Repair, installation and maintenance companies in Arizona have often been classified as contractors for purposes of transaction privilege tax (TPT). While this allowed them to purchase supplies tax-free, it subjected them to the standard 30% contractor deduction for labor, regardless of actual labor cost.
Now there’s relief. Arizona Governor Brewer signed into law H2535 which provides a deduction from the tax base of prime contracting for qualified business thereby removing them from the Prime contracting classification.
The new deduction named “Property with independent functional utility” is for the gross proceeds of sales or gross income derived from a contract for the installation, assembly, repair, or maintenance of machinery, equipment, or other tangible personal property.
The deduction does not include any sales or gross proceeds from the portion of any contracting activity that consists of the development of, or modification to, real property in order to facilitate the installation, assembly, repair, maintenance, or removal of machinery, equipment, or other tangible personal property.
Businesses that fall under this classification will now pay TPT on the purchase of any supplies and personal property and pass the tax along to the customer.
The deduction is for both TPT and Use Tax and the legislation provides for a comparable exemption for municipal TPT purposes.
Since the law is retroactive to tax periods beginning from and after 6/30/1997, the legislation provides that any claim for a refund based on the legislation’s retroactive application (i) will be considered timely if it is filed with the Arizona Department of Revenue (ADOR) or the appropriate city or town on or before December 31, 2013, and (ii) may not exceed an aggregate amount of $10,000. If the aggregate amount of a taxpayer’s valid claims exceeds $10,000, the ADOR will reduce each claim proportionately so the aggregate amount of the refund will be not more than $10,000.
Be sure to check the newly released legislation for details.
Melinda Nelson, CPA