Arizona handles contractor taxation differently than most states. Prime contractors pay Transaction Privilege Tax on their gross receipts from construction contracts. This isn’t collected from customers as a separate line item the way retail sales tax works. Most contractors build it into their contract price, so customers don’t see tax broken out on their invoice.

The TPT rate depends on the type of work and location. Residential construction typically has a lower rate than commercial work. Rates also vary by city, so a job in Phoenix has a different total rate than one in Queen Creek or Scottsdale. You need to know the rates for every jurisdiction where you’re working.

What makes Arizona unusual is that the tax applies to the entire contract value, not just materials. In many states, contractors pay sales tax when they buy materials and then charge customers for labor separately with no tax. Arizona taxes the whole thing at the contractor level.

Subcontractors working for a licensed prime contractor are generally exempt from TPT. The prime contractor pays the tax on the full contract, so charging tax again at the subcontractor level would create double taxation. This exemption requires proper documentation showing the relationship with a licensed prime contractor. Without that documentation, you’re liable for the tax.

If you’re buying materials for a job, you need an Arizona TPT license to purchase them tax-exempt. Without one, you’ll pay tax at the register and then potentially owe TPT again when you bill the customer. That’s double taxation eating into your margins.

Getting this wrong creates problems. Underpaying TPT means back taxes plus interest and penalties when Arizona catches up. Overpaying means you’re eroding profit unnecessarily. Contractors and home service businesses in Arizona need to track their TPT obligations carefully because the rules around residential vs. commercial classifications and subcontractor exemptions are specific and enforcement has increased.

If you’re unsure whether you’re handling TPT correctly, a Phoenix area enrolled agent can review your setup and make sure you’re not overpaying or creating liability you don’t know about.