Under the prime contracting classification for direct costs of architectural and engineering services, a privilege tax exemption applies to direct labor costs, direct material costs and third party subcontracted costs. To qualify for the exemption, the service must be performed by a person who is registered, certified, or licensed to perform architectural or engineering services, or an employee of such a person. Additionally, the contractor must have both gross proceeds and qualified direct costs from the same contract. However, costs that are essential to the performance of a contract do not necessarily qualify for an exemption as direct costs. (Arizona TPR 06-2, December 19, 2006)