De minimis
In short
The 15% test. Modification activity inside an MRRA contract is disregarded when it is 15% or less of the total contract.
In full
De minimis is a legal term meaning too small to matter. Here it names the 15% test, which decides whether modification activity inside an MRRA contract changes the treatment of the whole contract.
The combined modification charges are divided by the total contract amount. At 15% or less, the modification activity is disregarded and the entire contract is MRRA. Above 15%, the entire contract is prime contracting.
The rule is all-or-nothing in both directions. Above the line it is not only the modification portion that becomes taxable; the whole contract does.
Overhead and profit are allocated across the activity types pro rata by direct costs before the comparison is made.
A contract at exactly 15% is MRRA. The statute excludes "a de minimis amount of modification activity" and gives no percentage; the 15% figure is ADOR's. Its Contracting FAQs state 15% or less, and its worksheet describes modification activity of less than 15% as de minimis. ADOR Tax Policy stated in writing on September 30, 2026 that de minimis includes exactly 15%, and that the worksheet's wording does not exclude it.
The test is not run only once. A change order that directly relates to the scope of the original contract is folded into that contract, and the percentage is computed again on the combined total. Where the result moves the contract across 15%, in either direction, the new classification applies from the start of the contract. ADOR Tax Policy stated this in the same letter.
A.R.S. § 42-5075(P), (P)(2); ADOR Evaluating Mixed Construction Contracts worksheet, steps 4b–4c; ADOR Contracting FAQs, Mixed Contracts; ADOR Tax Policy information letters, 2026-08-25 and 2026-09-30