# Arizona Contractor Taxes and Licensing Guide

It depends on the job. Arizona has no sales tax on labor as such. Instead, new builds and big alterations fall under prime contracting transaction privilege tax (TPT), figured on 65% of the gross proceeds. Maintenance, repair, replacement and smaller alteration (MRRA) jobs aren't taxed that way; the contractor pays tax on materials at purchase.

## Key takeaways

- Arizona's tax is a transaction privilege tax (TPT) on the contractor, not a sales tax on the customer. The state rate is 5.6%, plus county and city rates.
- Modification work (new construction and alterations over the threshold) is taxed on 65% of gross proceeds, reported at the job location.
- MRRA work isn't taxed under prime contracting. You pay retail TPT on materials, and an MRRA-only contractor doesn't need a TPT license.
- The Registrar of Contractors (ROC) licenses general and trade contractors, including electrical, plumbing and HVAC, with a bond for each license.
- Employers need workers' comp from an insurer authorized in Arizona, or approval from the Industrial Commission (ICA) to pay claims directly.

## Do Arizona contractors charge sales tax on labor?

Arizona works differently from most states. There's no sales tax on the customer in the usual sense. The state levies a transaction privilege tax (TPT) on the business, and for contractors the question is which bucket the job falls into. The Arizona Department of Revenue (ADOR) splits construction into two kinds of work: modification and MRRA.

- **Modification.** New construction, plus alterations over the threshold. ADOR's summary says the "tax base is 65% of the gross proceeds after statutory deductions taken," reported under business class 015 at the job location. Statute A.R.S. 42-5075(B) sets the same 65% base.
- **MRRA.** Maintenance, repair, replacement and alteration work under the threshold. ADOR says MRRA activities are excluded from the prime contracting classification, and the contractor "does not include a tax line on the invoice to the customer."

The alteration threshold decides a lot of jobs. ADOR lists it as "25% of the property's tax value (residential property)" and "$750,000 (commercial property)." An alteration under that line is MRRA; over it, the job becomes modification. A kitchen remodel on a modest house can cross the 25% line faster than you think, so check the full cash value before you price the job. Our [labor vs. materials guide](https://www.brix.so/learn/sales-tax-on-labor-vs-materials) shows how other states draw the line.

> **Example (illustrative numbers): a $40,000 custom home addition**
>
> Say a new addition counts as modification and the contract is $40,000 with no other deductions. The prime contracting base is 65% of that, or $26,000. At an illustrative 8% combined state, county and city rate, the TPT would be $2,080.
>
> Rework the same numbers as a $6,000 water heater and fixture swap that qualifies as MRRA, and nothing is charged on the invoice. You paid tax on the parts when you bought them, and that cost is built into your price.

## How are materials and use tax handled on Arizona jobs?

The answer flips with the job type. On modification work, ADOR says a prime contractor "should purchase materials incorporated into the project tax-exempt," since the 65% base already covers them. On MRRA work, "MRRA contractors are required to pay retail TPT on their materials" unless a deduction applies. A licensed MRRA contractor can instead buy exempt and report the cost of materials under business code 315 where the project sits. An unlicensed, MRRA-only contractor must pay tax when buying the materials.

- **Subcontractors.** Prime contractors should hand subs ADOR Form 5005, which states the project scope and who is responsible for the tax. Subs on a modification project can buy materials exempt.
- **Mixed shops.** A contractor doing any modification work needs a TPT license, "even if some contracting activities are MRRA."
- **Use tax.** ADOR says the state use tax rate matches the state TPT rate of 5.6%, and some cities add their own. It applies when you buy taxable items from a seller that didn't charge Arizona tax. Read [use tax for contractors](https://www.brix.so/learn/use-tax-for-contractors) for how that works in practice.
- **Out-of-state contractors.** ADOR notes that the economic nexus thresholds for retail sales "do not apply" to contracting income.

## What does Arizona's TPT bond and license cost a new contractor?

Separate from your ROC license, ADOR generally requires a TPT bond from new contractors, out-of-state contractors without a principal Arizona location, and contractors with a history of TPT noncompliance. ADOR's bond page lists amounts by type of work, from $2,000 for trades like carpentry and concrete up to $22,000 for heavy, bridge and tunnel construction. Single-family general contractors fall at $7,000. Under A.R.S. 42-5006 the bond is kept for at least two years in those cases. New contractors apply on the paper JT-1 form, because ADOR says the online application isn't allowed for them.

## Which Arizona licenses do contractors and trades need?

The Registrar of Contractors (ROC) issues every construction license in Arizona, trades included. State law sorts licenses into residential, commercial and dual (both) classes under A.R.S. 32-1102, and each license carries a bond or cash deposit. Our [contractor license guide](https://www.brix.so/learn/contractor-license) covers exams and qualifying parties in general terms.

