Glossary · Invoicing & Pricing
Indirect cost of doing business
In short
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.
In full
On an MRRA contract the contractor pays tax on the materials and does not charge tax to the customer. ADOR directs that the tax paid on those materials be treated as an indirect cost of doing business.
That phrase has a practical meaning for pricing. The tax is a cost of the work, in the same category as fuel, insurance, or equipment wear — recovered through the price quoted, not added to it as a separate charge. A contractor who forgets to price for it absorbs it out of margin.
It also has a bookkeeping consequence. Because the tax is a cost rather than tax collected on behalf of the state, it belongs in job costing with the materials it was paid on. Recording it as a tax payable understates job cost and overstates liabilities.
The treatment is conditional on not billing the tax. ADOR's MRRA Contracting page states that if tax is included as a line item on the invoice, it must be remitted to the Department. Tax shown on the invoice stops being a cost and becomes an amount owed.
ADOR uses two wordings for the same treatment — "indirect cost of doing business" in the Contracting FAQs and "ordinary cost of doing business" on the MRRA Contracting page. They describe the same handling.
This treatment is specific to MRRA work. On a prime contracting contract the tax attaches to the contract amount, and A.R.S. § 42-5075(F) directs that the taxes be separately stated to the purchaser.
ADOR Contracting FAQs, MRRA; ADOR MRRA Contracting; A.R.S. § 42-5075(F), (P)