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Glossary

A resource for Arizona contractors — where statutes and guidelines meet integrity and diligence, together in one place. This expansive list of definitions features the terms that matter most for those committed to compliance. Every entry cites the statute or guidance it was sourced from, as well as the date the related source material was last checked.

Every term below is a link. Open one for the full definition, its sources, and related entries.

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Activities & Property

  • Alteration A physical change to existing property that is none of the other three MRRA activities. The only one of the four with a threshold above which the work becomes Modification.
  • Component One part of a larger whole. The term exists to make replacement work — swapping a component is replacement, whatever the contract is worth.
  • Existing property Real property that already has prior construction. MRRA can only exist on existing property.
  • Maintenance The upkeep of property or equipment. One of the four MRRA activities, and one of the three that carry no threshold at any contract size.
  • Real property Land and what is permanently attached to it. Arizona's TPT statutes never define it, and the entire contracting classification depends on it.
  • Repair Returning existing property to a usable state from partial or total inoperability. Physically swapping a broken part can be repair rather than replacement.
  • Replacement Taking out something already there and putting in something that does the same work — or better. The upgrade still counts, and contract size does not matter.
  • System A group of interdependent parts forming a unified whole. Like component, it exists to make replacement work.
  • Tangible personal property installed in existing property Something installed into a building that keeps its own identity and could come out in one piece. Swapping it is replacement, even though it never became part of the building.
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Audit

  • Burden of proof Who has to prove what. The taxpayer carries it for deductions and exemptions, with one contracting exception that runs against the Department.
  • Intent-to-Audit letter The letter that officially begins an audit. It arrives after the auditor has already made contact, and that earlier contact is what closes the voluntary disclosure door.
  • Look-back period How far back an audit reaches. Four years is the normal reach, and normal is not the same as maximum.
  • Managed Audit A self-examination of the business's own records under Department guidance. Once ADOR accepts the application, interest is removed and penalties are waived, and the right to protest the results is kept.
  • Proposed assessment The Department's determination that additional tax is due. It becomes final forty-five days after receipt, not after mailing — and some adjustments are not proposed assessments at all.
  • Protest window Forty-five days from receipt of the proposed assessment to file a written appeal. After it, the assessment stands.
  • Statute of limitations The deadline on assessing additional tax. Four years where a return was filed, and no deadline whatsoever where one was not.
  • The 45-day exemption-certificate rule Forty-five days from an auditor's request to produce a missing exemption certificate. A certificate that was available on the transaction date, fits the item and the purchaser's business, and is correct for the jurisdiction relieves the liability. The rule is in ADOR's audit guidance, not the statute.
  • TPT audit ADOR's examination of a business's records to test whether the right tax was reported. A defined sequence, with two separate 45-day deadlines inside it.
  • Voluntary Disclosure A program that converts an unlimited exposure into a bounded one. It is available only until the Department makes contact, and applications can be anonymous.
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Change & Conversion

  • Change directive A written order to change the work, issued before the price or the schedule for that change has been agreed.
  • Change order A modification to an existing contract. Change orders can move a project across the alteration threshold and require the contract to be reevaluated.
  • Determination Letter The Department's written decision closing an MRRA Credit Request, emailed to the prime contractor or their authorized appointee.
  • Final completion The point at which all contract work including punch list items is finished. Arizona's tax statute uses the term without defining it.
  • MRRA Credit Request The filing a prime contractor uses to recover retail-equivalent tax already paid on materials after a contract converts from MRRA to Modification.
  • Punch list Minor items of modification work done after substantial completion and before final completion. Arizona defines the term in the tax statute.
  • Reclassification An MRRA contract becoming a Modification contract partway through, either because of change orders or because it was categorized incorrectly at the start.
  • Scope of work What the contract commits the contractor to do. Whether a change order relates to it decides both the change order's tax treatment and whether its dollars count toward the threshold.
  • Substantial completion The point at which a project is usable for its intended purpose though minor work remains. Arizona's tax statute uses the term without defining it.
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Classifications

