Arizona guide for HVAC, plumbing and electrical contractors
Transaction privilege tax and bookkeeping for HVAC, plumbing and electrical contractors in Arizona
In Arizona repair, replacement and alteration of an existing building is not taxed on the job. New construction is taxed as prime contracting, on 65% of gross receipts.
Arizona has no sales tax in the usual sense. It has a transaction privilege tax, a tax on the business for the privilege of doing business, and for contractors it splits every job into two kinds. Maintenance, repair, replacement and alteration of an existing building, which the state calls MRRA, is not taxed on the job price at all. New construction and large alterations are prime contracting, taxed on 65% of the gross receipts. An HVAC changeout on an existing home is the state's own example of MRRA. Here is how the rules work, with the Department of Revenue's wording next to each one.
Checked against Arizona’s own sources on October 18, 2026. By the Books and Trucks team. Not tax advice.
| Labor | Not taxed on MRRA work: maintenance, repair, replacement or alteration of existing property. New construction is prime contracting, taxed on 65% of gross receipts with no separate labor figure. |
|---|---|
| Materials | On MRRA jobs you pay retail TPT on materials when you buy them, or buy exempt on Form 5000 and remit the retail equivalent at the job-site rate. No tax line on the invoice. |
| Filing | Set by estimated annual tax, not sales: under $2,000 annual, $2,000 to $8,000 quarterly, over $8,000 monthly. Due the 20th, with e-filing accepted to the last business day. |
| Rate | 5.6% state prime contracting rate, plus county and city rates on the same return. |
| Licence | Registrar of Contractors: commercial, residential or dual licence per trade, two years at a time. |
| Income tax | Yes, a flat 2.5%. |
MRRA
Repair, replacement and alteration of an existing building is not taxed on the job
MRRA activities are excluded from the prime contracting classification by statute. The gross receipts of an MRRA job are not subject to transaction privilege tax, and labor is not taxable. What is taxed is the materials, at the retail rate, and the Department expects that tax to be treated as an ordinary cost of doing business, not shown to the customer.
Maintenance is the upkeep of property or equipment. The state's own example: topping off fluids in an HVAC system.
Repair is returning existing property to a usable state from partial or total inoperability. The state's example: fixing a leaky bathtub or shower.
Replacement is removing a component or system and installing one with the same, similar or upgraded design or functionality. The state's example: removal and replacement of a roof, flooring, a sprinkler system or HVAC unit.
A whole-system swap is still replacement. The state says an HVAC system includes the heating and cooling unit, air filtration, furnace or boiler and ducting, and a plumbing system includes sink bowls, handles, faucets and pipes. More than one replacement may be included in a contract.
A contractor's invoice for MRRA projects should not include a line item for tax, since neither the labor nor the materials are taxable to the customer. If tax is shown on the invoice, it must be remitted to the Department.
Alteration is a direct physical change, such as adding square footage, below 25% of a home's full cash value or $750,000 on commercial property. Over the threshold at bid time, the job is modification and fully taxable. There is a 25% cushion for overruns at completion.
Mixed contracts: modification work is de minimis, and the job stays MRRA, when it is 15% or less of total receipts.
Change orders follow the original contract's treatment when they relate to its scope of work.
Prime contracting
New construction is taxed on 65% of gross receipts
Modification covers ground-up construction, grading, demolition and other new contracting activity where none existed before. Building a new home is the state's example.
Source: Arizona Department of Revenue, modification contracting
The tax base for the prime contracting classification is 65% of gross proceeds. The 35% is a standard deduction in place of an actual labor figure, taken after the other statutory deductions.
A prime contractor may not deduct what it pays subcontractors. All gross receipts from the project go in the base.
A licensed subcontractor on a modification job reports its receipts under business code 015 and deducts them with code 550, keeping the prime's Form 5005 as proof that the prime is responsible for the tax.
Receipts are sourced to the job site, not the shop. Contractors report each job to the city where the work was done.
Source: Arizona Department of Revenue, modification contracting
Contractors on modification jobs may factor the tax into the price and need not show it as a separate line.
Materials
Pay at the counter, or buy exempt and remit the retail equivalent
Contractors who perform only MRRA work do not need a TPT licence. They pay retail tax when they buy materials.
A licensed contractor may buy materials tax free with Form 5000 and report the retail equivalent under business code 315 on the gross cost of materials, without markup, at the job-site rate, in the period the materials are used.
The Department advises contractors doing both kinds of work to buy everything exempt and remit the retail equivalent on MRRA materials, so returns can be amended easily if an alteration flips to modification.
If an alteration turns into modification, the prime must issue Form 5005 to subs and file the MRRA credit workbook within six months.
