Washington's excise taxes apply to all business activities conducted in the state. Corporations, partnerships, sole proprietorships, joint ventures, nonprofit organizations, limited liability organizations, etc., conducting business in this state (whether or not the business has office locations in Washington), are all subject to these taxes.
Businesses subject to any of Washington's excise taxes must register with the Department of Revenue by completing a Business License Application.
The following section provides an overview of how tax applies to the construction business. Terminology, construction activities and a general description of the seven categories of construction will be covered.
Business and occupation tax: Washington's business and occupation (B&O) tax is levied on the gross receipts of business operations. This means there are no deductions for labor, materials, taxes or other costs of doing business. This is different from an income tax which is applied to the net income of business operations. The nature of the business activity determines appropriate B&O tax reporting. There are different B&O tax classifications for extracting, manufacturing, wholesaling, government contracting, public road construction, service and other activities, retailing and others. Each classification has its own tax rate. Businesses performing more than one activity may be subject to tax under one or more B&O tax classifications. Each business owes the B&O tax on its gross income. For example: where a prime contractor has a $100,000 construction contract and hires a subcontractor to perform a portion of the construction for $20,000, the prime contractor is taxable on $100,000 and the subcontractor is taxable on $20,000.
Retail sales tax: Businesses selling goods at retail or performing retail services (such as custom prime construction) must also collect and remit retail sales tax on their total charges unless a specific exemption applies. This taxable amount includes charges for permits and other fees, labor, profit, materials and charges for subcontractors. Sales tax rates vary around the state. Contractors performing retail services must collect sales tax based on the tax rate of the jurisdiction in which they perform their services.
Wholesale sales: Businesses making wholesale sales do not collect retail sales tax on their charges. However, they must obtain a reseller permit from the buyers to document why sales tax was not collected. Wholesale sales are those made to businesses buying a product or service for resale. Subcontractors on custom construction projects (a wholesaling activity) must receive and accept in good faith a reseller permit from the prime contractor or another subcontractor.
Use as a consumer: All persons engaged in construction are consumers in regard to the tools (purchased or rented) and supplies (items which are not finally incorporated into the real estate) used in performing the construction. However, depending on the type of construction being performed, the builder may also be considered the consumer of materials incorporated into the job. Refer to the section addressing the particular construction activity to find the types of items that are used as a consumer. Contractors may not use a reseller permit to purchase items "used as a consumer" in performing construction services.
Purchases for resale: Purchases for resale are purchases of items or services which will be resold without intervening "use as a consumer." Retail sales tax or use tax is not paid on purchases for resale. Contractors purchasing items for resale must give the vendor a reseller permit to avoid paying sales tax. If sales tax is paid, the contractor may claim a "tax paid at source" deduction (WAC 458-20-102).
Use tax: In general, use tax is due on items "used as a consumer" upon which retail sales tax has not been paid. If sales tax has not been paid on purchases of tools, supplies, and materials used in the construction but not incorporated into the real estate improvements, use tax is due. Use tax is also due on items extracted (such as rock) or produced (such as tooling) and used by the contractor in performing the construction. The use tax and sales tax rates are the same. The applicable tax rate is determined by the location where the item is first used or where the construction service is performed.
Deferred sales tax: Deferred sales tax is due when goods are acquired without payment of sales tax under such conditions that the sales tax was due. This most commonly occurs when goods are purchased for dual purposes. A purchase for dual purpose occurs when a business purchases goods both to resell and to use in the business. A business may give its supplier a reseller permit for goods purchased for dual purposes if the majority of the goods are purchased for resale (WAC 458-20-102). While many people assume that use tax is due if goods are used without the payment of sales tax, it's actually deferred sales tax that is due. Referring to the tax as "deferred" simply means that the payment of sales tax is deferred until it is determined that the goods will not be resold. Deferred sales tax is computed upon the purchase price. This includes shipping/handling or freight charges. The tax rate and location code (tax jurisdiction) is based on where the contractor received the items, just like sales tax. For example, if the contractor picked up the items at a store, then the store location would determine the sales tax rate and location code. If the items were delivered to the contractor, then the delivery address would determine the correct sales tax rate and location code.
Report deferred sales tax on the use tax/deferred sales tax line and the local use tax/deferred sales tax lines of your excise tax returns.
Gross contract price - taxable consideration: The gross contract price to provide a construction service is the amount subject to tax. The gross contract price includes all charges related to a specified job under one contract. This includes all consideration paid without deduction for costs, even if those costs would not be defined as construction services if provided independent of a construction contract. For example, billings to a customer for building permits, engineering fees, architectural fees, tools, and tax expenses are part of the gross contract price subject to tax. A customer's payment of the contractor's liabilities directly to third parties is also taxable as part of the gross contract price.