  • Construction contracting classification The city-level name for contracting tax. Arizona cities tax construction contracting under the Model City Tax Code; the state taxes the same work under prime contracting.
  • Modification Contracting work taxable under the prime contracting classification, covering new construction and alterations at or above the applicable threshold.
  • MRRA Contracting work on existing property that is excluded from prime contracting tax. The tax applies to the materials rather than to the contract.
  • Owner-Builder An owner who improves property and keeps it. The city tax arrives twenty-four months after the work is substantially complete, and only on what was built by contractors the owner released from liability.
  • Prime contracting The state classification Modification work is taxed under, at 65% of gross. A classification, not a person — prime contractor is the role.
  • Retail classification The classification taxing sales of tangible personal property. It reaches contractors twice — as buyers of materials, and as the fallback when prime contracting does not apply.
  • Speculative Builder An owner who improves real property and sells it. The tax is a city tax on the selling price, and it accrues at close of escrow rather than on any contract.
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Forms & Certificates

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Institutions & Instruments

  • ADOR The Arizona state tax agency. It administers Transaction Privilege Tax, publishes the contracting guidance, issues the forms, and conducts audits.
  • ADOR Tax Policy The ADOR office that answers written questions on how the law applies. Written answers carry protection that phone calls do not.
  • Arizona Revised Statutes Arizona's codified law. Where ADOR guidance and the statute disagree, the statute wins — which is not a hypothetical in contracting.
  • AZTaxes.gov ADOR's online portal for filing and paying TPT. It also holds two lookup tools contractors need: license verification and address-based tax rates.
  • City business license A city-issued permit to do business in that city. Arizona has no state business license, and this is not a TPT license.
  • Information letter ADOR's written answer to a taxpayer's question, short of a formal ruling. If it proves wrong, interest and penalties on the resulting deficiency are abated, provided the deficiency comes from the advice and not from inadequate or inaccurate information the taxpayer supplied. The tax itself is not abated.
  • Model City Tax Code The shared rulebook Arizona cities use for their own privilege tax. Near-uniform across cities, but each city chooses among optional provisions, so treatment still varies.
  • Private taxpayer ruling A formal written determination applying the law to one taxpayer's specific facts. Stronger than an information letter: the taxpayer who received it is protected against the tax itself, provided the reliance was reasonable and the information given was adequate and accurate, for transactions from the date it was received.
  • Registrar of Contractors The state agency that licenses contractors to perform construction work. When a contractor says they are licensed, this is usually what they mean — and it is not a TPT license.
  • Tax Procedure Notice A category of published ADOR guidance. The two that governed contracting — TPN 15-1 and TPN 18-1 — were rescinded effective January 1, 2026.
  • TPT license The license that lets a business report and remit TPT. Separate from an ROC license and from any city business license, and not always required for contractors.
  • Transaction Privilege Tax Not a sales tax, despite the nickname. TPT is a tax on the business for the privilege of doing business in Arizona, owed whether or not anything is collected from the customer.
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Invoicing & Pricing

  • Gross receipts The total taken in before any deduction. Arizona defines three overlapping terms for it, and the prime contracting classification does not run on the one most people say.
  • Indirect cost of doing business How tax paid on materials is treated on an MRRA contract — as an input cost the contractor absorbs and prices for, not as tax charged to the customer.
  • Markup The amount a contractor adds to cost to arrive at the price charged. A pricing term, not a tax term — but where it is added changes what is taxed.
  • Overhead and profit On a mixed contract, overhead and profit are spread across the activity types pro rata by direct costs before the 15% test is run.
  • Separate line item Whether tax is shown as its own line on the customer's invoice. The rule reverses between MRRA and prime contracting, and published sources differ on the prime contracting side.
  • Tax base The figure the tax rate is applied to. For prime contracting it is 65% of gross, after the statutory deductions come out.
  • Tax factoring Working the tax back out of a price that already includes it, for contractors who quote a flat amount rather than showing tax separately.
  • The 35% reduction Thirty-five percent of a prime contracting contract is excluded from tax automatically. The statute states it as a 65% base rather than as a deduction.
  • The factor The number a contractor multiplies a tax-inclusive flat price by to arrive at the tax owed. It varies by location and is not one statewide figure.
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Licensing & Bonding

