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ARIZONA STATE SENATE
Fifty-Fourth Legislature, First Regular Session
reconstruction contracting; local tax; exemption.
Purpose
Outlines requirements for a city, town or taxing jurisdiction to levy taxes on reconstruction contracting.
Background
The Arizona Department of Revenue (ADOR) must collect and administer any transaction privilege tax (TPT) and affiliated excise tax imposed by a city or town, including use taxes, severance taxes, jet fuel excise and use taxes and rental occupancy taxes. ADOR and each city or town must enter into an intergovernmental agreement or contract to provide a uniform method of administration, collection, audit and licensing of TPT and affiliated excise taxes imposed by the state or cities and towns (A.R.S. § 42-6001). The procedures for the collection, levy and enforcement of payment of TPT and affiliated excise taxes levied by a city or town must be performed in the same manner as state TPT and affiliated excise taxes. Statute exempts multiple types of sales, fees and proceeds from municipal TPT, sales, use or other similar taxation (A.R.S. § 42-6004).
The
Model City Tax Code (MCTC) allows a TPT to be levied on the gross income from
the business activity on every person that engages in business as a speculative
builder. The gross income of a speculative builder that is considered taxable
is the total selling price from the sale of improved real property at the time
of closing of escrow or transfer of title. In cases that involve reconstruction
contracting, the speculative builder can exclude the prior value allowed for
reconstruction contracting in determining taxable income. Additionally, a city
can decide to:
1) prohibit either the cost or fair market value of the land to be excluded or
deducted from gross income; 2) allow the seller's original purchase price of
the land to be excluded from the gross income from the sale; or 3) allow the
fair market value of the land to be excluded from gross income (ADOR art. 4 § 416).
There is no anticipated fiscal impact to the state General Fund associated with this legislation.
Provisions
1. Prohibits a city, town or taxing jurisdiction from levying a TPT, sales, gross receipts, use, franchise or other similar tax or fee on gross proceeds of sales or gross income derived from reconstruction contracting unless certain criteria are met.
2. Prohibits reconstruction contracting from being included in the tax base for a city, town or taxing jurisdiction tax unless:
a) the gross building area, excluding the addition of an interior floor or mezzanine, increases by more than 25 percent in the 24-month period before the sale of the real property; and
b) the property is sold within 24 months after substantial completion.
3. Allows a speculative builder to exclude the prior value allowed for reconstruction contracting from gross income if a tax is assessed on reconstruction contracting.
4. Specifies that the prior value is determined by the taxpayer and is equal to:
a) the property's full cash value before the reconstruction contracting improvement as determined by the county assessor in the year preceding the year in which the reconstruction contracting improvement could have been included in the county assessor's valuation;
b) the taxpayer's actual arm's length cost of reconstructed property before the reconstruction contracting activity; or
c) the value determined by a licensed real estate appraiser as of the previous acquisition date of the property in an independent appraisal of all property involved in the sale that is subject to a tax under reconstruction contracting.
5. Specifies that gross income from the sale of improved real property does not include the fair market value of land that is included in the sale.
6. Requires the fair market value of land to be determined in the same manner as the prime contracting classification.
7. Defines prior value and reconstruction contracting.
8. Makes technical and conforming changes.
9. Becomes effective on the general effective date.
Prepared by Senate Research
February 18, 2019
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