Tax guide · Arizona · Rules checked October 2026

Is Labor Taxable in Arizona? Sales Tax on Contractor Labor

Do Arizona contractors charge sales tax on labor? It depends on whether the job is a repair or a build. Arizona has no sales tax in the usual sense. It has a transaction privilege tax (TPT), a tax on the business for the privilege of doing business, and it sorts contracting into two kinds. Maintenance, repair, replacement and small alterations of existing property (MRRA) carry no tax on the job at all: you pay tax on the materials and the invoice has no tax line. New construction and larger projects (modification) are taxed under prime contracting on 65% of the whole contract price, labor included, and you may pass that tax to the customer. Every rule below links to the Arizona statute or Department of Revenue page it came from.

Rules checked as of October 2026 ยท Arizona. Plain-English summary of the published transaction privilege tax rules for contractors and service businesses in Arizona, checked against the official pages linked in the guide. Rates from the Arizona Department of Revenue table effective October 1, 2026. Not tax advice. Sources: A.R.S. 42-5075, Prime Contracting Classification, ADOR: MRRA Contracting, ADOR: Modification Contracting, ADOR: Contracting FAQs, ADOR: Contracting Examples, A.R.S. 42-5061, Retail Classification, ADOR Ruling TPR 93-31, Services Rendered in Addition to Selling at Retail, ADOR: Transaction Privilege Tax Rate Tables.

Read this first. This is a plain-English summary of the Arizona rules for contractors and service businesses, not tax advice. Arizona asks two questions about a job: is it work on existing property under the size limits, and is anything being sold as goods. The answers decide whether the job is taxed at all, and on what base. Read the linked law and the Department of Revenue guidance, and check with the Department or your accountant before you change how you bill.

Repairs and replacements carry no tax line. New construction is taxed on 65% of the price.

The prime contracting statute taxes "sixty-five percent of the gross proceeds of sales or gross income derived from the business." The other 35% comes off as a flat deduction, so labor and materials are both inside the taxed share. Since 2015 the statute has carved repair work out of that tax: a contract with an owner for maintenance, repair, replacement or alteration "is not subject to tax under this section if the contract does not include modification activities."

So Arizona trade work sorts into three kinds of job:

  • MRRA contract. A water heater swap, a roof replacement, a furnace repair, a leaky shower, a new HVAC unit, a kitchen remodel under the size limit. You pay tax on the materials, and the customer pays no TPT on the labor or anything else.
  • Modification contract. A new house, a new building, grading a lot, demolition, or an alteration over the size limit. The prime contractor owes TPT on 65% of the gross receipts, labor and materials together, at the job site's rate.
  • Sale or repair of movable property. Appliances, mowers, vehicles, equipment. This is retail: the parts are taxed, and separately stated repair or installation labor is not.

Services on their own are generally untaxed. TPT applies to listed business classifications (retail, prime contracting, rentals, restaurants and so on), and house cleaning, lawn mowing and similar work are not on that list.

Source: A.R.S. 42-5075(B) and (P), ADOR Contracting FAQs and ADOR: MRRA Contracting.

What gets taxed, at a glance

The job Is the labor taxable? Who pays tax on materials On the invoice
Repairing or replacing plumbing, wiring, a water heater, a roof or an HVAC unitNoYou, when you buy themNo tax line
Remodel of a home under 25% of its full cash value, or a commercial job up to $750,000NoYou, when you buy themNo tax line
New house, new building, grading, demolition, or a remodel over those limitsYes, on 65% of the whole priceBought exempt by a licensed contractor; the tax is in the 65%Tax may be shown or built into the price
Subcontract work under a prime contractor on a modification jobNo, the prime owes itBought exempt (Form 5000, or the prime's Form 5009L if you are unlicensed)No tax line
Repairing an appliance, mower, generator or vehicleNo, if separately statedCustomer, through your billTax the parts. Labor on its own line
Mowing, edging, weeding, pruning, leaf cleanupNoYou, on supplies you use upNo tax line
New lawn, gravel, trees and irrigation for a new homeYes, as part of a modification jobAs for any modification jobTax may be shown or built in
House cleaning, janitorial, window washingNoYou, on supplies you use upNo tax line

