property tax; residential property

HB2394 - 572R - I Ver

REFERENCE TITLE:
property tax; residential property

State of Arizona

House of Representatives

Fifty-seventh Legislature

Second Regular Session

2026

HB 2394

Introduced by

Representatives
Biasiucci: Hernandez A, Hernandez C, Pe�a, Taylor, Volk, Willoughby

AN
ACT

amending sections 42-5075, 42-5076,
42-12001, 42-12054 and 42-12056, Arizona Revised Statutes;
amending title 42, chapter 11, article 3, Arizona Revised Statutes, by adding
section 42-11134; relating to property tax.

(TEXT OF BILL BEGINS ON NEXT PAGE)

Be it enacted by the Legislature of the State of Arizona:

Section 1. Section 42-5075, Arizona Revised Statutes,
is amended to read:

START_STATUTE
42-5075.

Prime contracting classification; exemptions; definitions

A. The prime contracting classification is comprised
of the business of prime contracting and the business of manufactured building
dealer.� Sales for resale to another manufactured building dealer are not
subject to tax. Sales for resale do not include sales to a lessor of
manufactured buildings. The sale of a used manufactured building is
not taxable under this chapter. The prime contracting classification
does not include any work or operation performed by a person that is not
required to be licensed by the registrar of contractors pursuant to section 32-1121.

B. The tax base for the prime contracting
classification is sixty-five percent of the gross proceeds of sales or
gross income derived from the business. The following amounts shall
be deducted from the gross proceeds of sales or gross income before computing
the tax base:

1. The sales price of land, which shall not exceed
the fair market value.

2. Sales and installation of groundwater measuring
devices required under section 45-604 and groundwater monitoring wells
required by law, including monitoring wells installed for acquiring information
for a permit required by law.

3. The sales price of furniture, furnishings,
fixtures, appliances and attachments that are not incorporated as component
parts of or attached to a manufactured building or the setup
site. The sale of such items may be subject to the taxes imposed by
article 1 of this chapter separately and distinctly from the sale of the
manufactured building.

4. The gross proceeds of sales or gross income
received from a contract entered into for the modification of any building,
highway, road, railroad, excavation, manufactured building or other structure,
project, development or improvement located in a military reuse zone for
providing aviation or aerospace services or for a manufacturer, assembler or
fabricator of aviation or aerospace products within an active military reuse
zone after the zone is initially established or renewed under section 42-1301. To
be eligible to qualify for this deduction, before beginning work under the
contract, the prime contractor must have applied for a letter of qualification
from the department of revenue.

5. The gross proceeds of sales or gross income
derived from a contract to construct a qualified environmental technology
manufacturing, producing or processing facility, as described in section 41-1514.02,
and from subsequent construction and installation contracts that begin within
ten years after the start of initial construction. To qualify for
this deduction, before beginning work under the contract, the prime contractor
must obtain a letter of qualification from the department of revenue. This
paragraph shall apply for ten full consecutive calendar or fiscal years after
the start of initial construction.

6. The gross proceeds of sales or gross income from
a contract to provide for one or more of the following actions, or a contract
for site preparation, constructing, furnishing or installing machinery,
equipment or other tangible personal property, including structures necessary
to protect exempt incorporated materials or installed machinery or equipment,
and tangible personal property incorporated into the project, to perform one or
more of the following actions in response to a release or suspected release of
a hazardous substance, pollutant or contaminant from a facility to the
environment, unless the release was authorized by a permit issued by a
governmental authority:

(a) Actions to monitor, assess and evaluate such a
release or a suspected release.

(b) Excavation, removal and transportation of
contaminated soil and its treatment or disposal.

(c) Treatment of contaminated soil by vapor
extraction, chemical or physical stabilization, soil washing or biological
treatment to reduce the concentration, toxicity or mobility of a contaminant.

(d) Pumping and treatment or in situ treatment of
contaminated groundwater or surface water to reduce the concentration or
toxicity of a contaminant.

(e) The installation of structures, such as cutoff
walls or caps, to contain contaminants present in groundwater or soil and
prevent them from reaching a location where they could threaten human health or
welfare or the environment.

This paragraph does not include
asbestos removal or the construction or use of ancillary structures such as
maintenance sheds, offices or storage facilities for unattached equipment,
pollution control equipment, facilities or other control items required or to
be used by a person to prevent or control contamination before it reaches the
environment.

7. The gross proceeds of sales or gross income that
is derived from a contract for the installation, assembly, repair or
maintenance of machinery, equipment or other tangible personal property that is
either deducted from the tax base of the retail classification under section 42-5061,
subsection B or that is exempt from use tax under section 42-5159,
subsection B and that has independent functional utility, pursuant to the
following provisions:

(a) The deduction provided in this paragraph
includes the gross proceeds of sales or gross income derived from all of the
following:

(i) Any activity performed on machinery, equipment
or other tangible personal property with independent functional utility.

(ii) Any activity
performed on any tangible personal property relating to machinery, equipment or
other tangible personal property with independent functional utility in
furtherance of any of the purposes provided for under subdivision (d) of this
paragraph.

