The Classifier

What it answers

Arizona taxes most construction contracts one of two ways. On a Modification contract the transaction privilege tax attaches to the contract amount, labor included. On an MRRA contract it attaches to the materials the contractor buys, and the labor is outside the tax base. Which one applies is decided by facts the contractor already holds, against rules the state has already published. The Classifier asks for those facts, one project at a time, and returns the classification with the rule that decides it and the citation behind the rule.

The classification is the first line of the answer, not the whole of it. Under it the result states what the classification means for the invoice, for how materials are bought and where the tax on them is paid, for the business code and deduction codes the tax preparer will need, and for which ADOR forms are the contractor's to issue and which to expect from someone else. Every form named is linked to ADOR's Contracting Forms page, and every term of art to its entry in the glossary, with a preview on hover.

It runs in the browser and takes a few minutes. Nothing entered is stored or sent anywhere, and a new visit starts blank. A result prints, or saves as a PDF, with the date, the customer and the project reference, as a dated record for the project file.

How it works

The questions follow the order the statute walks, and each one asks for a fact rather than a conclusion: who hired you, where the property is, what the contract covers. The tool applies the rule. Several questions appear only where an earlier answer makes them matter.

1. Your role. A contractor; an owner improving property to sell, paid for work after a sale, or still holding improved property twenty-four months after completion; or a manufactured building dealer. The owner answers return the Speculative Builder and Owner-Builder classifications, which are city taxes on the owner rather than on a contractor's invoice, or the statute's rule for an owner who is paid for modifications after title passes.
2. Who hired you, and whether you have subcontractors. Neither changes the classification. Together they decide which forms are yours to issue, which to expect from someone else, and how the income is reported.
3. Situations the statute settles first. Work on tribal land, work at a landfill, a public procurement contract for surface or subsurface improvements to land, and casual work under $1,000 by someone who is not a licensed contractor are each settled before the ordinary analysis, because each decides whether the contract is inside the prime contracting section at all. So is grounds work: a lawn maintenance contract that includes no landscaping is outside the section, and one landscaping item in it puts the whole contract inside. Most projects are none of these, and those questions are left alone.
4. The property. Its property tax class, residential or commercial, as the county assessor classifies the parcel rather than as the building looks; and whether it exists yet. New or ground-up construction is Modification, and no MRRA analysis applies, because MRRA requires existing property.
5. The kinds of work the contract covers, answered for the whole contract, including work that is subcontracted out. Maintenance, repair and replacement are MRRA at any contract size. Modification is construction, grading and leveling ground, or wreckage and demolition. Alteration is a physical change to existing property that is none of those, and it is the one kind with a dollar threshold.
6. The contract amount, and for an alteration, the threshold. On residential property an alteration at or under 25% of the parcel's full cash value is MRRA, and the tool opens the county assessor's parcel search, where that figure is published, for each of Arizona's fifteen counties. On other property the threshold is a flat $750,000. Over it, an alteration is Modification.
7. Where one contract covers more than one kind of work, its value is divided across the kinds selected, overhead and profit included, and the parts must add up to the contract amount. Alteration charges are tested against their own threshold first, and those over it count as modification. The combined modification charges are then divided by the contract amount. ADOR calls this the de minimis rule; in plain terms it is the 15% test. More than 15% and the whole contract is prime contracting; 15% or less and the whole contract is MRRA. It is all-or-nothing in both directions, and a contract is never split.
8. Whether the business holds an Arizona TPT license. It does not change the classification. It changes what the result says about buying materials, about the codes, and about the forms.

Where the answers do not agree with each other, the result says so rather than choosing quietly. A contract entered as covering several kinds of work, with its whole value placed under one of them, is classified as the one the money describes, and the discrepancy is stated on screen and on the printed record. Where a case is genuinely ambiguous, the result says that too, rather than guessing.

What a result contains

The classification comes first, named the way the statute and ADOR name it, with the way it was reached in parentheses: MRRA (Replacement), Modification (Alteration), Modification (Mixed Project). Where a contract is outside the section, or its income is exempt, the result says that instead. Under the classification, in order:

• What this means. What the tax attaches to, in a sentence.
• Basis for this classification. The facts entered, the rule they met, and the statute that states it.
• Charges by activity type. On a mixed contract, the figures the 15% test ran on.
• Invoicing. Whether the tax is stated as a separate line item. The statute requires a prime contractor to state it on a Modification contract; on an MRRA contract it is not shown.
• Materials and tax. How materials are bought, where the tax on them is paid, and what happens to warranty work.
• Codes and deductions. The business code, the deductions reachable on ordinary contracting work, and which of them reach cities as well as the state. The figures on the return are the tax preparer's.
• Forms. Which ADOR forms are yours to issue, which come to you, and what each one does. Form 5005 and Form 5088 do opposite things, and the result says what each one does to who pays the tax on materials.

Where a point needs care, the result carries a note that says so: a change order that could take an alteration over its threshold, charges ADOR reserves the right to reallocate, a presumption the statute makes against an owner. Where a question bearing on a rule is with ADOR Tax Policy, the result marks it, and the Sources page records the question and, when it arrives, the answer.

Every result closes the same way, with what follows where a classification differs from how the work has been billed: the look-back period, the amended return, Arizona's voluntary disclosure program, and the published sequence of a TPT audit. Facts and links only. What to do with them is the reader's decision.

What it is built on

The prime contracting section of the Arizona Revised Statutes, A.R.S. § 42-5075, read at the Legislature's site. ADOR's contracting guidelines, its MRRA Contracting page and its Contracting FAQs. ADOR's Evaluating Mixed Construction Contracts worksheet, which the 15% test follows step by step. The Model City Tax Code for the two owner classifications. The instructions to every form the results name. Where a statute and an ADOR page differ, the statute governs. Where published sources differ from one another, the result states the difference and the treatment it follows.

Where the published sources stop short, the question goes to ADOR Tax Policy in writing rather than being guessed at. The Sources page lists every question put to the Department, with what came back and when, and a result states the Department's answer at the point where it applies.

Where other questions go

The Classifier answers from the facts entered and knows nothing else about the business, so an output is only as accurate as those facts. It is a free educational tool, and the Terms page states the terms that govern its use; they reach everyone who uses it, client or not.

The figures on a return, and any position taken on a filing, belong with your tax preparer. A manufactured building dealer's sale, and the two owner classifications, are stated from the statute rather than analyzed, and the result says so; Candor takes those questions directly, at no charge.

One project at a time is what the tool does. Ten to twenty projects together, with all the documentation for each, and where the records do not support the treatment applied, is the Compliance Review.

A correction to anything inaccurate goes through the correction form. A suggestion for the tool goes to contact@booksbycandor.com.