MRRA jobs: tax on the materials, none on the bill

The Department's MRRA page defines the four words. Maintenance is "the upkeep of property or equipment." Repair is "returning existing property to a usable state." Replacement is removing existing property from service and putting in something of the same, a similar or an upgraded design, whatever the contract amount. Its examples: topping off fluids in an HVAC system, refinishing hardwood floors, fixing a leaky bathtub, replacing hail-damaged roof tiles, and "removal and replacement of a roof, flooring, a sprinkler system or HVAC unit." Alteration is a direct physical change to existing property, such as adding square footage, below the size limits in the next section.

On an MRRA job the materials still carry retail TPT, and the Department treats that tax as your cost of doing business. There are two ways to pay it:

  • At the counter. "Contractors who perform only MRRA work need not have a TPT license." You pay the tax when you buy the materials, and you file no return.
  • Licensed and buying exempt. A licensed contractor may buy materials tax free with Form 5000, then report the cost of the materials (without your markup) under business code 315, "MRRA Amount," at the rate of the job site.

Either way, the customer's invoice carries no tax. The FAQ is direct: "the contractor should not include tax as a separate line item on the invoice to the customer for MRRA projects," and the MRRA page warns that "if tax is included as a line item on the invoice, it must be remitted to the Department." A $2,400 water heater replacement in Mesa is billed at $2,400.

Source: ADOR: MRRA Contracting, ADOR Contracting FAQs (MRRA, Licensing, Exemption Certificates) and A.R.S. 42-5075(S).

When a remodel becomes taxable: the alteration limits

An alteration stays out of the tax only while it is under a limit set when the contract is bid or signed:

  • Homes (residential class two, three and four property): the contract may not be "more than twenty-five percent of the most recent full cash value" of the property, the county assessor's value.
  • Everything else: the contract amount may not be "more than $750,000."

Over the limit, the job is modification and the whole contract is taxed under prime contracting. Three details matter in practice. A project that starts under the limit and grows stays an alteration if it ends no more than 25% over it. Change orders that relate to the original scope count toward the contract amount. And "project elements may not be artificially separated" to stay under the limit.

Take a Mesa house with a full cash value of $340,000. Its limit is $85,000. A $95,000 addition bid at the start is over it, so it is modification: the tax is 8.3% on 65% of $95,000, or $5,125.25. A $70,000 kitchen remodel on the same house is an alteration and has no tax line.

Source: A.R.S. 42-5075(S)(1), definition of alteration and ADOR: MRRA Contracting.

Modification jobs: prime contracting on 65% of the contract

Modification covers "construction, grading and leveling ground, wreckage or demolition" that is not MRRA. The Department's examples are building a new home or structure, laying a new pipe network, and grading a lot or removing stumps before new construction. A prime contractor on this work must hold a TPT license (applied for on Form JT-1, because a bond may be required) and reports under business code 015.

  • The base. Gross receipts less statutory deductions (land, architect and design fees in a written contract, development fees), then 35% off. Labor is inside the base.
  • Materials. A licensed contractor buys materials that go into the project tax free with Form 5000. The tax on them is part of the 65%.
  • Showing the tax. "A licensed contractor may, but need not, show tax as a separate line item on their invoice." Contractors are allowed to build it into the price instead, which the Department calls factoring.
  • Where. Receipts "are to be sourced to the location the project takes place," at the job site's state, county and city rates. Cities tax the same 65% base.

A $400,000 custom home in Phoenix, at the combined 9.1% contracting rate, carries tax of $400,000 x 65% x 9.1% = $23,660, about 5.9% of the price. Shown on its own line, the customer pays $423,660.

