Contracting Tax Changes and Sample City Tax Returns

Contracting Changes

For Contractors doing Maintenance, Repair, Replacement,

or Alteration (MRRA) work

 

During the 2013, 2014, and 2015 legislative sessions, the legislature made significant changes to how Arizona and cities' transaction privilege tax (TPT) applies to contracting activities.  For information on the changes and examples, the Arizona Department of Revenue has published a Transaction Privilege Tax Notice (TPN 15-1).  The document can be found at www.azdor.gov under Contracting FAQs.  On the same web page, you can find a list of upcoming contracting classes being held by the Department or YouTube videos of past classes.

If after reviewing the state material you determine that some or all of your jobs meet the definition of MRRA, then you will need to change how you complete your City of Tucson tax return.  Below are directions for completing the City of Tucson tax return.  Following these directions will allow filed tax returns to be correctly processed by the City’s tax system.

 

All income is from MRRA work and taxes on materials used were paid to the vendor when purchased.

Contracting activity.List your gross receipts on the line labeled Contracting 15 in Column 1.On the back of the return in the column labeled Business Class Code 15, list the total income next to the deduction labeled Other (Explain).Transfer that number to the front of the return in Column 2.Column 3 and Column 5 should be zero.

Please do not list the MRRA income on the back of the return as Retail Service Labor (16).A retail service labor deduction taken under the business class code 15 will result in the deduction being disallowed and tax due on the deduction will be assessed. (See Example 1)

All income is from MRRA work but retail taxes on the purchase of materials were not paid to the vendor.

If you have kept your State and City tax licenses and are purchasing materials tax exempt, then you will need to report the equivalent retail tax on the cost of materials used in jobs.  The reporting of the cost of the materials will need to be under the business activity Retail, 17.

Contracting activity.  List the labor associated with the MRRA jobs under the business activity Contracting, 15 and take the deduction as Other (Explain) on the back of the return.

Retail activity.  List the cost of the materials used in the in-city projects on the front of the return on the line labeled Retail, 17 as gross receipts (Column 1).  Since the cost of the materials is being reported, there are no allowable deductions.  Therefore, the Gross Receipts in Column 1 equal the Net Taxable amount in Column 3.  The City’s 2% tax rate applies. (See Example 2)

All income is from subcontracting jobs done for a licensed contractor.  The job meets the definition of MRRA and the agreement with the general contractor is for each subcontractor to pay taxes on the materials when purchased.  All materials were purchased and taxes were paid to the vendors.

Contracting activity.  Deduct all of your income on the back of the tax return as subcontracting income (03). (See Example 3)

All income is from subcontracting jobs done for a licensed contractor.  The job meets the definition of MRRA and the agreement with the general contractor is for each subcontractor to pay taxes on the materials when purchased.  Materials used in the project that were purchased tax exempt.

Contracting activity.  Report all of the labor as contracting income on the front of the tax return and deduct the same income amount on the back of the tax return as subcontracting income (03).

Retail activity.  List the cost of the materials used in the in-city projects on the front of the return on the line labeled Retail, 17 as Gross Receipts (Column 1).  Since the cost of the materials is being reported, there are no allowable deductions.  Therefore, the Gross Receipts in Column 1 equal the Net Taxable amount in Column 3.  The City’s 2% tax rate applies. (See Example 4)

Income is a combination of MRRA income (exempt) and prime contracting income (taxable).  All materials were purchased tax exempt.

Contracting activity.  Gross receipts is the total income for the month.  On the back of the return, list the income from the labor on MRRA jobs as Other.  For the prime contracting income, list the appropriate deductions like Out-of-City Contracting (01), Subcontracting Income (03), Tax Collect/Factored (04), and the 35% Standard Contracting (05).

Retail activity.  Gross Receipts is the total cost of materials used in MRRA projects done inside Tucson city limits.  Since the cost of the materials is being reported, there are no allowable deductions.  Therefore, the Gross Receipts in Column 1 equal the Net Taxable amount in Column 3.  The City’s 2% tax rate applies. (See Example 5)

Income is a combination of MRRA income (exempt) and prime contracting income (taxable).  Materials for MRRA jobs were purchased and tax was paid to the vendors.  Materials for prime contracting jobs were purchased tax exempt.

Contracting activity.  Gross Receipts is the total income for the month.  On the back of the return, list the income from MRRA jobs as Other.  For the prime contracting income, list the appropriate deductions like Out-of-City Contracting (01), Subcontracting Income (03), Tax Collect/Factored (04), and the 35% Standard Contracting (05).

Retail activity.  Taxes on the cost of the MRRA materials will not need to be reported and paid by the contractor since tax was paid to the vendors. (See Example 6)

If you have questions on completing the City of Tucson tax returns, please contact the Tax Audit Section at (520) 791-4681.