No credit is given for sales tax paid to another state on MRRA materials. Buy exempt and remit the Arizona retail equivalent, or buy in Arizona.
Form 5000M is only for unlicensed MRRA contractors buying materials that are exempt by statute, such as for a nonprofit hospital or a solar device. It does not cover ordinary job materials.
Materials used under a warranty on an MRRA job are taxed as MRRA materials. Extended warranties themselves are not taxable.
Rates and filing
State plus county plus city, on one return, with frequency set by your estimated tax
The state prime contracting rate is 5.6%: 5% plus a 0.6% increment that runs from July 1, 2021 to June 30, 2041.
Source: A.R.S. 42-5010.01, additional rate increment to 2041
Phoenix: the city rate for prime contracting (code 015) and MRRA materials (code 315) is 2.8% from July 1, 2025, up from 2.3%. Contracts signed before July 1, 2025 stay at the old rate.
Tucson: the city rate for both codes is 2.6%.
Filing frequency is set by estimated annual combined state, county and city tax: annual under $2,000, quarterly $2,000 to $8,000, monthly over $8,000, seasonal for eight months or less of activity.
Tax is due on the 20th of the month after the period. An electronic return and payment are timely if received by the last business day of the month, but penalties and interest run from the 20th.
A $0 return is required even for a period with no sales or tax due.
Prime contractors and subs on modification jobs must hold a TPT licence and apply by mail on Form JT-1 because a bond may be required. An MRRA-only sub can do one one-off modification job without a licence; the second one needs it.
Licensing
Registrar of Contractors licences, two years at a time
The Registrar of Contractors issues commercial, residential and dual licences for each trade. HVAC: C-39 commercial, R-39 residential, CR-39 dual. Plumbing: C-37, R-37, CR-37. Electrical: C-11, R-11, CR-11.
Source: Arizona Registrar of Contractors, licence classifications
Licences run two years. New dual specialty licence: $100 application, $380 licence and $370 recovery fund, $850 in all. Renewal: $380 plus $270 recovery fund, $650. Commercial-only licences pay no recovery fund assessment.
Source: Arizona Registrar of Contractors, licence and renewal fees
Exams: $61 statutes and rules exam plus a $66 trade exam. Electrical applicants may take the NASCLA electrical exam for $116 instead.
Source: Arizona Registrar of Contractors, licence and renewal fees
The handyman exemption covers work where the whole contract price, labor and materials included, is under $1,000, but never when a building permit is required, and the work must not be split to stay under the cap.
Source: A.R.S. 32-1121, who does not need a contractor licence
Contractors must be properly licensed before submitting bids. The R-39 residential licence allows adding a circuit to an existing panel but not installing a new service panel or sub-panel.
Source: Arizona Registrar of Contractors, licence classifications
Business licences are a city matter, not a state one. Tucson charges $20 a year and Phoenix $50.
Payroll and business taxes
A 2.5% flat income tax and the cheapest unemployment insurance in the pilot
Arizona individual income tax is a flat 2.5% for 2023 and every year after. The optional small business income tax return is also 2.5%.
Source: Arizona Senate fact sheet, SB 1260 (2023), 2.5% flat tax
New employees file Form A-4 within five days. If they do not, withhold at 2% until they choose a rate. The options run from 0.5% to 3.5% of gross taxable wages.
Unemployment insurance: new employers pay 2% for at least two calendar years. The 2026 taxable wage limit is $8,000, so the most a new employer pays per worker is $160 a year.
Earned paid sick time: employees accrue at least one hour per 30 hours worked. With 15 or more employees the yearly cap is 40 hours; with fewer than 15 it is 24 hours.
Register for withholding and unemployment together on the JT-1 application at AZTaxes.gov.
Season and market
A cooling season most states never see
Phoenix and Tucson run a cooling season on a different scale. The normal July high in Phoenix is above 106 degrees, and 100-degree days stretch from late spring into October. The monsoon, officially June 15 to September 30, adds humidity, dust storms and lightning, so HVAC breakdowns, water heater and slab leak calls and storm-related electrical work all peak between June and September. December to February is the quiet stretch, which is when cash planning, licence renewals and tax clean-up should happen.
Phoenix's 1991 to 2020 normal average high in July is 106.5 degrees.
Source: National Weather Service Phoenix, July climate summary
Monsoon season runs June 15 to September 30 and brings 30% to 60% of the year's rainfall, with flash floods, lightning, microbursts, dust storms and heat waves.
In 2024 Arizona had 2,936 plumbing, heating and air conditioning contractor establishments with 37,389 employees at average pay of $80,892, and 2,224 electrical contractor establishments with 33,760 employees.