**Arizona contractor licenses by trade (checked 2026-10-19)**

| Trade | Agency | Credential | Link |
| --- | --- | --- | --- |
| General contractor | Registrar of Contractors (ROC) | B General Residential, B-1 General Commercial, or KB-1 Dual Building. ROC says a B licensee must subcontract electrical, plumbing, HVAC, boiler, pool, spa and well work to properly licensed contractors. | [ROC license classifications](https://roc.az.gov/license-classifications) |
| Electrical | ROC | C-11 Electrical (commercial) or R-11 Electrical (residential) | [ROC license classifications](https://roc.az.gov/license-classifications) |
| Plumbing | ROC | C-37 Plumbing (commercial), R-37 Plumbing including solar (residential), or CR-37 dual | [ROC license classifications](https://roc.az.gov/license-classifications) |
| HVAC | ROC | C-39 Air Conditioning and Refrigeration (commercial), R-39 (residential), or CR-39 dual | [ROC license classifications](https://roc.az.gov/license-classifications) |
| Bonds | ROC (A.R.S. 32-1152) | Residential general: $5,000 to $15,000. Residential specialty: $1,000 to $7,500. Commercial bonds scale with annual volume, starting at $5,000 (general) or $2,500 (specialty) under $150,000. | [A.R.S. 32-1152](https://www.azleg.gov/ars/32/01152.htm) |

_Residential and dual licensees must also either pay into the Residential Contractors' Recovery Fund or post an extra $200,000 bond (A.R.S. 32-1152(C)). Cities may require their own business or trade registrations; ask the city where you work._

Small jobs have a narrow way out. A.R.S. 32-1121(A)(14) exempts work on one project where the total price, labor and materials included, is under $1,000, as long as the work is "of a casual or minor nature." The exemption is gone if the job needs a local building permit, if a bigger job is split up to stay under $1,000, or if your ads don't say "not a licensed contractor."

## What income taxes do Arizona contractors owe?

Arizona taxes personal income at a flat rate. ADOR's tax table page says that "for tax year 2023 and beyond" there are no bracket tables "due to Arizona's flat tax rate of 2.5%." Sole proprietors and most LLC and S corporation owners pay that on business profit through their personal return. C corporations pay 4.9% of Arizona taxable income, per ADOR's 2025 Form 120 instructions. TPT is separate and comes out of gross receipts, so price it in before you figure profit. To plan federal and state quarterly payments, try the [quarterly estimated tax calculator](https://www.brix.so/tools/quarterly-estimated-tax-calculator).

## Is workers' comp required for Arizona contractors?

Yes, once you have workers on the payroll. A.R.S. 23-902 covers "every person who employs any workers or operatives regularly employed in the same business," and the statute counts part-year and seasonal work in your usual trade. Under A.R.S. 23-961 you cover it with an insurance carrier authorized to write comp in Arizona, or by proving to the Industrial Commission of Arizona (ICA) that you can pay claims directly or through an approved pool. Watch the subcontractor rule too: under 23-902(B), if you control a sub's work that's part of your business, the sub's workers can be treated as your employees. Our [workers' compensation guide](https://www.brix.so/learn/workers-compensation) explains premiums.

## What about city taxes and other local rules?

- **City privilege tax.** ADOR's October 1, 2026 rate table lists prime contracting rates for 91 cities and towns, and ADOR collects those city taxes for them. Report at the job location, not your shop.
- **Speculative builders.** ADOR says the speculative builder tax "is imposed only at the city level" and is due when the property sells.
- **Lien rights.** Arizona has its own preliminary notice and filing deadlines for [mechanics liens](https://www.brix.so/learn/mechanics-lien). Send notices at the start of the job.
- **Next door.** Working near the border? [New Mexico](https://www.brix.so/taxes/new-mexico) taxes construction labor through its gross receipts tax, and [Nevada](https://www.brix.so/taxes/nevada) and [California](https://www.brix.so/taxes/california) have their own pages.

> **Not tax advice**
>
> This is a summary of ADOR, ROC and state statute guidance as of the date shown, not tax or legal advice. Whether a job is MRRA or modification turns on the facts. Ask ADOR, or a CPA who works with Arizona contractors, before you file.

BRIX sorts your job costs and receipts, tracks the tax you've paid on materials, and flags quarterly estimated tax dates, so your CPA gets clean numbers. Invoices and payments sync to QuickBooks. BRIX doesn't file taxes or give tax advice.

- [Bookkeeping and tax help](https://www.brix.so/features/bookkeeping-taxes): Keeps expenses categorized, tracks 1099 subcontractors and sales tax, and reminds you of quarterly estimated tax dates. BRIX does not file taxes or give tax advice.
- [QuickBooks sync](https://www.brix.so/integrations/quickbooks): Syncs customers, invoices and payments with QuickBooks so the books match the jobs.

## Frequently asked questions

### Is labor taxable in Arizona construction?

Not as a separate sales tax line. On modification jobs, the contractor owes prime contracting TPT on 65% of gross proceeds, which covers labor and materials together. On MRRA jobs, there's no tax on the invoice; the contractor pays retail tax on materials instead.

### What counts as MRRA work in Arizona?

Maintenance, repair, replacement and alteration work, as long as an alteration stays under the threshold. ADOR lists that threshold as 25% of the property's tax value for residential property and $750,000 for commercial property. Over the line, the job is treated as modification.

