Arizona Contractor Taxpayer Bond

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What is an Arizona Contractor Taxpayer Bond?

In certain states—including Arizona—contractors must hold a taxpayer bond before the state will consider their business legally licensed. You may hear this bond referred to as an Arizona taxpayer bond or an Arizona taxpayer bond for contractors, but they're all the same type of surety bond.

Let's take a closer look at how Arizona taxpayer bonds work and why you need one to become properly licensed.

An Arizona taxpayer bond is a specific type of surety bond required for contractors in the state of Arizona. Essentially, this bond guarantees that the bond holder (the contractor) will pay their state taxes in a timely manner. States like Arizona require this type of bond for a few key reasons:

• To ensure timely collection of all state tax revenue
• To hold contractors who fail to pay their state taxes accountable

In short, an Arizona taxpayer bond makes it harder for contractors in the state to avoid paying their tax bills. If a contractor does fail to pay, the state has a built-in method for recouping its losses by filing a claim against the bond. Now, let's walk through how this type of bond actually works.

How Arizona Contractor Taxpayer Bonds Work

There are three parties involved in every surety bond, including Arizona taxpayer bonds.

Principal. The contractor who needs an Arizona taxpayer bond to work in the state is referred to as the principal. They are ultimately—though not initially—responsible for paying out any claims made against the bond.

Obligee. The obligee is the state agency that requires the surety bond. If the contractor fails to pay their state taxes on time, it's the obligee who files a claim against the bond.

Surety. The company that issues the bond—and initially pays out any claims against it—is known as the surety. The principal is then responsible for reimbursing the surety for any claims paid.

If an Arizona contractor fails to pay their tax bill, the state can file a claim against that contractor's taxpayer bond. The surety is then responsible for paying out valid claims from the state. Before paying, the surety will investigate to confirm the claim is valid—which it usually is. Only once the claim is verified will the surety settle it, up to the full bond amount.

The contractor isn't in the clear once a claim is paid, though. They're required to reimburse the surety for the full claim amount, and may also owe interest and fees. If the contractor refuses to pay the surety back, the surety can pursue legal means to collect the debt.

Who Needs an Arizona Contractor Taxpayer Bond?

Contractors working in the state of Arizona need an Arizona taxpayer bond to run their businesses legally. When applying for licensing, contractors must have this bond secured, or they won't be able to become licensed. In some cases, contractors may also need to secure a different type of surety bond to meet the terms of specific client contracts.

How Much Arizona Contractor Taxpayer Bonds Cost

The cost of a taxpayer bond varies from state to state. In Arizona, the required bonded amount can range anywhere from $2,000 to $102,000. This amount is known as the bonding capacity—the highest amount a government agency can claim against the bond.

The primary type of contracting work a contractor performs determines the exact bond amount required. When applying for licensing, contractors can find out the specific amount they need to secure.

Typically, the cost of an Arizona taxpayer bond is a percentage of the bonded amount. The percentage you'll pay depends on factors such as your credit score, business finances, and business history. The higher your credit score, the lower your bond premium—meaning the less you'll spend to secure the bond. That's why it can help to work on improving your credit score before applying for an Arizona taxpayer bond, or before renewing one once the bond term ends. The bond term is simply the period during which the bond is active, and it can usually be renewed when it expires.