(iii) Any activity that is related to the activities
described in items (i) and (ii) of this subdivision, including inspecting the
installation of or testing the machinery, equipment or other tangible personal
property.

(b) The deduction provided in this paragraph does
not include gross proceeds of sales or gross income from the portion of any
contracting activity that consists of the development of, or modification to,
real property in order to facilitate the installation, assembly, repair,
maintenance or removal of machinery, equipment or other tangible personal
property that is either deducted from the tax base of the retail classification
under section 42-5061, subsection B or exempt from use tax under section
42-5159, subsection B.

(c) The deduction provided in this paragraph shall
be determined without regard to the size or useful life of the machinery,
equipment or other tangible personal property.

(d) For the purposes of this paragraph,
"independent functional utility" means that the machinery, equipment
or other tangible personal property can independently perform its function
without attachment to real property, other than attachment for any of the
following purposes:

(i) Assembling the machinery, equipment or other
tangible personal property.

(ii) Connecting items of machinery, equipment or
other tangible personal property to each other.

(iii) Connecting the machinery, equipment or other
tangible personal property, whether as an individual item or as a system of
items, to water, power, gas, communication or other services.

(iv) Stabilizing or protecting the machinery,
equipment or other tangible personal property during operation by bolting,
burying or performing other similar nonpermanent connections to either real
property or real property improvements.

8. The gross proceeds of sales or gross income
attributable to the purchase of machinery, equipment or other tangible personal
property that is exempt from or deductible from transaction privilege and use
tax under:

(a) Section 42-5061, subsection A, paragraph
25, 29 or 58.

(b) Section 42-5061, subsection B.

(c) Section 42-5159, subsection A, paragraph
13, subdivision (a), (b), (c), (d), (e), (f), (j), (k), (m) or (n) or paragraph
55.

(d) Section 42-5159, subsection B.

9. The gross proceeds of sales or gross income
received from a contract for the construction of an environmentally controlled
facility for the raising of poultry for the production of eggs and the sorting,
cooling and packaging of eggs.

10. The gross proceeds of sales or gross income that
is derived from a contract entered into with a person who is engaged in the
commercial production of livestock, livestock products or agricultural,
horticultural, viticultural or floricultural crops or products in this state
for the modification of any building, highway, road, excavation, manufactured
building or other structure, project, development or improvement used directly
and primarily to prevent, monitor, control or reduce air, water or land pollution.

11. The gross proceeds of sales or gross income that
is derived from the installation, assembly, repair or maintenance of clean
rooms that are deducted from the tax base of the retail classification pursuant
to section 42-5061, subsection B, paragraph 17.

12. For taxable periods beginning from and after
June 30, 2001, the gross proceeds of sales or gross income derived from a
contract entered into for the construction of a residential apartment housing
facility that qualifies for a federal housing subsidy for low-income
persons over sixty-two years of age and that is owned by a nonprofit
charitable organization that has qualified under section 501(c)(3) of the
internal revenue code.

13. For taxable periods beginning from and after
December 31, 1996 and ending before January 1, 2017, the gross proceeds of
sales or gross income derived from a contract to provide and install a solar
energy device. The contractor shall register with the department as
a solar energy contractor. By registering, the contractor
acknowledges that it will make its books and records relating to sales of solar
energy devices available to the department for examination.

14. The gross proceeds of sales or gross income
derived from a contract entered into for the construction of a launch site, as
defined in 14 Code of Federal Regulations section 401.5.

15. The gross proceeds of sales or gross income
derived from a contract entered into for the construction of a domestic
violence shelter that is owned and operated by a nonprofit charitable
organization that has qualified under section 501(c)(3) of the internal revenue
code.

16. The gross proceeds of sales or gross income
derived from contracts to perform postconstruction treatment of real property
for termite and general pest control, including wood-destroying
organisms.

17. The gross proceeds of sales or gross income
received from contracts entered into before July 1, 2006 for constructing a
state university research infrastructure project if the project has been
reviewed by the joint committee on capital review before the university enters
into the construction contract for the project. For the purposes of
this paragraph, "research infrastructure" has the same meaning
prescribed in section 15-1670.

18. The gross proceeds of sales or gross income
received from a contract for the construction of any building, or other
structure, project, development or improvement owned by a qualified business
under section 41-1516 for harvesting or processing qualifying forest
products removed from qualifying projects as defined in section 41-1516
if actual construction begins before January 1, 2024. To qualify for
this deduction, the prime contractor must obtain a letter of qualification from
the Arizona commerce authority before beginning work under the contract.

19. Any amount of the gross proceeds of sales or
gross income attributable to development fees that are incurred in relation to
a contract for construction, development or improvement of real property and
that are paid by a prime contractor or subcontractor. For the
purposes of this paragraph:

(a) The attributable amount shall not exceed the
value of the development fees actually imposed.

(b) The attributable amount is equal to the total
amount of development fees paid by the prime contractor or subcontractor, and
the total development fees credited in exchange for the construction of,
contribution to or dedication of real property for providing public
infrastructure, public safety or other public services necessary to the
development. The real property must be the subject of the
development fees.

(c) "Development fees" means fees imposed
to offset capital costs of providing public infrastructure, public safety or
other public services to a development and authorized pursuant to section 9-463.05,
section 11-1102 or title 48 regardless of the jurisdiction to which the
fees are paid.