Subcontractors. A subcontractor is not taxed on a modification job that was "within the control of a prime contractor" who is liable for the tax. The prime gives each sub a Form 5005 for the project, and a licensed sub reports its income and deducts it under code 550. A sub never charges the prime TPT.

Jobs with both kinds of work. Each contract is judged on its own. Modification work is "de minimis" if it is 15% or less of the contract's receipts, and then the whole contract stays MRRA. Over that, the Department's guidance treats the contract as taxable, and it publishes a worksheet for weighing mixed contracts and change orders.

Source: A.R.S. 42-5075(B), (D), (P) and (S), ADOR: Modification Contracting, ADOR Contracting FAQs (Prime Contracting, Mixed Contracts, Forms) and ADOR: Contracting Examples.

Repairs to appliances, equipment and vehicles

Work on movable property falls under the retail classification, not contracting. The statute exempts "services rendered in addition to selling tangible personal property at retail," and the Department's ruling TPR 93-31 names repair labor, installation labor, and instruction and training. The catch is the invoice: the labor must be "shown separately on the sales invoice and records," and if it is not, "the total amount of the charge is subject to the transaction privilege tax."

A refrigerator repair in Tucson at the 8.7% combined rate, with a $90 part and $140 of labor on separate lines, carries $7.83 of tax. The same job written as one $230 charge carries $20.01.

The same split works for installing goods on other movable property: seat covers, a stereo, window tint, an awning on a motor home. Installing into a building is different. The Department's FAQ says a retailer that sells and installs flooring is a contractor, so contracting rules decide the tax.

Source: A.R.S. 42-5061(A)(2), ADOR Ruling TPR 93-31 and ADOR Contracting FAQs (Sale and Installation).

Landscaping, lawn care and cleaning

Lawn maintenance is not taxed "if the contract does not include landscaping activities." The statute lists what counts as maintenance: mowing and edging, weeding, repairing sprinkler or drip heads, seasonal flower changes, refreshing gravel, dethatching, seeding winter lawns, leaf and debris removal, pruning trees and shrubs, and applying pesticide and fertilizer. You pay tax on the supplies and charge the customer none.

Landscaping is contracting. Installing lawns, grading or leveling ground, installing gravel or boulders, planting trees, felling trees, stump removal, building irrigation berms and installing underground sprinkler systems are taxable under prime contracting, but the MRRA rule still applies to them. New landscaping for a new home is modification. Replacing a sprinkler system in an existing yard is a replacement, which the Department lists as MRRA. Write the scope down so the job's class is clear.

Cleaning. House cleaning, janitorial work and window washing are services, not one of the TPT classifications. A cleaning company pays tax on its supplies when it buys them and adds no tax to the bill.

Source: A.R.S. 42-5075(J), (K) and (P), ADOR: MRRA Contracting and A.R.S. 42-5061(A)(1).

Warranties

The Department's FAQ settles three cases. An automatic warranty on a modification job is part of that job's taxable receipts, and materials for warranty work on it may be bought exempt. An automatic warranty on an MRRA job is part of the MRRA job, so it is not taxed, but the materials you use on a callback are taxed when you buy them. An optional extended or third-party warranty is not taxable under A.R.S. 42-5061(A)(3).

Source: ADOR Contracting FAQs (Warranties) and A.R.S. 42-5061(A)(3).

Which rate applies

The state rate is 5.6%. Each county adds its own, and 91 cities and towns add theirs, all collected by the Department of Revenue. Its rate table effective October 1, 2026 gives these combined contracting rates (business code 015):

  • Phoenix 9.1% (Maricopa County 6.3% plus 2.8% city)
  • Tucson 8.7% (Pima County 6.1% plus 2.6%)
  • Mesa 8.3%, Tempe 8.1%, Scottsdale 8.0% and Chandler 7.8%
  • Flagstaff 9.386% (Coconino County 6.9% plus 2.486%)
  • Unincorporated Maricopa County 6.3%

Some cities charge contractors more than shops. The city contracting rate is its own line in the table, and in places it is higher than the retail rate. Surprise is 3.7% for contracting and 2.8% for retail. Cave Creek is 5.0% and 3.0%. Queen Creek is 4.25% and 2.25%. Look up the contracting line for the job's city, not the retail one.

