Glossary · Invoicing & Pricing
The 35% reduction
In short
Thirty-five percent of a prime contracting contract is excluded from tax automatically. The statute states it as a 65% base rather than as a deduction.
In full
Thirty-five percent of a prime contracting contract is not taxed. A.R.S. § 42-5075(B) states this from the other direction: the tax base for the prime contracting classification is sixty-five percent of the gross proceeds of sales or gross income derived from the business.
The two statements describe the same arithmetic, and contractors encounter both. Searching for a thirty-five percent deduction in the statute finds nothing, because the statute never uses that figure.
It is automatic. Unlike the itemized deductions at § 42-5075(B), the reduction requires no certificate, no letter of qualification, and no documentation of what it represents. It is understood to stand in for the labor component of a construction contract, but the statute attaches no such condition and does not require the contractor to show any labor at all.
It applies only under the prime contracting classification. MRRA work is outside that classification entirely, so there is nothing for the reduction to apply to — a contractor who applies sixty-five percent to an MRRA materials cost has used the wrong rule.
Sequence matters when both apply. The itemized deductions come out of gross first, and the sixty-five percent is taken on what remains.
A.R.S. § 42-5075(B)