20. The gross proceeds of sales or gross income
derived from a contract entered into for the construction of a mixed waste
processing facility that is located on a municipal solid waste landfill and
that is constructed for the purpose of recycling solid waste or producing
renewable energy from landfill waste. For the purposes of this
paragraph:

(a) "Mixed waste processing facility"
means a solid waste facility that is owned, operated or used for the treatment,
processing or disposal of solid waste, recyclable solid waste, very small
quantity generator waste or household hazardous waste. For the
purposes of this subdivision, "very small quantity generator waste",
"household hazardous waste" and "solid waste facility" have
the same meanings prescribed in section 49-701, except that solid waste
facility does include a site that stores, treats or processes paper, glass,
wood, cardboard, household textiles, scrap metal, plastic, vegetative waste,
aluminum, steel or other recyclable material.

(b) "Municipal solid waste landfill" has
the same meaning prescribed in section 49-701.

(c) "Recycling" means collecting,
separating, cleansing, treating and reconstituting recyclable solid waste that
would otherwise become solid waste, but does not include incineration or other
similar processes.

(d) "Renewable energy" means usable
energy, including electricity, fuels, gas and heat, produced through the
conversion of energy provided by sunlight, water, wind, geothermal, heat,
biomass, biogas, landfill gas or another nonfossil renewable resource.

21. The gross proceeds of sales or gross income
derived from a contract to install containment structures. For the
purposes of this paragraph, "containment structure" means a structure
that prevents, monitors, controls or reduces noxious or harmful discharge into
the environment.

C. Entitlement to the deduction pursuant to
subsection B, paragraph 7 of this section is subject to the following
provisions:

1. A prime contractor may establish entitlement to
the deduction by both:

(a) Marking the invoice for the transaction to
indicate that the gross proceeds of sales or gross income derived from the
transaction was deducted from the base.

(b) Obtaining a certificate executed by the
purchaser indicating the name and address of the purchaser, the precise nature
of the business of the purchaser, the purpose for which the purchase was made,
the necessary facts to establish the deductibility of the property under
section 42-5061, subsection B, and a certification that the person
executing the certificate is authorized to do so on behalf of the purchaser.�
The certificate may be disregarded if the prime contractor has reason to
believe that the information contained in the certificate is not accurate or
complete.

2. A person who does not comply with paragraph 1 of
this subsection may establish entitlement to the deduction by presenting facts
necessary to support the entitlement, but the burden of proof is on that
person.

3. The department may prescribe a form for the
certificate described in paragraph 1, subdivision (b) of this
subsection. The department may also adopt rules that describe the
transactions with respect to which a person is not entitled to rely solely on
the information contained in the certificate provided in paragraph 1,
subdivision (b) of this subsection but must instead obtain such additional
information as required in order to be entitled to the deduction.

4. If a prime contractor is entitled to a deduction
by complying with paragraph 1 of this subsection, the department may require
the purchaser who caused the execution of the certificate to establish the
accuracy and completeness of the information required to be contained in the
certificate that would entitle the prime contractor to the deduction.� If the
purchaser cannot establish the accuracy and completeness of the information,
the purchaser is liable in an amount equal to any tax, penalty and interest
that the prime contractor would have been required to pay under article 1 of
this chapter if the prime contractor had not complied with paragraph 1 of this
subsection. Payment of the amount under this paragraph exempts the
purchaser from liability for any tax imposed under article 4 of this
chapter. The amount shall be treated as a transaction privilege tax
to the purchaser and as tax revenues collected from the prime contractor in
order to designate the distribution base for purposes of section 42-5029.

D. Subcontractors or others who perform modification
activities are not subject to tax if they can demonstrate that the job was
within the control of a prime contractor or contractors or a dealership of
manufactured buildings and that the prime contractor or dealership is liable
for the tax on the gross income, gross proceeds of sales or gross receipts
attributable to the job and from which the subcontractors or others were paid.

E. Amounts received by a contractor for a project
are excluded from the contractor's gross proceeds of sales or gross income
derived from the business if the person who hired the contractor executes and
provides a certificate to the contractor stating that the person providing the
certificate is a prime contractor and is liable for the tax under article 1 of
this chapter. The department shall prescribe the form of the
certificate.� If the contractor has reason to believe that the information
contained on the certificate is erroneous or incomplete, the department may
disregard the certificate. If the person who provides the
certificate is not liable for the tax as a prime contractor, that person is
nevertheless deemed to be the prime contractor in lieu of the contractor and is
subject to the tax under this section on the gross receipts or gross proceeds
received by the contractor.

F. Every person engaging or continuing in this state
in the business of prime contracting or dealership of manufactured buildings
shall present to the purchaser of such prime contracting or manufactured
building a written receipt of the gross income or gross proceeds of sales from
such activity and shall separately state the taxes to be paid pursuant to this
section.

G. For the purposes of section 42-5032.01, the
department shall separately account for revenues collected under the prime
contracting classification from any prime contractor engaged in the preparation
or construction of a multipurpose facility, and related infrastructure, that is
owned, operated or leased by the tourism and sports authority pursuant to title
5, chapter 8.