Source: BLS Quarterly Census of Employment and Wages, Arizona 2024
What goes wrong
The Arizona mistakes we fix most often
- 1A sales tax line on an MRRA invoiceThe customer is not taxed on a repair or replacement job, so any tax shown on the invoice has to be sent to the state on top of the tax you paid on materials. We make sure MRRA invoice templates have no tax line and the materials tax sits in job cost.
- 2Buying exempt and never remittingMaterials bought tax free on Form 5000 for a replacement job still owe the retail equivalent under code 315, at the job-site rate, in the month they are used. We track exempt purchases by job so the code 315 figure is on every return.
- 3Reporting to the shop's city instead of the job'sReceipts and retail equivalent are sourced to where the work was done. A Phoenix shop doing a Tucson job reports to Tucson at Tucson's rate. We record the job-site city on every invoice.
In QuickBooks Online
Set up tax the way Arizona expects
In Arizona most trade shop work is MRRA, so the customer invoice carries no tax and the materials tax lives in the job cost. If you buy exempt on Form 5000, the retail equivalent has to be tracked by job and remitted under code 315 at the job-site rate. The job-site city goes on every invoice, because that is where the state expects the receipts reported.
Sales tax filing is part of our monthly bookkeeping for trade shops on QuickBooks Online, from $599 a month: see HVAC bookkeeping, plumbing bookkeeping and electrical contractor bookkeeping.
Booked calls: weekdays, 9am to 5pm Eastern. By phone, or 30 minutes on Teams.
Books behind or tax set up wrong? New clients start with a free QuickBooks cleanup.
Questions
Arizona owners ask
Do HVAC contractors charge sales tax in Arizona?
Not on repair or replacement jobs. Replacing a unit on an existing home is MRRA, so there is no tax on the job price and no tax line on the invoice. You pay retail transaction privilege tax on the equipment and materials and treat it as a cost.
Source: ADOR, MRRA contracting
Is labor taxable in Arizona for plumbing?
No for maintenance, repair, replacement and alteration work on existing property; the Department says labor is not taxable. On new construction the whole contract is taxed under prime contracting on 65% of gross receipts, with no separate labor figure.
Source: ADOR, contracting FAQs
Do I need a TPT licence as an electrician in Arizona?
Not if you only do MRRA work and pay tax when you buy materials. Yes if you do new construction as a prime or sub, or if you want to buy materials tax free and remit the retail equivalent yourself. Modification contractors apply on Form JT-1 by mail because a bond may be required.
Source: ADOR, contracting FAQs
What is the 35% deduction for contractors in Arizona?
It is the standard labor deduction under prime contracting. Tax is computed on 65% of gross receipts after other statutory deductions such as subcontractor and MRRA amounts. It does not apply to MRRA jobs, which are not taxed on receipts at all.
Source: ADOR, modification contracting
How often do I file TPT in Arizona?
It depends on estimated annual combined tax, not sales: under $2,000 annual, $2,000 to $8,000 quarterly, over $8,000 monthly. Returns are due the 20th with a grace period to the last business day of the month for e-filers, and a $0 return is still required.
Source: ADOR, TPT filing frequency
Can you set this up in our QuickBooks?
Yes. Tax filing is part of our monthly bookkeeping for trade shops on QuickBooks Online. For Arizona that means MRRA invoices with no tax line, materials tax in job cost or the code 315 retail equivalent tracked by job, the job-site city on every invoice, and the TPT return filed on one form for state, county and city.
Sources
Every rule above was read in these Arizona documents. Open the source before you change how you bill.
- Arizona Department of Revenue, MRRA contracting
- Arizona Department of Revenue, modification contracting
- Arizona Department of Revenue, contracting FAQs
- Arizona Department of Revenue, TPT filing frequency
- Arizona Department of Revenue, TPT due dates
- Arizona Department of Revenue, Phoenix city profile
- Arizona Department of Revenue, Tucson city profile
- Arizona Department of Revenue, withholding tax
- A.R.S. 42-5075, prime contracting classification
- A.R.S. 42-5010, tax rates
- A.R.S. 42-5010.01, additional rate increment to 2041
- A.R.S. 32-1121, who does not need a contractor licence
- A.R.S. 23-372, earned paid sick time
- Arizona Senate fact sheet, SB 1260 (2023), 2.5% flat tax
- Arizona Registrar of Contractors, licence classifications
- Arizona Registrar of Contractors, licence and renewal fees
- Arizona Department of Economic Security, calculating unemployment taxes
- Arizona DES, 2026 unemployment tax rate chart
- National Weather Service Phoenix, July climate summary
- National Weather Service Phoenix, monsoon outlook
- BLS Quarterly Census of Employment and Wages, Arizona 2024
Other states
The short answer for every state is in contractor sales tax by state. Full guides so far: