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Scottsdale Privilege Tax

You are in the construction business in the City of Scottsdale. A contractor is considered to be in business in Scottsdale when the construction job is in Scottsdale. Contractors report the income from each job to the Arizona city in which the job is located, not to the city where the contractor is based.

 

TAX RATE ON CONSTRUCTION CONTRACTING

 

 

The Scottsdale tax rate is 1.65% 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. Remediation Contracting is not subject to the tax.

Examples of taxable contracting activity include:

 

 
  • Construction or demolition of a building
  • Road construction
  • Land excavation and landscaping
  • Installation of permanently attached equipment or fixtures to real property
  • Sales and installation of floor covering
  • Home remodeling
  • Repairs to a building
  • Construction for a government agency (including work for the City of Scottsdale)
  • Construction for a church or nonprofit organization

Examples of items that are not considered construction contracting:

 

     

     
  • Remediation Contracting
  • Landscape maintenance, lawn mowing (exempt service)
  • Installation of drapes and miniblinds (retail)
  • Plug-in kitchen equipment (retail)
  • Tangible personal property included in a construction contract that would otherwise be exempt if purchased by the specified entity. ie: non-profit qualified healthcare providers


     

    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 License number of the construction contractor or speculative builder stating that they are liable for the tax. The City has Exemption Certificates available that you may use to document these exemptions. (A sample is provided in the back of this pamphlet.)

    Contractors who work for a property owner, not another contractor or speculative builder, will be considered to be the contractor for the job and responsible for the related tax.



     

    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. However, the owner may be liable for some additional tax if the property is offered for sale or sold prior to occupying the home for at least six (6) months.

    Many Owner-Builders become Speculative Builders and are subject to tax based on the sales price of the real property. A Speculative Builder is defined as:

    An "Owner-Builder" who sells or contracts to sell, at any time, improved real property consisting of:

    1. custom, model, or inventory homes regardless of the stage of completion of such homes; or
    2. improved residential or commercial lots without a structure, or

    An Owner-Builder who sells or contracts to sell improved real property, other than real property specified in (A) and (B) above:

    1. prior to completion or
    2. before expiration of twenty-four (24) months after the improvements of the real property sold are substantially complete.

    An "owner-builder" who is building a commercial structure 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 on the 25th month following completion and would be based on the cost of construction.

    The City has an Owner-Builder Declaration which should be completed at the time a building permit is issued. This declaration clarifies the owner’s intent with respect to Privilege Tax. See sample form in the back of this pamphlet.


    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 real property such as subdivision lots are taxable as Speculative Builder Sales.

    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 or transfer of title, whichever occurs first.

    The City does not acknowledge artificially contrived transactions or sales which do not reflect the fair market value of the property transferred. Sales to a "Marketing Arm" would be taxed at the final sales price to the actual consumer or the fair market value of the property transferred; whichever is higher.

     

    EXEMPTIONS AVAILABLE FOR ITEMS YOU PURCHASE

    There is an exemption from the tax on retail sales for materials which a contractor or speculative builder purchases for incorporation into a building or improvement. This exemption does not apply to:

    • Furniture, construction equipment or tools sold or leased to a contractor or speculative builder.
    • Any other tangible personal property which is not incorporated into the actual improvements.
    • Materials purchased directly by an owner-builder.

    DEDUCTIONS

     

    The following are typical deductions subtracted from gross income to arrive at the taxable income:

     

    • Privilege Tax collected

    Exempt subcontracting

    35 percent standard deduction

    Out-of-City contracting

    • Installation, assembly, repair or maintenance of income-producing capital equipment
    • Installation, assembly, repair or maintenance of clean rooms

    If you have charged your customer Privilege Tax separately, and it is included in gross income, you may deduct it.

    If you have not separately charged your customer Privilege Tax, you may "factor" your Privilege Tax. This means that the total contract price includes Privilege Tax and you can compute the amount of tax and deduct it. Formulas for factoring tax are included in the back of this pamphlet. These factors change based on any changes to the combined state, county and city tax rate. Make sure you use the factor that corresponds to the tax rate in effect for your transaction. Computer spreadsheet templates are also available through our office.

    A standard 35% deduction is allowed for all income taxable as contracting. The 35% standard deduction should be computed after the Privilege Tax deduction has been deducted.

