Construction contracts can be as complicated as the projects they govern. They typically involve numerous parties, phases, and types of work.
The overwhelming majority of states tax construction contracts according to traditional principles of property law. That is, they begin by looking at whether the Contractor is primarily providing services or selling goods (with any services merely being incidental to the sale of those goods). In other words, the question is whether they are transferring title to real property or personal property. Accordingly, their analysis principally focuses on what the Contractor delivers and the nature of the goods being incorporated into the Project.
Arizona, however, has a unique approach that begins with the real property and asks what the Owner is hiring the Contractor to do to that real property. Is the Contractor modifying real property, in which case the state levies taxes on 65% of the Prime Contractor’s revenue? Or, is the Contractor performing the “lesser” services of maintenance, repair, replacement or alteration (MRRA), in which case each contractor or subcontractor pays sales tax when it purchases materials?
The framework is simple, but the devil is in the details. Determining the tax liability of Contractor depends on understanding the Project, the Contractor’s role(s), and how the Contract evolves over time. The Construction Attorneys at Mesch Clark Rothschild are here to assist with issues that contractors and sub-contractors face with regard to sale tax issues.