Use the job site for contracting. Prime contracting receipts and the code 315 MRRA amount both go to the place the work is done. A retail sale or repair from an Arizona shop generally takes the rate where the business takes the order. Rates change during the year, so check the Department's current table or its rate look-up tool when you set up a job.

Source: ADOR: Transaction Privilege Tax Rate Tables (table effective October 1, 2026), ADOR: Modification Contracting and A.R.S. 42-5040.

What this means for how you write the invoice

  • No tax line on MRRA work. A $14,500 bathroom remodel in Chandler carries no TPT. The tax you paid on the tile, fixtures and lumber belongs inside your material prices, so price it in with the markup. A tax line you add has to be sent to the state.
  • Check the limit before you bid a big remodel. Look up the home's full cash value on the county assessor's site and compare the contract to 25% of it. Over $750,000 on a commercial job, the same.
  • On modification work, decide how to show the tax. Either put it on its own line at 65% of the price times the job-site rate, or build it into the price. Say which on the proposal so nobody is surprised.
  • On repairs to equipment and vehicles, put labor on its own line. A lump-sum price taxes the labor.
  • Describe the work exactly. "Replaced existing HVAC unit" is MRRA. "Installed ductwork and system in new addition" may not be. The description is your evidence.
  • Keep the forms with the job. Form 5005 from the prime if you sub, Form 5000 copies if you buy exempt.

In Numulo every line has a Tax box. On a modification job, a line for the TPT at the job site's rate on 65% of the price shows the customer exactly what it is. On an equipment repair, set the rate and untick the labor lines, and the tax line shows its base, such as "Tax (8.7% on $90.00)" on the refrigerator above.

Write the Arizona invoice the way the state taxes it

The free Numulo editor puts parts, labor and materials on separate lines, marks each line taxable or not, and prints the base the tax was worked out on. Fill it in and download a clean PDF, no account needed.

Open the free invoice generator → or start from the plumber, HVAC or landscaping template, or the contractor invoice template for remodels and new construction.

Frequently Asked Questions

Do Arizona contractors charge sales tax on labor?

Not on maintenance, repair, replacement or small alterations of existing property (MRRA). The contractor pays transaction privilege tax on the materials and the customer's invoice carries no tax line. New construction, grading, demolition and alterations over the limits are modification, taxed under prime contracting on 65% of the whole contract price, labor included. The contractor owes that tax and may show it on the invoice or build it into the price.

What is MRRA in Arizona?

MRRA stands for maintenance, repair, replacement and alteration. Since 2015 a contract with an owner for MRRA work is not taxed under the prime contracting classification, as long as it includes no more than a de minimis amount of modification. Alteration only counts while the contract is no more than 25% of a home's full cash value, or $750,000 for other property. The contractor pays tax on the materials, at purchase or through business code 315.

How is prime contracting tax calculated in Arizona?

The tax base is 65% of the gross receipts from the job, after statutory deductions such as land and separately contracted design fees. That base is taxed at the state, county and city contracting rates of the job site. A $400,000 new home in Phoenix at the 9.1% combined contracting rate carries $23,660 of tax, about 5.9% of the price. Subcontractors working under the prime contractor's Form 5005 owe no tax on the job.

Is lawn care or house cleaning taxable in Arizona?

No. Lawn maintenance such as mowing, edging, weeding, pruning and leaf cleanup is not taxed if the contract includes no landscaping, and house cleaning is not a taxable classification. The business pays tax on the supplies it uses. Landscaping, such as installing a lawn, gravel, trees or an underground sprinkler system, is contracting: taxed when it is part of new construction or other modification work, and untaxed as MRRA when it replaces something in an existing yard.

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