    Note: The City of Scottsdale does not allow a land deduction.

    What is Remediation Contracting?

     

     

    The following activities are considered remediation contracting and are exempt:

    (1) Excavation, transportation, treatment, and/or disposal of contaminated soil for purposes of site remediation (rather than characterization);

    (2) Installation of groundwater extraction and/or injection wells for purposes of groundwater remediation;

    (3) Installation of pumps and piping into groundwater extraction wells for remediation purposes;

    (4) Installation of vapor extraction wells for the purpose of soil or groundwater remediation;

    (5) Construction of remediation systems, such as groundwater treatment plants, vapor extraction systems, or air injection systems;

    (6) Connection of remediation systems to utilities;

    (7) Abandonment of groundwater or vapor extraction wells;

    (8) Removal/demolition of remediation systems;

    (9) Capping/closure construction activities; and service or handling charges for subcontracted remediation contracting activities.

    PRIVILEGE TAX CAN APPLY TO CERTAIN FORECLOSED PROPERTY

     The City of Scottsdale follows the model cities tax code, which was adopted in 1987. One of the provisions of this code is a section that applies to recently improved foreclosed property such as a new commercial or residential structure. The code section 595(c) reads as follows:

    • Any person who purchases, or who acquires by foreclosure, by sale under trust deed or warranty deed in lieu of foreclosure, or by any other method, improved real property or a portion of improved real property for which the Privilege Tax imposed by this Chapter has not been paid shall be responsible for payment of such tax as a speculative builder or owner builder, as provided in Sections 416 and 417.

     

     

    Section 416 and 417 relate to the tax imposed on the sale of recently improved real property. Examples would be speculative homes, model homes and commercial buildings where the original owner would have been responsible for the tax imposed under these sections but avoids the tax due to the foreclosure transaction. In this circumstance the party acquiring the foreclosed property would be responsible for the tax if any is due. The tax is triggered upon acquisition, based on the bid price, and is payable at the time the property is subsequently sold.

    Only a very small percentage of foreclosure transactions are impacted by this particular tax since it only applies to newly constructed properties in which no tax was paid.


     

     

    City of Scottsdale

    Development Services Division 480-312-2500

    Tax Audit Division 480-312-2768

     

     

    7447 East Indian School Road

    Scottsdale, Arizona 85251

    Building Permit # ___________________ Date __________________________

    Owner-Builder Declaration

     

     

    Owner's Name _________________________________________________________

    Owner' Address _______________________________________________________

    Owner's Phone _________________________________________________________

    Job Address __________________________________________________________

    Subdivision _________________________________________________________

    Book/Map/Parcel __________--__________--__________

    Lot Number __________

    Commercial ______ or Residential ______

    Scottsdale Privilege Tax Number _______________________

    The following is provided so that I, acting in the capacity of an Owner-Builder may attest my having made an application to construct a structure at the above named address. I also make the following declaration at this time regarding my intention as an Owner-Builder as it relates to the City of Scottsdale Privilege Tax.

    I am an Owner-Builder who declares the following: I am improving the above named property for sale; and I will assume liability for tax on such construction activity; and I have a valid Scottsdale Privilege Tax license number. I will provide each contractor with a copy of this declaration

    .

    I am an Owner-Builder who declares the following: At this time, I do not intend on selling the improved real property described above. I understand that each Construction Contractor who works on the improvements related to the property above will be liable for Privilege Tax. I will provide a list (Form C-2) to the City showing all Construction Contractors, the amounts paid to each contractor, the address of each contractor and the City of Scottsdale Privilege Tax number for each contractor. I understand that such a listing is required prior to the completion of the project and that final inspections may be delayed if the requested information is not provided. I understand that the sale of the improved property may result in additional tax which will become my responsibility. Any taxes assessed against me may be offset with a credit for any tax amounts previously reported to the City by the listed construction contractors.



    Applicant Signature: _______________________________ Date: ________________

    Print Name:_____________________________________________

    FORM C-2

    City of Scottsdale

     

     

    Development Services Division 480-312-2500

    Tax Audit Division 480-312-2400

    One Civic Center

    7447 E. Indian School Road

    Scottsdale, AZ 85251

    Building Permit #
    Owner’s Name
    Owner’s Address
    Phone
    Job Address
    Book/Map/Parcel
    Lot Number
    Legal Description

    Owner/Builder’s

    List of Contractors

     

    Contractor

     

    Name

     

    Address

    Total Paid

    Scottsdale Privilege Tax Number

    State Contractor License No.