  • Annual Bond Exemption Documentation to city building authorities that a contractor has met the bonding requirement. Not an exemption a contractor applies for, and it expires every July.
  • Economic nexus A sales-volume test that makes remote sellers taxable. It does not reach contracting income.
  • One-time bond exemption A per-project certificate for a contractor who is not on the annual list. Issued at the Department's discretion.
  • Physical nexus Being taxable because the activity happens here. For a contractor this is the whole question, because the work is on Arizona land.
  • Principal place of business Whether a contractor's base is in Arizona. It decides bonding, and it has a statutory definition with a staffing test.
  • Taxpayer Bond for Contractors Security the Department holds against unpaid tax. Two separate requirements exist, and the published sources describe who is caught differently.
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Materials

  • Exempt purchase Buying materials without paying tax at the register by giving the vendor an exemption certificate. Which certificate depends on whether the contractor holds a TPT license.
  • Materials incorporated into real property Materials that become part of the real property when installed. The whole materials-tax scheme depends on this phrase.
  • Retail equivalent An amount equal to retail tax, remitted by a licensed contractor on materials used in MRRA work that were bought tax free.
  • Statutory deduction An amount the statute permits to be subtracted before tax is computed. Two different sets apply depending on which tax is being calculated.
  • Use tax Arizona's tax on using or consuming property in the state when transaction privilege tax was not paid on it. Related to the retail equivalent but not the same thing.
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Mixed contracts

  • ADOR's reallocation right The Department's power to re-sort itemized charges that do not match the work described. It runs one way — a contractor has no matching right.
  • Artificial separation Splitting project elements out of a contract to get alteration under the threshold. Prohibited by statute — and ADOR carries the burden of proving it happened.
  • Bucket ADOR's term for each activity type a mixed contract is sorted into before the 15% test is applied.
  • Combined modification charges The numerator of the 15% test: every modification charge in the contract, added together.
  • De minimis The 15% test. Modification activity inside an MRRA contract is disregarded when it is 15% or less of the total contract.
  • Itemization A gating precondition. The mixed-contract analysis is available only where the charge for each activity type is separately identified.
  • Lump sum A contract stating one price with no breakdown by activity. Without back-end records, the mixed-contract analysis is unavailable.
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Reporting

  • Amended return A corrected return for a period already filed. The TPT-2 marks it with a checkbox rather than a separate form.
  • Business code The number on the return that says which classification income is being reported under. For a contractor it is the difference between taxing a contract and taxing materials.
  • Deduction code The number that identifies which deduction is being claimed on Schedule A. A deduction without a code is not a deduction.
  • Filing period How often a return is due. Set by expected annual liability, and the due date is not the delinquency date.
  • Job-site rate The combined rate in force where the work is performed. It follows the project, not the contractor.
  • Location-based reporting Reporting income to the jurisdiction it belongs to. For a contractor that is the job site, which is usually not the business's own location.
  • No gross receipts A licensed contractor files every period, including periods with nothing to report. The return has a box for it.
  • Sourcing Deciding which jurisdiction an amount belongs to. In contracting it follows the work, with two named exceptions.
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Roles

  • Contractor Defined twice, for two purposes. The tax definition rests on modifying property; the licensing definition rests on being paid to build, repair, or demolish it.
  • General contractor A licensing scope covering whole structures rather than one trade. Not the same thing as prime contractor, which is a tax role.
  • Manufactured building dealer A dealer in manufactured, mobile, or factory-built buildings. The state places the dealer inside the prime contracting classification; cities tax the same sales elsewhere.
  • Materials vendor The supplier a contractor buys from. Not a defined tax term — but on an MRRA project the vendor, not the contractor, is often the party actually taxed.
  • Owner Broader than the title holder. The statute reaches an agent and anyone with authority to perform or authorize the work, with a tenant and a property manager named expressly.
  • Prime contractor Carries two senses: the contractor holding the owner's contract, and the party liable for the tax. They are not always the same party.
  • Specialty contractor A trade contractor licensed for one specialized craft rather than for whole structures. The label is a licensing scope and decides nothing about tax classification.
  • Subcontractor A contractor working under a prime rather than contracting with the owner. A subcontractor performing MRRA work remains an MRRA contractor.
  • Taxpayer The business that owes the tax, not the customer who pays the price. On a contracting project, which business that is depends on the classification.
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Special situations

