Arizona Taxpayer Bond for Contractor
What Is the Purpose of the Arizona Contractor Taxpayer Bond?
Under Arizona Revised Statutes Title 42, applicable licensed contractors and dealers of manufactured housing (mobile homes) must file a custom Taxpayer Bond for Contractor, or more commonly known as the Contractor Taxpayer Bond, with the Arizona Department of Revenue (AZDOR). The purpose of the surety bond is to ensure that the contractor or dealer will pay all transaction privilege taxes, possible fees or penalties to the AZDOR, and any other obligations.
Who Needs the Contractor Taxpayer Bond in Arizona?
The AZDOR requires licensed contractors and mobile home dealers that meet specific criteria to obtain the Arizona Contractor Taxpayer Bond. The criteria include:
- Delinquent taxpayer residents who have a contractor license with the Arizona Registrar of Contractors (AZ ROC) and are initially applying for a transaction privilege tax license
- Out-of-state or in-state prime contractors who have been in business for less than 1-year and are entering into a construction contract of $50,000 or more
- Licensed contractors or dealers who have a history of delinquency in paying Arizona taxes
However, some contractors can qualify for an exemption from the bonding requirement. In order to apply for an exemption, the licensee must complete and submit the Transaction Privilege Tax License Application for Bond Exemption form to the AZDOR. Supporting documentation that provides why the contractor is entitled to an exemption must be included with the form. Qualifying supporting documentation includes:
- If the taxpayer has been in business for at least 2-years outside of Arizona immediately preceding the exemption request, the contractor can submit statements from an authorized state employee from each state in which the business has been licensed in the last 2-years.
- Documentation verifying that no potential Arizona tax liability exists for the licensee
- An active surety bond for a previous Arizona transaction privilege tax license that covers the liability for the previous license and the new license
A written appeal can be submitted to the AZDOR if the contractor’s initial exemption request is denied.
If the contractor or dealer maintains a good standing of their bond and payment of all taxes for two years, they may request to have the surety bond requirement waived. The taxpayer must submit the Bond Release Request for Contractors to the AZDOR.
How Is the Custom Bond Amount Determined?
The bond amount is based upon the type of work being performed by the contractor or dealer. The AZDOR required bond limits and associated types of work are listed below:
- $2,000- General contractors of residential buildings, other than single-family housing; operative builders; and manufacturers of mobile homes
- $7,000- General contractors of single-family housing which includes water, sewer, and pipeline work; and communication and power-line construction work
- $17,000- General contractors of industrial building and warehouses; of non-residential buildings; and highways and street construction except elevated highways
- $22,000- Heavy construction work not elsewhere classified (ex: dams, land drainage, etc.)
- $102,000- Bridges, tunnels, and elevated highway construction work
Based on the contractor or dealer’s application, the AZDOR will determine which bond limit is required of the applicant to file.
What Do Surety Underwriters Need to Know?
Industry experts have confirmed that the Arizona Contractor Taxpayer Bond has a moderately low-risk status for surety providers to take on. The bond has a custom limit with amounts starting at $2,000, which can be freely written, while the highest limit of $102,000 will need to be manually underwritten. A soft credit check of the applicant is strongly recommended for each one of the possible bond limits as well as a review of their business and personal financials for the higher bond limits.
With an exception to new contractors entering into a contract of $50,000 or more, the Contractor Taxpayer Bond is typically required to be obtained by contractors or dealers who have a history of taxpayer delinquency. This should be taken into account during the underwriting process, especially when it comes to applicants with higher bond limits.
Contractors and dealers must follow all rules and regulations pertinent to their transaction privilege tax license and Arizona Revised Statutes Title 42. Failure to do so may result in large fees, revocation of the individual’s TPT license, or a possible claim on their bond.
If a claim on the Contractor Taxpayer Bond is pursued, it will go through a notification and hearing process with the AZDOR before an official claim notice can be issued to the bondholder’s surety company.
What Do Surety Claims Handlers Need to Know?
The Arizona Department of Revenue may file a claim on the bond if the contractor or dealer violates state laws pursuant to Arizona Revised Statutes Title 42 and/or regulations pertaining to their transaction privilege tax license. Although, claims are ultimately pursued if the contractor or dealer fails to pay all taxes, penalties, and other obligations in full and on time.
If a determination is made that the contractor or dealer has committed a tax deficiency, they will be sent written notification of the official deficiency filing with an additional ten-day notice for the time and place of their scheduled hearing held by the AZDOR. The hearing takes place in order to determine the amount of tax and fees to be paid by the contractor or dealer. If the individual is unable to or refuses to pay the amount ordered, the AZDOR will file a claim on their bond to cover such fees.
The Department of Revenue should give a clear timeline for the bond handling and claim payout deadline, but if they do not, it is recommended that the surety provider default to their company’s claim handling and payout timeline standards.
Are There Any Alternatives to the Contractor Taxpayer Bond?
Yes, the AZDOR will accept a cash deposit or certificate of a deposit equal to the required bond limit. The bond alternative will need to be reviewed and approved by the AZDOR before the contractor or dealer can commence business operations.
How Much Does the Taxpayer Bond Cost in Arizona?
The bond cost is typically based at less than 1% of the custom bond limit as well as the contractor or dealer’s personal credit score. For example, a 1-year bond term could start at $100 for preferred credit score applicants who meet the criteria for a $2,000 bond limit. Surety providers also offer additional 2- or 3-year bond term rates so the cost of the bond can fluctuate due to those instances.
How Is the Contractor Taxpayer Bond Filed In Arizona?
The Department of Revenue requires the original signed and sealed Arizona Contractor Taxpayer Bond to be filed with their office along with the transaction privilege license application.
In order to sustain a good legal standing with the department, new applicants must keep the bond on file for a minimum of two years. The department will not require the applicant to maintain the bond beyond that timeline if they have paid all taxes due on time during that two-year period. Bonds filed by contractors who have contracts over $50,000 must maintain the bond until all taxes have been paid for that specific project.
The original bond form and additional required documents should be mailed to the following address:
Arizona Department of Revenue
P.O. Box 29032
Phoenix, AZ 85038-9032
Can the Taxpayer Bond for Contractors Be Cancelled?
The bond may be cancelled by the surety company upon the principal’s request or upon their own accord, but only once two years have passed following the bond activation date. The bond is continuous and therefore will remain so until officially canceled. The surety provider must send a written cancellation request to the AZDOR; liability of the bond will be released within 30 days of receiving the bond termination notice.
Bond cancelation requests should be mailed to the address below:
Arizona Department of Revenue
1600 W Monroe
Phoenix, AZ 85007
Are Contractor Taxpayer Bonds Renewable?
While there is a required two-year term for this bond, contractors and dealers will not be obligated to renew the bond upon the term expiration if all taxes have been paid over that time period. If the AZDOR finds that the applicant has failed to pay all their taxes in that timeline, they will be required to renew the bond for another two-year term.