Glossary · Licensing & Bonding
Physical nexus
In short
Being taxable because the activity happens here. For a contractor this is the whole question, because the work is on Arizona land.
In full
Physical nexus is the ordinary basis on which Arizona taxes a business: the activity happens in Arizona.
For contracting it is close to automatic and rarely in doubt. The work is performed on real property located in Arizona, so the income is Arizona income. An out-of-state contractor who takes a single Arizona project is taxable on it, must hold a TPT license, and is within the bonding requirement because the principal place of business is elsewhere.
That is a different question from where the income is reported. Nexus decides whether Arizona taxes the contractor at all; sourcing decides which jurisdiction within Arizona the amount belongs to. A contractor can have unquestionable nexus and still get the reporting wrong.
An out-of-state contractor should not expect a threshold to shield a small Arizona project. The sales thresholds that excuse small out-of-state sellers belong to a different section and a different classification.
A.R.S. § 42-5075; A.R.S. § 42-5006(A); ADOR Contracting FAQs