    General Contractor
    Structural (B-2)
    Electrical (C-11)
    Plumbing (C-37)
    Mechanical (C-39)
    Grading Excavation
    Cement/Concrete
    Sewer Drains
    Framing
    Roofing
    Sheet Metal
    Fireplace
    Insulation
    Lathing
    Plastering
    Glass
    Painting
    Cabinets
    Linoleum
    Flooring Wood
    Carpeting/Tile
    Doors/Garage
    Masonry Blk Walls
    Interior Decor
    Sprinklers
    Landscaping
    Paving

    This form must be completed and submitted five days prior to final inspection

    City of Scottsdale

    Subcontractor Written Declaration

     

     

     

     

    To comply with Section 415(c) of the Scottsdale Revised Code this declaration is used to substantiate any agreement between contractors and other contractors or owner-builders as it relates to Privilege Tax. The intent of this form is to relieve the subcontractor of tax liability if another contractor or owner-builder is claiming responsibility for tax.


     

    ________________ I am a Construction Contractor who is liable for all tax on the project described below. I have included my City of Scottsdale Privilege Tax number in the space provided below. The subcontractor listed below should not be held liable for tax on this project related to work performed under my direction.


     

    ________________ I am an Owner-Builder who is improving the property described below for sale; and I am assuming liability for the tax for such construction contracting activity; and I have provided my City of Scottsdale Privilege Tax number in the space provided below. The subcontractor listed below should not be held liable for tax related to work performed on this project.


     

    Property Address:_______________________________________________________

    Subdivision:____________________________________________________________

    Lot Number(s):__________________________________________________________

    Legal Description: _____________-________-_____________


     

    Subcontractor Name:____________________________________________________

     

    Scottsdale Privilege License Number: __________________________

    Contractor or Owner-Builder Name:_______________________________________

    Scottsdale Privilege License Number: __________________________


     

    I certify that the above information is correct and that I understand that making a false or fraudulent claim to obtain a sales tax deduction is a Class One Misdemeanor under Scottsdale Revised Code Section 580.

    Signature of Contractor or Owner- Builder:_________________________________

    Title: _______________________________________ Date:____________________

     

    City of Scottsdale

    Speculative Builder Resale Certificate

     

     

     

     

    In order to comply with the requirements of Section 416(b)(4) of the Scottsdale Revised Code which provides an exclusion for the sale of partially improved residential* real property from one speculative builder to another speculative builder; the seller should have the purchaser complete the following information:


     

    Property Address: ________________________________________________

    Subdivision: _____________________________________________________

    Lot Number(s): ___________________________________________________

    Legal Description: __________-________-___________


     

    I am a speculative builder who is purchasing the partially improved real property described above and hereby assume liability for and will pay all taxes that would otherwise be due the City at the time of this sale. I further declare that I am licensed with the City of Scottsdale to conduct business as a speculative builder and have included my account number below.


     

    Purchaser's Business Name: _______________________________________

    Purchaser's Address: _____________________________________________

    Purchaser's City of Scottsdale Privilege Tax Number: __________________


     

    Seller's Business Name: ___________________________________________

    Seller's City of Scottsdale Privilege Tax Number: _____________________


     

    I certify that the above information is correct and that I understand that making a false or fraudulent claim to obtain a tax exemption is a Class One Misdemeanor under Scottsdale Revised Code Section 580.

     

    Purchaser______________________________________________________________

    Title ____________________________________ Date _____________________


     

    The seller should retain this copy and submit a copy of this declaration with the tax return where he claims the exclusion.

     

    * The speculative builder resale provisions apply only to residential real property. If the transaction involves commercial property this provision does not apply.


     

    FACTORING PRIVILEGE TAX FOR CONTRACTING ACTIVITY WITH LAND INVOLVED

     

    The following formulas can be used for factoring Privilege Tax on contracting and speculative building activity for jobs in Scottsdale. These factors are derived from the combined state, county and city tax rate of 7.1%. Two factors are required, one for state and county which allow a land deduction; and the other for Scottsdale which does not allow a land deduction.