H. For the purposes of section 42-5032.02,
from and after September 30, 2013, the department shall separately account
for revenues reported and collected under the prime contracting classification
from any prime contractor engaged in the construction of any buildings and
associated improvements that are for the benefit of a manufacturing
facility. For the purposes of this subsection, "associated
improvements" and "manufacturing facility" have the same
meanings prescribed in section 42-5032.02.

I. For the purposes of section 42-5032.03 and
subject to section 48-4238, beginning October 1, 2025 and each month
thereafter

through� December 31, 2055, the
department shall separately account for revenues reported and collected under
the prime contracting classification from any prime contractor engaged in the
construction of any buildings and associated improvements that are for the
benefit of a major league baseball facility or an adjacent building that is owned
by a county stadium district pursuant to title 48, chapter 26 and operated by
the county stadium district or the professional baseball franchise organization
that occupies the major league baseball

facility
or adjacent building. For the purposes of this subsection,
"adjacent building" and "major league baseball facility"
have the same meanings prescribed in section 48-4201.

J. The gross proceeds of sales or gross income
derived from a contract for lawn maintenance services is not subject to tax
under this section if the contract does not include landscaping
activities. Lawn maintenance service is a service pursuant to
section 42-5061, subsection A, paragraph 1, and includes lawn mowing
and edging, weeding, repairing sprinkler heads or drip irrigation heads,
seasonal replacement of flowers, refreshing gravel, lawn dethatching, seeding
winter lawns, leaf and debris collection and removal, tree or shrub pruning or
clipping, garden and gravel raking and applying pesticides, as defined in
section 3-361, and fertilizer materials, as defined in section 3-262.

K. Except as provided in subsection P of this
section, the gross proceeds of sales or gross income derived from landscaping
activities is subject to tax under this section. Landscaping
includes installing lawns, grading or leveling ground, installing gravel or
boulders, planting trees and other plants, felling trees, removing or mulching
tree stumps, removing other imbedded plants, building irrigation berms,
installing railroad ties and installing underground sprinkler or watering systems.

L. The portion of gross proceeds of sales or gross
income attributable to the actual direct costs of providing architectural or
engineering services that are incorporated in a contract is not subject to tax
under this section. For the purposes of this subsection,
"direct costs" means the portion of the actual costs that are
directly expended in providing architectural or engineering services.

M. Operating a landfill or a solid waste disposal
facility is not subject to taxation under this section, including filling,
compacting and creating vehicle access to and from cell sites within the
landfill.� Constructing roads to a landfill or solid waste disposal facility
and constructing cells within a landfill or solid waste disposal facility may
be deemed prime contracting under this section.

N. The following apply in determining the taxable
situs of sales of manufactured buildings:

1. For sales in this state where the manufactured
building dealer contracts to deliver the building to a setup site or to perform
the setup in this state, the taxable situs is the setup site.

2. For sales in this state where the manufactured
building dealer does not contract to deliver the building to a setup site or
does not perform the setup, the taxable situs is the location of the dealership
where the building is delivered to the buyer.

3. For sales in this state where the manufactured
building dealer contracts to deliver the building to a setup site that is
outside this state, the situs is outside this state and the transaction is
excluded from tax.

O. The gross proceeds of sales or gross income
attributable to a written contract for design phase services or professional
services, executed before modification begins and with terms, conditions and
pricing of all of these services separately stated in the contract from those
for construction phase services, is not subject to tax under this section,
regardless of whether the services are provided sequential to or concurrent
with prime contracting activities that are subject to tax under this
section. This subsection does not include the gross proceeds of
sales or gross income attributable to construction phase
services. For the purposes of this subsection:

1. "Construction phase services" means
services for the execution and completion of any modification, including the
following:

(a) Administration or supervision of any
modification performed on the project, including team management and
coordination, scheduling, cost controls, submittal process management, field
management, safety program, close-out process and warranty period services.

(b) Administration or supervision of any
modification performed pursuant to a punch list. For the purposes of
this subdivision, "punch list" means minor items of modification work
performed after substantial completion and before final completion of the
project.

(c) Administration or supervision of any
modification performed pursuant to change orders. For the purposes
of this subdivision, "change order" means a written instrument issued
after execution of a contract for modification work, providing for all of the
following:

(i) The scope of a change in the modification work,
contract for modification work or other contract documents.

(ii) The amount of an adjustment, if any, to the
guaranteed maximum price as set in the contract for modification
work. For the purposes of this item, "guaranteed maximum
price" means the amount guaranteed to be the maximum amount due to a prime
contractor for the performance of all modification work for the project.

(iii) The extent of an adjustment, if any, to the
contract time of performance set forth in the contract.

(d) Administration or supervision of any
modification performed pursuant to change directives. For the
purposes of this subdivision, "change directive" means a written
order directing a change in modification work before agreement on an adjustment
of the guaranteed maximum price or contract time.

(e) Inspection to determine the dates of substantial
completion or final completion.

(f) Preparation of any manuals, warranties, as-built
drawings, spares or other items the prime contractor must furnish pursuant to
the contract for modification work. For the purposes of this
subdivision, "as-built drawing" means a drawing that indicates
field changes made to adapt to field conditions, field changes resulting from
change orders or buried and concealed installation of piping, conduit and
utility services.

