Glossary · Invoicing & Pricing
Tax factoring
In short
Working the tax back out of a price that already includes it, for contractors who quote a flat amount rather than showing tax separately.
In full
Tax factoring means extracting the tax from receipts when the tax was not separately identified to the purchaser. ADOR describes it as a mathematical process used when the seller wishes to charge the purchaser a flat amount.
This is not what factoring means anywhere else in business. In finance, factoring is selling receivables to a third party at a discount to get paid sooner. In Arizona transaction privilege tax it has no connection to receivables, financing, or discounts. A contractor who knows the finance meaning is not merely unfamiliar with this one, but actively misled by it.
The situation it addresses: a prime contractor quotes one flat price to the customer rather than showing the contract amount and the tax as two figures. The tax is inside that price and still has to be reported. Factoring is the arithmetic that separates them after the fact.
ADOR states that any prime contractor may opt to factor transaction privilege tax and county excise tax, and that while the prime contractor has the option of separately charging the tax, it is often more convenient to charge a flat price and factor later.
Factoring is a reporting method, not a way to reduce what is owed. The same tax is due whichever way the price is presented to the customer.
One thing the guidance does not say underlies the option. A.R.S. § 42-5075(F) provides that a prime contractor "shall present to the purchaser … a written receipt … and shall separately state the taxes to be paid pursuant to this section." ADOR's Contracting FAQs and Tax Factoring page both describe separate statement as optional. Published sources differ; see separate line item, which carries the divergence in full.
ADOR Tax Factoring; ADOR Contracting FAQs, Prime Contracting