### Do I need a TPT license if I only do repairs?

ADOR says a TPT license isn't required if all your contracting is MRRA. You'd pay Arizona tax on materials when you buy them. If you take on any modification work, you need a TPT license for the whole business.

### What is the state TPT rate for prime contracting?

ADOR's rate table effective October 1, 2026 lists the state transaction privilege tax rate as 5.6%. County and city rates are added on top, and they differ by location. Use ADOR's rate table or lookup tool for the job site's combined rate.

### How much work can I do in Arizona without an ROC license?

Under A.R.S. 32-1121, under $1,000 per project, labor and materials included, for casual or minor work. The exemption doesn't apply if the job needs a building permit, if you split a job to stay under the limit, or if your advertising leaves out "not a licensed contractor."

### Does Arizona license electricians and plumbers separately?

Contracting businesses in those trades get ROC licenses, such as C-11 or R-11 for electrical and C-37 or R-37 for plumbing. A B general residential contractor must subcontract that work to a properly licensed contractor. Check with your city about any local trade rules.

### Can I buy workers' comp from a private insurer in Arizona?

Yes. A.R.S. 23-961 lets employers insure with a carrier authorized to write workers' comp in Arizona. The alternative is proving to the Industrial Commission that you can pay claims directly or through an approved pool.

## Related

- [Do Contractors Charge Sales Tax on Labor or Materials?](https://www.brix.so/learn/sales-tax-on-labor-vs-materials)
- [What Is Use Tax for Contractors?](https://www.brix.so/learn/use-tax-for-contractors)
- [What Is a Contractor License?](https://www.brix.so/learn/contractor-license)
- [What Is Workers' Compensation Insurance?](https://www.brix.so/learn/workers-compensation)
- [What Is a Mechanic's Lien?](https://www.brix.so/learn/mechanics-lien)
- [Quarterly Estimated Tax Calculator for Self-Employed Contractors (2026)](https://www.brix.so/tools/quarterly-estimated-tax-calculator)
- [New Mexico Contractor Taxes and Licensing Guide](https://www.brix.so/taxes/new-mexico)
- [Nevada Contractor Taxes and Licensing Guide](https://www.brix.so/taxes/nevada)
- [California Contractor Taxes and Licensing Guide](https://www.brix.so/taxes/california)
- [Self-Employment Tax Calculator (2026)](https://www.brix.so/tools/self-employment-tax-calculator)

## Sources

- [Arizona DOR, Contracting guidelines (TPT license, MRRA vs. modification, Form 5005, JT-1, out-of-state contractors)](https://azdor.gov/transaction-privilege-tax/contracting-guidelines) (checked 2026-10-19)
- [Arizona DOR, Modification v MRRA summary (65% tax base, business codes 015 and 315)](https://azdor.gov/transaction-privilege-tax/contracting-guidelines/mrra-v-modification-summary) (checked 2026-10-19)
- [Arizona DOR, MRRA contracting (alteration thresholds)](https://azdor.gov/transaction-privilege-tax/contracting-guidelines/mrra-contracting) (checked 2026-10-19)
- [Arizona DOR, Bond for contractors](https://azdor.gov/transaction-privilege-tax/contracting-guidelines/bond-contractors) (checked 2026-10-19)
- [Arizona DOR, TPT and other tax rate tables effective October 1, 2026 (5.6% state rate; city taxes collected by ADOR)](https://azdor.gov/sites/default/files/document/TPT_RATETABLE_10012026.pdf) (checked 2026-10-19)
- [Arizona DOR, Understanding use tax](https://azdor.gov/individuals/income-tax-filing-assistance/understanding-use-tax) (checked 2026-10-19)
- [Arizona DOR, Form 140 optional tax tables (2.5% flat rate)](https://azdor.gov/forms/individual/form-140-optional-tax-tables) (checked 2026-10-19)
- [Arizona DOR, 2025 Form 120 corporation income tax instructions (4.9%)](https://azdor.gov/sites/default/files/document/FORMS_CORPORATE_2025_120_i.pdf) (checked 2026-10-19)
- [A.R.S. 42-5075, Prime contracting classification](https://www.azleg.gov/ars/42/05075.htm) (checked 2026-10-19)
- [Arizona Registrar of Contractors, License classifications](https://roc.az.gov/license-classifications) (checked 2026-10-19)
- [A.R.S. 32-1102, Classification of contractors](https://www.azleg.gov/ars/32/01102.htm) (checked 2026-10-19)
- [A.R.S. 32-1121, Persons not required to be licensed (handyman exemption)](https://www.azleg.gov/ars/32/01121.htm) (checked 2026-10-19)
- [A.R.S. 32-1152, Contractor bonds and cash deposits](https://www.azleg.gov/ars/32/01152.htm) (checked 2026-10-19)
- [A.R.S. 23-902, Employers subject to workers' compensation](https://www.azleg.gov/ars/23/00902.htm) (checked 2026-10-19)
- [A.R.S. 23-961, Methods of securing compensation](https://www.azleg.gov/ars/23/00961.htm) (checked 2026-10-19)

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Written by BRIX Editorial Team. Last updated 2026-10-19. General information, not tax, legal or financial advice.
Canonical: https://www.brix.so/taxes/arizona