Construction Contracting
You owe construction contracting tax if:
You are in the construction business in the City of Mesa. A contractor is
considered to be in business in Mesa when the construction job is in Mesa.
Contractors report the income from each job to the Arizona city in which the job
is located, not to the city in which the contractor is based.
Tax rate on construction contracting
The Mesa tax rate is 1.75% of the taxable income.
(Note: The Mesa City Tax rate
increased to 1.75% effective 07/01/2006)
What is construction contracting?
Construction contracting includes construction, remodeling, repairs,
demolition, etc. to real property. There does not have to be a contract for the
work. A construction contractor who provides only labor is subject to the same
provisions as one who provides both materials and labor.
Examples of activities that are or
are not taxable construction contracting
Are subcontractors taxed?
Income from acting as a subcontractor is exempt from the tax. To qualify for
this exemption, the subcontractor must obtain the City Privilege Transaction (Sales) License number
of the prime contractor plus a written declaration from the prime contractor
that he is liable for the tax.
The City has exemption certificates available which you may use to document
exemptions such as this. Contractors who work for a property owner, not another
contractor or speculative builder will be considered a prime contractor for that
job.
Are owner-builders taxed?
Owners who are improving real property for themselves may or may not be the
party liable for paying the tax on the construction.
A homeowner who is building his own principal residence would not normally be
the liable party. Each of the contractors or suppliers who provide materials
and/or services would be liable based on their income from the job.
A "speculative builder" who is building a home or other property
for sale would be liable for tax based on the property's sales price. If the
property is not sold within 24 months of the date it was completed, the tax
would be due based on the cost of construction. The tax on a home in a home
builder's inventory is not due until the home is sold, even if it exceeds 24
months.
Other owner-builders who are building for their own use would not normally be
liable for the tax. Their contractors and suppliers would be the liable parties.
However, the owner may be liable for some additional tax if he sells the
property within 24 months after completion.
Go to Owner-Builders and Speculative Builders
for more detail.
Gross Income
Contractors are taxable based on their gross income from the contracting
business. Normally this will be either the total amount of the contract or the
sales price of the property when it is sold. The income is taxable regardless of
whether it includes both labor and materials or just labor.
Sales of improved land such as subdivision lots are taxable as contracting.
The tax applies when the off-site improvements have been constructed to the
property.
Contractors may report on a progressive billing basis or on a cash receipt
basis. Home builders and speculative builders report the total selling price at
the time of close of escrow.
Deductions
The following are typical deductions subtracted from the gross income to
arrive at the taxable income:
-
Exempt subcontracting.
- Out of City contracting.
- Environmental Remediation Contracting
- Transaction privilege tax collected is deductible. If you have charged your customer
transaction privilege tax separately, and it is included in gross income, you may deduct it.
- If you have not charged your customer transaction privilege tax, you may "factor"
your transaction privilege tax. This means that the total contract price includes
transaction privilege tax and
you can compute the amount of tax and deduct it. Some formulas for factoring tax
are included below.
- A standard 35% deduction is allowed for all income taxable as contracting.
This is in lieu of an actual labor deduction. This 35% should be computed after
the transaction privilege tax deduction has been deducted.
- No land deduction is allowed.
Factoring Transaction Privilege Tax
The following are formulas for factoring transaction privilege tax on contracting in Mesa.
These formulas are based on a combined state, county and city tax rate of 8.05%.
They also consider that a land deduction is allowable for state and county
purposes but not for Mesa purposes.
Factors to apply to Gross Income (GI) and Land (L):
| 1. |
No sale of land is included in the gross income: |
|
|
|
Total Transaction Privilege Tax = (.04972323 X GI) |
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| 2. |
The gross income includes the sale of land: |
|
|
|
Total Transaction Privilege Tax = (.04972323 X GI) - (.03891383 X L) |
|
| 3. |
The sale involves only the sale of land: |
|
|
|
Total Transaction Privilege Tax = (.01124706 X GI) |
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Exemptions available for items you purchase
There is an exemption from the tax on retail sales for materials which a
contractor purchases for incorporation into a building or improvement. This does
not apply to construction equipment and tools sold or leased to a contractor. It
does not apply to any other tangible personal property which is not incorporated
into the actual improvements being built. It does not apply to materials
purchased directly by an owner-builder.
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