When a contract calls for progress payments, tax is due on the gross amount billed. Sales tax is considered collected only when stated separately on contract documents and/or sales invoices.
Disputed claims/billings: An amount not paid because of a dispute is subject to tax until the unpaid claim is written off as a bad debt. If additional income results from a court ordered settlement, the income is considered part of the gross contract amount subject to tax. Some of the settlement amount may be considered by the court to be interest because of late payments. This interest is not part of the gross contract amount, but it is subject to tax under the Service and Other Activities B&O tax classification.
Penalty clause in the contract: Losses suffered by a contractor because of a penalty clause for failure to complete work by a specified time are not deductible from the gross contract price in determining taxes due. If retainage is not paid because the contractor failed to perform, the lost retainage is not deductible from the gross amount subject to tax.
In general terms, construction activities include, but are not limited to:
- installing, repairing, cleaning, improving, constructing and decorating real property
- constructing and improving new or existing buildings and structures
- cleaning, fumigating, razing or moving structures
- cleaning and repairing furnaces and septic tanks
- clearing land and moving earth
- drilling oil or water wells
- building or improving streets, roads, etc.
- hazardous waste site cleanup
- radioactive waste cleanup
- services in respect to the performance of any of the above jobs
In more specific terms, construction activities also include the performance of general contracting, construction management, construction cleanup/debris removal, landscaping, painting, plumbing, electrical wiring, heat/ventilation/air conditioning, roofing, flooring/carpeting, windows, masonry, concrete, drywall, lighting, windows, framing, carpentry, trim work, etc.
Construction categories for tax purposes
Businesses perform construction activities as prime contractors, subcontractors, or speculative builders. Businesses may perform construction as a prime contractor on one job, a subcontractor on another, and as a speculative builder on yet another project.
Generally, a prime contractor is hired by the landowner and a subcontractor is hired by a prime contractor. For state tax purposes, the difference between a prime contractor and a subcontractor is only significant on "custom" contracting jobs. Otherwise, a prime and subcontractor are treated the same for tax purposes.
To determine how to properly report your taxes, you must determine which category of construction activities you perform. A general description of each of the categories follows. Further information on each category of construction activity is detailed in the respective section of this guide.
1. Custom construction
Generally, custom construction involves residential and commercial construction performed for others, including road construction for the state of Washington. However, custom construction is also a catch-all (or default) category for other construction activities. That is, custom contracting is the category for construction activities that are not specifically designated as speculative building; federal government contracting; public road construction; logging road construction; radioactive waste cleanup on federal lands; or designated hazardous site cleanup jobs.
Prime contracting: Custom prime contracting is when a contractor is hired by a landowner (or a person having the rights of ownership, such as a lessee or easement holder) to complete an entire construction project. The custom prime contractor may perform all, or a portion of the construction, or hire other contractors (subcontractors) to perform all, or a portion of the work. The income from custom prime contracting (without deduction for any amounts paid to subcontractors) is reported under the Retailing B&O tax classification and is subject to retail sales tax unless a specific exemption applies.
Subcontracting: Custom subcontracting is when a contractor is hired by a custom prime contractor to provide a portion of the services necessary to complete the project. Income from custom subcontracting is reported under the Wholesaling B&O tax classification.
2. Speculative building
Speculative building is when a builder makes improvements on land he/she owns. Speculative builders are not subject to B&O tax or retail sales tax on the sale of the real estate. They are, however, subject to the real estate excise tax. On some projects, the landowner will directly hire different contractors to perform portions of the total project. In these cases, each contractor hired by the landowner is taxable as a custom prime contractor.
3. Federal government contracting
The Government Contracting B&O tax classification applies only when a prime or subcontractor engages in constructing, installing, and improving real property of, or for, the United States, its instrumentalities, or a county or city housing authority.
4. Public road construction
The Public Road Construction B&O tax classification applies only when a prime or subcontractor builds, repairs, or improves streets, roads, etc., owned by a municipal corporation or political subdivision of the state of Washington or the federal government. (This type of construction does not apply to roads owned by the state of Washington.)
5. Logging road construction
Logging road construction is road construction which is directly related to a logging operation. Generally, income from logging road construction which is directly related to a logging operation is reported under the Extracting/Extracting for Hire B&O tax classification.
6. Construction services performed in Indian country
When construction is performed in Indian Country for enrolled tribal members.