    To determine the combined tax due for all jurisdictions:

      1. Multiply the gross receipts by the rate .04411413
      2. Multiply the land value by the rate .03541557
      3. Subtract the result of step 2 from step 1.

    The result obtained from step 3 represents the combined tax due for the city, county and state, and provides the deduction for factored Privilege Tax (Deduction Code E). The following steps are needed to properly complete the tax return.

      1. Subtract the amount derived from step 3 from the gross receipts.
      2. Multiply the result in step 4 by .35. The result is the 35% standard deduction for the City. (Deduction Code N)
      3. To compute taxable income, subtract the amounts derived from step 3 and step 5 from the gross receipts.
      4. Multiply the result of step 6 by .014 to determine the amount of Scottsdale City tax due.

    Note: For improved lot sales replace steps 1 through 3 with "Multiply the gross receipts by the rate .00901794." This will provide the amount of City tax due. Since improved lot sales are only taxed by the City, the state and county taxes do not factor into the calculations.

    If you use a personal computer and have access to a spreadsheet program you may obtain templates from our office which greatly simplify the factoring process.

     





     

    Example:

    Gross Selling Price (Gross Receipts) 100,000

    Land Value 30,500

     

     

    Step 1 100,000 x .04411413 = 4,411.41

    Step 2 30,500 x .03541557 = 1,080.17


     

    Step 3 4,411.41 - 1,080.17 = 3,331.24

    (Deduction Code E)

    Step 4 100,000 - 3,331.24 = 96,668.76

    Step 5 96,668.76 x .35 = 33,834.07

    (Deduction Code N) 35%

    Step 6 100,000 - 3,331.24 - 33,834.07 = 62,834.69

    Step 7 62,844.69 x .014 = 879.69

    On your Tax Returns:

     

     

    City State

    Gross Receipts 100,000.00 100,000.00

    Deductions:

    Land N/A 30,500.00

    City/State Tax (E) 3,331.24 3,331.24

    35% Standard (N) 33,834.07 23,159.07*

    Total Deductions 37,165.31 56,990.31

    Net Taxable 62,834.69 43,009.69

    (Gross - Deductions)

    Tax Rate .014 .057

    Tax 879.69 + 2,451.55 = 3,331.24

    (Net Taxable x Tax Rate) Total Tax


     

    * When calculating the State tax, the 35% standard deduction is computed after subtracting the land value and the factored tax 100,000-30,500-3,331.24 = 66,168.76 x.35 = 23,159.07

     



    City of Scottsdale

    Contracting Model

    Computation of Tax Due

    No Land Involved

    GROSS RECEIPTS (GR)

    $100,000.00

    0.03106629 - state
    MULTIPLY GROSS BY FACTOR

    0.04411413

    0.00434928 - county
    0.00869856 - city
    TOTAL TAX (GR X FACTOR)

    4,411.41

    NET RECEIPTS (GR - TAX)

    95,588.59

    PROOF:
    NET RECEIPTS (NR)

    95,588.59

    0.35

    Total Deductions

    STANDARD 35% DEDUCTION (NR x 35 %)

    33,456.01

    $37,867.42

    TAXABLE INCOME (NR - 35 %)

    62,132.58

    CITY TAX @ 1.4%

    869.85

    STATE TAX @ 5.7%

    3,541.56

    TOTAL TAX

    4,411.41



     

     

    CITY OF SCOTTSDALE

     

     

     

    Customer Service Division

     

    Office Location and Mailing Address

    7447 E. Indian School Road, Suite 110

    Scottsdale, Arizona 85251

    CUSTOMER SERVICE INFORMATION

                                                 Tax Permit Registration

    General Information

    Filing Tax Returns

    480-312-2400

    CITY OF SCOTTSDALE ONE-STOP-SHOP

     

    480-312-2500

    CITY OF SCOTTSDALE INSPECTION SERVICES

     

    DIVISION

    480-312-5750

    DELINQUENCY INFORMATION;

     

    480-312-2705

    Audit Information

     

    Calculation of Tax

    Interpretation of Law

    Determination of Deduction

    480-312-2768

    Copies of the complete transaction Privilege Tax ordinance are available for $7.00.

    January 1, 2000