(g) Preparation of status reports after modification
work has begun detailing the progress of work performed, including preparation
of any of the following:

(i) Master schedule updates.

(ii) Modification work cash flow projection updates.

(iii) Site reports made on a periodic basis.

(iv) Identification of discrepancies, conflicts or
ambiguities in modification work documents that require resolution.

(v) Identification of any health and safety issues
that have arisen in connection with the modification work.

(h) Preparation of daily logs of modification work,
including documentation of personnel, weather conditions and on-site
occurrences.

(i) Preparation of any submittals or shop drawings
used by the prime contractor to illustrate details of the modification work
performed.

(j) Administration or supervision of any other
activities for which a prime contractor receives a certificate for payment or
certificate for final payment based on the progress of modification work
performed on the project.

2. "Design phase services" means services
for developing and completing a design for a project that are not construction
phase services, including the following:

(a) Evaluating surveys, reports, test results or any
other information on-site conditions for the project, including physical
characteristics, legal limitations and utility locations for the site.

(b) Evaluating any criteria or programming
objectives for the project to ascertain requirements for the project, such as
physical requirements affecting cost or projected utilization of the project.

(c) Preparing
drawings and specifications for architectural program documents, schematic
design documents, design development documents, modification work documents or
documents that identify the scope of or materials for the project.

(d) Preparing an initial schedule for the project,
excluding the preparation of updates to the master schedule after modification
work has begun.

(e) Preparing preliminary estimates of costs of
modification work before completion of the final design of the project,
including an estimate or schedule of values for any of the following:

(i) Labor, materials, machinery and equipment,
tools, water, heat, utilities, transportation and other facilities and services
used in the execution and completion of modification work, regardless of
whether they are temporary or permanent or whether they are incorporated in the
modifications.

(ii) The cost of labor and materials to be furnished
by the owner of the real property.

(iii) The cost of any equipment of the owner of the
real property to be assigned by the owner to the prime contractor.

(iv) The cost of any labor for installation of
equipment separately provided by the owner of the real property that has been
designed, specified, selected or specifically provided for in any design
document for the project.

(v) Any fee paid by the owner of the real property
to the prime contractor pursuant to the contract for modification work.

(vi) Any bond and insurance premiums.

(vii) Any applicable taxes.

(viii) Any contingency fees for the prime contractor
that may be used before final completion of the project.

(f) Reviewing and evaluating cost estimates and
project documents to prepare recommendations on site use, site improvements,
selection of materials, building systems and equipment, modification
feasibility, availability of materials and labor, local modification activity
as related to schedules and time requirements for modification work.

(g) Preparing the plan and procedures for selection
of subcontractors, including any prequalification of subcontractor candidates.

3. "Professional services" means architect
services, engineer services, geologist services, land surveying services or
landscape architect services that are within the scope of those services as
provided in title 32, chapter 1 and for which gross proceeds of sales or gross
income has not otherwise been deducted under subsection L of this section.

P. The gross proceeds
of sales or gross income derived from a contract with the owner of real
property or improvements to real property for the maintenance, repair,
replacement or alteration of existing property is not subject to tax under this
section if the contract does not include modification activities, except as
specified in this subsection.� The gross proceeds of sales or gross income
derived from a de minimis amount of modification activity does not subject the
contract or any part of the contract to tax under this section. For the
purposes of this subsection:

1. Tangible personal property that is incorporated
or fabricated into a project described in this subsection may be subject to the
amount prescribed in section 42-5008.01.

2. Each contract is independent of any other
contract, except that any change order that directly relates to the scope of
work of the original contract shall be treated the same as the original
contract under this chapter, regardless of the amount of modification
activities included in the change order. If a change order does not directly
relate to the scope of work of the original contract, the change order shall be
treated as a new contract, with the tax treatment of any subsequent change order
to follow the tax treatment of the contract to which the scope of work of the
subsequent change order directly relates.

Q. Notwithstanding subsection P of this section, a
contract that primarily involves surface or subsurface improvements to land and
that is subject to title 28, chapter 19, 20 or 22 or title 34, chapter 2 or 6
is taxable under this section, even if the contract also includes vertical
improvements. Agencies that are subject to procurement processes
under those provisions shall include in the request for proposals a notice to
bidders when those projects are subject to this section. This
subsection does not apply to contracts with:

1. Community facilities districts, fire districts,
county television improvement districts, community park maintenance districts,
cotton pest control districts, hospital districts, pest abatement districts,
health service districts, agricultural improvement districts, county free
library districts, county jail districts, county stadium districts, special
health care districts, public health services districts, theme park districts
or revitalization districts.

2. Any special taxing district not specified in
paragraph 1 of this subsection if the district does not substantially engage in
the modification, maintenance, repair, replacement or alteration of surface or
subsurface improvements to land.

