Glossary · Invoicing & Pricing
Markup
In short
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.
In full
Markup is the amount added to a cost to produce the price charged to the customer. It is a construction cost accounting term rather than a tax term, and Arizona's transaction privilege tax statutes do not define it.
It matters for tax because of where it is reported. On a prime contracting contract the tax base is computed on the gross proceeds of sales or gross income, which is the marked-up price the customer pays, not the contractor's underlying cost. Markup is inside the taxed amount.
On an MRRA contract the position reverses. Tax attaches to the materials the contractor purchases and incorporates, measured on the cost of those materials. Markup added on top of material cost is not part of that measure.
So the same markup is inside the tax base on one classification and outside it on the other, which is one of the reasons the classification question has to be settled before a contract is priced rather than after.
Markup is also distinct from overhead and profit as ADOR uses that phrase on a mixed contract. There, overhead and profit are contract-wide amounts allocated across activity types before the 15% test is applied, and the allocation method is prescribed.
A.R.S. § 42-5075(B), (P); A.R.S. § 42-5008.01