge help for contractors is the “safe harbor” clause, a new addition to the new law.

Contractors who reasonably estimate a project will be merely an alteration won’t be penalized if it turns into a somewhat bigger project.  


Related Content: Small Business News | Arizona

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