R. Notwithstanding subsection S, paragraph 10 of
this section, a person owning real property who enters into a contract for sale
of the real property, who is responsible to the new owner of the property for
modifications made to the property in the period subsequent to the transfer of
title and who receives a consideration for the modifications is considered a
prime contractor solely for purposes of taxing the gross proceeds of sale or
gross income received for the modifications made subsequent to the transfer of
title. The original owner's gross proceeds of sale or gross income
received for the modifications shall be determined according to the following
methodology:

1. If any part of the contract for sale of the
property specifies amounts to be paid to the original owner for the
modifications to be made in the period subsequent to the transfer of title, the
amounts are included in the original owner's gross proceeds of sale or gross
income under this section. Proceeds from the sale of the property
that are received after transfer of title and that are unrelated to the
modifications made subsequent to the transfer of title are not considered gross
proceeds of sale or gross income from the modifications.

2. If the original owner enters into an agreement
separate from the contract for sale of the real property providing for amounts
to be paid to the original owner for the modifications to be made in the period
subsequent to the transfer of title to the property, the amounts are included
in the original owner's gross proceeds of sale or gross income received for the
modifications made subsequent to the transfer of title.

3. If the original owner is responsible to the new
owner for modifications made to the property in the period subsequent to the
transfer of title and derives any gross proceeds of sale or gross income from
the project subsequent to the transfer of title other than a delayed
disbursement from escrow unrelated to the modifications, it is presumed that
the amounts are received for the modifications made subsequent to the transfer
of title unless the contrary is established by the owner through its books,
records and papers kept in the regular course of business.

4. The tax base of the original owner is computed in
the same manner as a prime contractor under this section.

S. For the purposes of this section:

1. "Alteration" means an activity or
action that causes a direct physical change to existing property. For the
purposes of this paragraph:

(a) For existing property that is properly
classified as
class one property under section 42-12001,
paragraph 15,
class two property under section 42-12002, paragraph
1, subdivision (c) or paragraph 2, subdivision (c) and that is used for
residential purposes, class three property under section 42-12003 or
class four property under section 42-12004, this paragraph does not apply
if the contract amount is more than twenty-five percent of the most
recent full cash value established under chapter 13, article 2 of this title as
of the date of any bid for the work or the date of the contract, whichever
value is higher.

(b) For all existing
property other than existing property described in subdivision (a) of this
paragraph, this paragraph does not apply if the contract amount is more than
$750,000.

(c) Project elements
may not be artificially separated from a contract to cause a project to qualify
as an alteration. The department has the burden of proof that project elements
have been artificially separated from a contract.

(d) If a project for which the owner and the person
performing the work reasonably believed, at the inception of the contract,
would be treated as an alteration under this paragraph and, on completion of
the project, the project exceeded the applicable threshold described in either
subdivision (a) or (b) of this paragraph by not more than twenty-five
percent of the applicable threshold for any reason, the work performed under
the contract qualifies as an alteration.

(e) A change order that directly relates to the
scope of work of the original contract shall be treated as part of the original
contract, and the contract amount shall include any amount attributable to a
change order that directly relates to the scope of work of the original
contract.

(f) Alteration does not include maintenance, repair
or replacement.

2. "Contracting" means engaging in
business as a contractor.

3. "Contractor" is synonymous with the
term "builder" and means any person or organization that undertakes
to or offers to undertake to, or purports to have the capacity to undertake to,
or submits a bid to, or does personally or by or through others, modify any
building, highway, road, railroad, excavation, manufactured building or other
structure, project, development or improvement, or to do any part of such a
project, including the erection of scaffolding or other structure or works in
connection with such a project, and includes subcontractors and specialty
contractors. For all purposes of taxation or deduction, this
definition shall govern without regard to whether or not such a contractor is
acting in fulfillment of a contract.

4. "Manufactured building" means a
manufactured home, mobile home or factory-built building, as defined in
section 41-4001.

5. "Manufactured building dealer" means a
dealer who either:

(a) Is licensed pursuant to title 41, chapter 37,
article 4 and who sells manufactured buildings to the final consumer.

(b) Supervises, performs or coordinates the
excavation and completion of site improvements or the setup of a manufactured
building, including the contracting, if any, with any subcontractor or
specialty contractor for the completion of the contract.

6. "Modification" means construction,
grading and leveling ground, wreckage or demolition. Modification
does not include:

(a) Any project described in subsection P of this
section.

(b) Any wreckage or demolition of existing property,
or any other activity that is a necessary component of a project described in
subsection P of this section.

(c) Any mobilization or demobilization related to a
project described in subsection P of this section, such as the erection or
removal of temporary facilities to be used by those persons working on the
project.

7. "Modify" means to make a modification
or cause a modification to be made.

8. "Owner" means the person that holds
title to the real property or improvements to real property that is the subject
of the work, as well as an agent of the title holder and any person with the
authority to perform or authorize work on the real property or improvements,
including a tenant and a property manager. For the purposes of
subsection P of this section, a person who is hired by a general contractor
that is hired by an owner, or a subcontractor of a general contractor that is
hired by an owner, is considered to be hired by the owner.

9. "Prime contracting" means engaging in
business as a prime contractor.