  • Automatic warranty A warranty included with the work for no extra charge. It is treated as part of the contract it came with, which decides how warranty-work materials are taxed.
  • Construction phase services Work that executes and completes the modification. Never excluded by the design phase provision, and the category most disputed items belong to.
  • Design phase services Work that develops the design rather than executing it. Excluded from the tax base only where three contract conditions are met first.
  • Development fees Fees a jurisdiction imposes to offset the public cost of a development. Deductible from the contracting tax base, including where they were satisfied by building the infrastructure instead of paying.
  • Equipment rental Renting equipment for the contractor's own use is taxable. The lessor owes the tax, and the contractor pays it as part of the price.
  • Extended or third-party warranty A warranty sold separately for its own price. The charge for it is not taxable, and ADOR treats the materials used in warranty work as MRRA whatever the original project was.
  • Independent functional utility A statutory test for whether equipment is its own thing or part of the building. Equipment that passes it takes its installation contract out of the prime contracting tax base.
  • Job Order Contracting A master arrangement under which individual orders define the actual work. Each order is classified on its own, so one arrangement can produce both MRRA and Modification.
  • Landfills and solid waste disposal facilities Operating a landfill is outside prime contracting; building roads to one or cells within it may not be. The statute draws the line and then carves two construction activities back in.
  • Landscaping and lawn maintenance Two statutory lists with nearly touching entries. Lawn maintenance escapes the tax only if the contract contains no landscaping activity at all.
  • Out-of-state project Work performed outside Arizona is not taxed here, but it is reported and then deducted rather than left off the return.
  • Professional services Five named licensed professions, and only those five. Excluded on the same contract conditions as design phase services, and not the same deduction as architectural and engineering direct costs.
  • Sale-and-installation Selling goods is retail; selling goods and installing them into real property is contracting. Arranging the installation is enough to cross the line.
  • Work on an Indian reservation Contracting on a reservation for a tribe or an affiliated Indian is exempt, and the exemption reaches the contract rather than only the materials. Who the work is for decides it.
  • Work order The instrument that defines actual work under a master agreement. Under a Job Order Contracting arrangement each one is classified on its own.
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Thresholds & Valuation

  • Alteration threshold The line above which alteration work becomes Modification. A percentage of the parcel's full cash value on residential property, a flat figure on everything else.
  • Commercial property Everything the residential paragraph does not name. The threshold there is a flat $750,000 that does not move with the property's value.
  • Contract amount The figure the alteration threshold is tested against: the contract price on a contract that is all alteration, and the alteration charges alone on a mixed contract.
  • County assessor The county office that sets full cash value. For a contractor it is the source of the residential threshold denominator, and the figure is public before the bid goes out.
  • Full cash value The county assessor's valuation that governs the residential alteration threshold. Limited property value is not the measure.
  • Limited property value The other number on an assessor's record, and the wrong one for the alteration threshold. It exists to slow property tax growth, not to measure what a property is worth.
  • Notice of Value The annual card the assessor mails an owner. It carries two values side by side, and only one of them is the alteration threshold denominator.
  • Parcel The unit the county assessor values, land and improvements together. The residential threshold is a percentage of the whole parcel, not of the house.
  • Property tax class The legal class the assessor assigns a parcel. For contracting it does one thing: it decides whether the residential percentage threshold or the flat commercial figure applies.
  • Residential property Defined for the alteration threshold by property tax class, not by what the building looks like. Class three, class four, and two narrow class two subdivisions.
  • The 25% cushion An overrun allowance that keeps a project an alteration when it finishes above the threshold. The statute grants it for any reason; ADOR's guidance grants it more narrowly.
  • Valuation year The year an assessor's value belongs to. It matters because the residential threshold asks for the most recent value as of two different dates, and takes the higher.

Definitions summarize statute and guidance as published by responsible government agencies. See the Sources page for additional information about Candor Bookkeeping's efforts to remain current and accurate.