In certain states—including the great state of Arizona—contractors need to hold a tax payer bond for the state to consider their business legal. You may hear this bond referred to as an Arizona tax payer bond or an Arizona tax payer bond for contractors, but they’re all the same type of surety bond.
Let’s take a closer look at how Arizona tax payer bonds work and why you need one to become properly licensed.
An Arizona tax payer bond is a specific type of surety bond required for contractors in the state of Arizona. Essentially what this surety bond guarantees is that the bond holder (aka the contractor) will pay their state taxes in a timely manner. There are a few reasons that states like Arizona require this type of bond.
To ensure timely collection of all state tax revenue
To hold contractors who fail to pay their state taxes accountable
Basically, an Arizona tax payer bond makes it more challenging for contractors working in that state to avoid paying their state tax bills. If they do fail to pay their state tax bills, the state at least has a method for recouping their losses by filing a claim against the Arizona tax payer bond. Now it’s time to walk through how this type of bond works.
There are three different parties involved in all surety bonds, including Arizona tax payer bonds.
Principal. The contractor who needs an Arizona tax payer bond in order to work in the state of Arizona is referred to as the principal. They are ultimately, although not initially, responsible for paying out claims against the surety bond.
Ogilbee. The obligee is the state agency who requires the surety bond. If the contractor fails to pay their state taxes in a timely manner, it’s the obligee who will file a claim against the Arizona tax payer bond.
Surety. The company that issues the bond and who initially pays out any claims against the bond is known as the surety. The principal will need to pay the surety back for any claims filed against the bond.
If for some reason or another an Arizona contractor fails to pay their tax bill, then the state can file a claim against that contractor’s Arizona tax payer bond. The surety will then be responsible for paying out claims from the state against the bond. This only happens if the surety confirms through an investigation that the government agency filing the claim is filing a valid claim (although this is usually the case). Only once the surety verifies the claim will they settle the claim up to the full bond amount.
The contractor isn’t in the free and clear here, they’ll need to pay back the surety for the full claim amount. In addition, the contractor may also owe the surety interest and fees. If the contractor refuses to pay back the surety, they can pursue legal means to collect the debt.
Again—contractors working in the state of Arizona need to have an Arizona tax payer bond to run their businesses legally. When they apply for licensing they have to have an Arizona tax payer bond secured or they won’t become licensed. In some cases, contractors will also need to secure a different type of surety bond to meet the terms of contracts with their clients.
How much tax payer bonds cost can vary on a state to state level. In the state of Arizona, the required bonded amount can be anywhere from $2,000 to $102,000. This amount is known as the bonding capacity. The bonding capacity is the highest amount a government agency can claim on a tax payer bond.
The primary type of contracting work a contractor does will determine the cost of the bond they need. When a contractor goes to apply for licensing, they can find out the exact amount they need to apply for.
Usually, the cost of an Arizona taxpayer bond is a certain percentage of the bonded amount. What percentage you are required to pay depends on a variety of factors such as your credit score, business finances, and business history. The higher your credit score is, the lower your bond premiums (aka how much you will spend to secure the Arizona tax payer bond) will cost. That’s why it can be helpful to work on improving your credit score before you apply for an Arizona tax payer bond or before you seek renewal when the bond term ends. The bond term is the period the bond is active for and it usually can be renewed once it ends.