Statutory deduction
In short
An amount the statute permits to be subtracted before tax is computed. Two different sets apply depending on which tax is being calculated.
In full
A statutory deduction is an amount a statute allows to be subtracted before the tax is computed. It is not a discretionary allowance and not a business expense — it exists only where a statute names it.
Two separate sets matter to a contractor, and they are easy to conflate.
On a prime contracting contract, A.R.S. § 42-5075(B) lists amounts deducted from gross proceeds of sales or gross income before the tax base is computed. The list is specific: the sales price of land, capped at fair market value; contracts in a military reuse zone; qualified environmental technology facilities; certain remediation work; machinery and equipment with independent functional utility; development fees; and others. Several require a letter of qualification obtained before work begins, which cannot be applied for afterward.
On MRRA work there is no prime contracting base to deduct from. Instead, the retail deductions at A.R.S. § 42-5061(B) carry into the retail-equivalent computation. That subsection deducts named categories of tangible personal property from the retail tax base in addition to the exclusions in subsection A — ADOR gives exempt machinery and equipment as an example — so materials otherwise subject to the equivalent may be deductible on the same grounds a retail sale would be.
The deduction codes used to report these on a return are a separate matter from the deductions themselves, and are set out on their own entry.
A deduction is not the same as the 35% reduction. The reduction is automatic and requires no documentation; a deduction must be identified, supported, and in several cases pre-qualified.
A.R.S. § 42-5075(B); A.R.S. § 42-5061(A), (B); ADOR MRRA Contracting