10. "Prime contractor" means a contractor
who supervises, performs or coordinates the modification of any building,
highway, road, railroad, excavation, manufactured building or other structure,
project, development or improvement, including the contracting, if any, with
any subcontractors or specialty contractors and who is responsible for the
completion of the contract. Except as provided in subsections E and
R of this section, a person who owns real property, who engages one or more
contractors to modify that real property and who does not itself modify that
real property is not a prime contractor within the meaning of this paragraph
regardless of the existence of a contract for sale or the subsequent sale of
that real property.

11. "Replacement" means the removal from
service of one component or system of existing property or tangible personal
property installed in existing property, including machinery or equipment, and
the installation of a new component or system or new tangible personal
property, including machinery or equipment, that provides the same, a similar
or an upgraded design or functionality, regardless of the contract amount and
regardless of whether the existing component or system or existing tangible
personal property is physically removed from the existing property.

12. "Sale of a used manufactured building"
does not include a lease of a used manufactured building.
END_STATUTE

Sec. 2. Section 42-5076, Arizona Revised Statutes, is amended to read:

START_STATUTE
42-5076.

Online lodging marketplace classification; definitions

A. The online lodging
marketplace classification is comprised of the business of operating an online
lodging marketplace.

B. The tax base for the online lodging marketplace
classification is the gross proceeds of sales or gross income derived from the
business measured by the total amount charged for an online transient lodging
transaction by the online lodging operator.

C. Through December 31, 2018, the online lodging
marketplace classification does not include any online lodging marketplace that
has not entered into an agreement with the department to register for, or has
not otherwise obtained from the department, a license to collect tax pursuant
to section 42-5005, subsection L.

D. The tax base for the online lodging marketplace
classification does not include the gross proceeds of sales or gross income
derived from charges to an occupant who is a transient as defined in section 42-5070
for the occupancy of any lodging accommodation in this state that is classified
for property tax purposes under section 42-12001.

E. For the purposes of this section:

1. "Online lodging marketplace" means a
person that provides a digital platform for compensation through which an
unaffiliated third party offers to rent lodging accommodations in this state to
an occupant, including a transient, as defined in section 42-5070, and
the accommodations are
not
classified for property tax
purposes under section 42-12001
, paragraph 15 or section
42-12003 or 42-12004
. For the purposes of this
paragraph:

(a) "Lodging accommodations" means any
space offered to the public for lodging, including any hotel, motel, inn,
tourist home or house, dude ranch, resort, campground, studio or bachelor
hotel, lodging house, rooming house, residential home, apartment house,
dormitory, public or private club, mobile home or house trailer at a fixed
location in this state or other similar structure or space.

(b) "Unaffiliated third party" means a
person that is not owned or controlled, directly or indirectly, by the same
interests.

2. "Online lodging operator" means a
person that is engaged in the business of renting to an occupant, including a
transient as defined in section 42-5070, any lodging accommodation in
this state offered through an online lodging marketplace.

3. "Online lodging transaction" means a
charge to an occupant, including a transient as defined in section 42-5070,
by an online lodging operator for the occupancy of any lodging accommodation in
this state and includes an online transient lodging transaction.

4. "Online transient lodging transaction"
means a charge to an occupant who is a transient as defined in section 42-5070
by an online lodging operator for the occupancy of any lodging accommodation in
this state.
END_STATUTE

Sec. 3. Section 42-12001, Arizona Revised
Statutes, is amended to read:

START_STATUTE
42-12001.

Class one property

For
the
purposes of taxation, class one
is established consisting of the following subclasses:

1. Producing mines and mining claims, personal
property used on mines and mining claims, improvements to mines and mining
claims and mills and smelters operated in conjunction with mines and mining
claims that are valued at full cash value pursuant to section 42-14053.

2. Standing timber that is valued at full cash
value.

3. Real and personal property of gas distribution
companies, electric transmission companies, electric distribution companies,
combination gas and electric transmission and distribution companies, and
companies engaged in
the generation of

generating

electricity that are valued at full cash value pursuant to section 42-14151.

4. Real and personal property of airport fuel
delivery companies that are valued pursuant to section 42-14503.

5. Real and personal property that is used by
producing oil, gas and geothermal resource interests that are valued at full
cash value pursuant to section 42-14102.

6. Real and personal property of water, sewer and
wastewater utility companies that are valued at full cash value pursuant to
section 42-14151.

7. Real and personal property of pipeline companies
that are valued at full cash value pursuant to section 42-14201.

8. Real and personal property of shopping centers
that are valued at full cash value or pursuant to chapter 13, article 5 of this
title, as applicable, other than property that is included in class nine.

9. Real and personal property of golf courses that
are valued at full cash value or pursuant to chapter 13, article 4 of this
title.

10. All property, both real and personal, of
manufacturers, assemblers or fabricators, other than property that is specifically
included in another class described in this article, that is valued under this
title.

11. Real and personal property that is used in
communications transmission facilities and that provides public telephone or
telecommunications exchange or interexchange access for compensation to effect
two-way communication to, from, through or within this state.

12. Real property and improvements that are devoted
to any other commercial or industrial use, other than property that is
specifically included in another class described in this article, and that are
valued at full cash value.

13. Personal property that is devoted to any other
commercial or industrial use, other than property that is specifically included
in another class described in this article, and that is valued at full cash
value.

