Construction Contracting

Contractor Declaration Certificate

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. 

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 taxable contracting activity include:

  • Construction or demolition of a building
  • Road construction
  • Land excavation and landscaping
  • Installation of permanently attached equipment
  • Sales and installation of floor coverings
  • Home remodeling
  • Repairs to a building
  • Construction for a government agency (including the City of Mesa)
  • Construction for a church or nonprofit organization
  • Examples of items which are not considered construction contracting:

  • Landscape maintenance
  • lawn mowing (exempt)
  • Installation of drapes & miniblinds (retail)
  • The sale of manufactured buildings
  • Plug-in kitchen equipment (retail)



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)
    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)

    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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    Office Locations:
    Licensing Office
    55 N. Center St.
    Mesa, AZ  85201
    Phone: 480-644-2316
    FAX: 480-644-3999

    Tax Audit & Collections
    20 E. Main St, Suite 450
    Mesa, AZ 85201
    Phone: 480-644-3816
    FAX: 480-644-2687


    Office Hours:

    Monday - Thursday
    7:00 a.m. to 6:00 p.m.
    Closed Fridays

    Mailing Address:
    Tax & Licensing Office
    P.O. Box 1466
    Mesa, Arizona 85211-1466

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