14. Real and personal property of electric
cooperatives that are valued at full cash value pursuant to section 42-14159.

15. Real
and personal property and improvements to the property that are used for
residential purposes and are all of the following:

(
a
) owned by a corporation or a limited liability company or
an affiliate of the corporation OR the limited liability company that owns more
than fifty properties in the county.

(
b
) solely
leased or rented, including leased or rented to lodgers.

(
c
) not
included in class two, three, four, six, seven or eight.

(
d
) valued at
full cash value.
END_STATUTE

Sec. 4. Section 42-12054, Arizona Revised
Statutes, is amended to read:

START_STATUTE
42-12054.

Change in classification of owner-occupied residence

A. If a person purchases or converts property that
is listed as class one pursuant to section 42-12001, paragraph 12
,

or
13
or 15
, class
two or class four pursuant to article 1 of this chapter and occupies the
property as the person's primary residence, the person may have the
classification reviewed for change to class three from the date of conversion
and occupancy as a primary residence and may appeal from the decision resulting
from the review in the same manner as provided by law for review of a valuation
for ad valorem property taxes and appeal from that review.

B. If a person purchases or converts property that
is listed as class one pursuant to section 42-12001, paragraph 12
,

or
13
or 15
, class
two or class four pursuant to article 1 of this chapter and the property is
occupied by a member of the owner's immediate family as described in section 42-12053,
the person may have the classification reviewed for change to class three from
the date of occupancy and may appeal the decision resulting from the review in
the same manner as provided by law for review of a valuation for ad valorem
property taxes and appeal from that review.

C. If a person makes such a conversion or occupancy
or appeals the classification after the county assessor has closed the rolls,
the person may petition the county board of supervisors to change the
classification and reduce the assessed valuation from the date of conversion or
occupancy.

D. The board of supervisors shall entertain the
petition in the same manner as a board of equalization hears a request for
reduction in valuation.

E. The petitioner may appeal the board of
supervisors' decision in the same manner as provided in section 42-16111,
except that the petitioner shall file the notice of appeal within fifteen days
after the board's finding.

F. If the board of supervisors finds that the
property is in fact the owner's primary residence and should be listed as class
three property, the board shall change the classification on the roll and fix
the assessed valuation from the date of occupancy. The amount of
taxes that is assessed against the property shall be computed by applying the
current tax rate to the original assessed valuation prorated for the portion of
the tax year before the property was occupied plus the current tax rate applied
to the reassessed value of the property prorated for the balance of the year.

G. The board of supervisors shall notify the
department, assessor and county treasurer of the change in classification, the
change in assessed valuation and the amount of tax assessed. The
department and the assessor may appeal any such decision in the same manner as
provided in section 42-16111. The assessor and treasurer shall
note the change on their records, and the treasurer may issue a future tax
credit, endorsed by the board, to the person whose property is liable for the
tax. The tax credit shall be used on the next or several succeeding
property tax assessments that the person may owe thereafter.
END_STATUTE

Sec. 5. Section 42-12056, Arizona Revised
Statutes, is amended to read:

START_STATUTE
42-12056.

Renewable energy systems valuation; definition

A. For properties
THAT are
subject
to this chapter and that are
class one as prescribed in section
42-12001, paragraph 15,
class three as
defined

prescribed
in section 42-12003 or class four as
defined

prescribed
in section 42-12004,
renewable energy systems and any other device or system designed primarily
for the production of

to produce
renewable
energy in which the majority of the energy is consumed on-site
,
are considered to add no value to the property.

B. For the purposes of this section, "renewable
energy systems" means electric generation systems and electric
transmission and distribution
systems
that
is

are
used or useful for
the generation,
storage, transmission

generating, storing, transmitting
or

distribution of

distributing
electric
power, energy or fuel derived from solar, wind or other nonpetroleum renewable
sources, including materials and supplies.
END_STATUTE

Sec. 6. Title
42, chapter 11, article 3, Arizona Revised Statutes, is amended by adding
section 42-11134, to read:

START_STATUTE
42-11134.

Exemption for primary residences; affidavit

A. Residential
property that is not subject to a mortgage, deed of trust or other similar
encumbrance and that is owned by a person who is at least sixty-two years
of age and who has occupied the property as the person's primary residence for
at least the two years prior to claiming the exemption is exempt from taxation.

B. The owner of the property shall
initially establish qualification for exemption under this section by filing an
affidavit with the county assessor under section 42-11152.� Thereafter,
the owner is not required to file an affidavit under section 42-11152
unless:

1. The property is no longer, or will
not be, used as the owner's primary residence.

2. Any interest in the title to the
property is conveyed to a new owner.
END_STATUTE

Sec. 7.
Applicability

Sections 42-5075, 42-5076,
42-12001, 42-12054 and 42-12056, Arizona Revised Statutes, as
amended by this act, apply to tax years beginning from and after December 31,
2026.

Sec. 8.
Conditional
enactment

Section 42-11134, Arizona
Revised Statutes, as added by this act, does not become effective unless the
Constitution of Arizona is amended by a vote of the people at the next general
election by passage of House Concurrent Resolution ______, fifty-seventh
legislature, second regular session, relating to property tax exemptions.