Custom construction

This section refers to all construction jobs except those which are specifically defined as speculative building, federal government contracting, public road construction, logging road construction, radioactive waste cleanup on federal lands, or construction services performed in Indian Country for enrolled members.

Prime contracting

Elements of custom prime contracting: Generally, the prime contractor on a custom construction job is a contractor who is hired by the owner of the land (or person having the rights of ownership such as lessee) to complete an entire job according to contract specifications. The custom prime contractor may perform the construction services or hire others to perform some, or all, of the work.

Excise tax reporting: Gross receipts from prime contracting on a custom construction job are taxable under the Retailing B&O tax classification and are subject to retail sales tax unless a specific exemption applies.

Custom prime contractors as consumers: The prime contractor is a consumer of all items that are not incorporated into the final project. In other words, a prime contractor is a consumer of tools, equipment, and supplies used in performing the construction service. As a consumer, the contractor must pay retail sales tax or use tax on such items.


Retail sales tax

Collecting retail sales tax

Prime contractors must collect retail sales tax from the landowner on the gross contract price (without deduction of costs incurred). Billing invoices must separately state the sales tax. If the contract requires retainage, sales tax must be computed before deducting such amounts.

For purposes of determining the tax due, the department presumes that a selling price quoted in any agreement between parties does not include the retail sales tax unless that tax is separately itemized (RCW 82.08.050). This is true even if the contractor and buyer know and agree that the price quoted includes state and local taxes. The words "tax included" is not sufficient to overcome the requirement to separately state the sales tax.

Bid, contract, pay estimate, or draw request

A contract is written evidence of a sale and should show sales tax as a separate amount. Even though written contract language may state that the selling price includes sales tax, it does not meet the requirement of separately stating sales tax from the selling price. Additionally, progress billings made against the total contract price of a job should separately state the sales tax. If a contract separately states the tax while individual billings omit the tax, the contract will be satisfactory proof that a separate and identifiable sales tax amount was collected from the customer. If individual billings separate the tax, the individual billings are proof of tax collected.

Is sales tax separately stated?

XYZ, Inc. custom builds residential homes on Jane Smith's land. XYZ, Inc. has determined that the contract to build is $162,000 ($150,000 plus 8% tax). The table below identifies the various ways in which the contractor may write the contract and explains the tax consequences:

Contract wording: Is sales tax separately stated?
XYZ, Inc. has a signed contract with Jane Smith which states the selling price is $162,000 with"sales tax included." XYZ, Inc. was paid $162,000 in total. There are no other documents supporting amounts received.

NO - The terms "sales tax included" do not quantify rate and amount of sales tax paid by Jane Smith.

$162,000 x tax rate = sales tax due

$162,000 x .08 = $12,960 sales tax due

B&O tax is due on $162,000

XYZ, Inc. signs a contract stating the total price is $150,000 plus $12,000 sales tax. Progress invoices do not separately state sales tax.

YES - The contract quantifies the rate and amount of sales tax paid by Jane Smith and this information is clearly stated to Jane Smith and XYZ, Inc.

$150,000 x tax rate = sales tax due

$150,000 x .08 = $12,000 sales tax due

B&O tax is due on $150,000

XYZ, Inc. signs a contract indicating tax was included on total price of $162,000. However, the invoices separately state sales tax.

YES - The invoices quantify the rate and amount of sales tax paid by Jane Smith and this information is clearly stated to Jane Smith and XYZ, Inc.

$150,000 x tax rate = sales tax due

$150,000 x .08 = $12,000 sales tax due

B&O tax is due on $150,000


You must compute sales tax before amounts for retainage are deducted on the invoice or bill to the customer. On the excise tax return, report the full selling price without a deduction for retainage under the Retailing B&O tax classification and retail sales tax. (Contractors reporting on a cash basis must also report in this manner.)

As an example, let's say that School Builders, Inc. has a contract with City High School to renovate the cafeteria for $100,000. School Builders, Inc. will invoice based on progress of the job. The sales tax rate is 8% and retainage is 5%. School Builders first progress billing should appear as follows:


Invoice example for a school builder

Line Item Billing

Retail sales tax must be collected on the full selling price. The selling price includes costs that may be itemized and charged directly to the landowner. Such costs are not deductible from the total contract amount. The following invoice illustrates this:


Invoice example


Collecting sales tax – local tax rates

Determining the correct local sales tax rate for retail construction services
Retail construction services are sourced to the location where the construction takes place. This means construction that takes place in Seattle is sourced to Seattle (location code 1726) and taxed at Seattle’s combined state and local sales tax rate.

Construction services performed at a construction site outside of Washington
You are not required to collect Washington sales tax or pay B&O tax when the construction site is outside of Washington.

Paying retail sales tax

A contractor is the consumer of items purchased for use in the construction process and not used as component parts of the finished structure. Therefore, retail sales tax must be paid to the vendors of such items.

Payment of sales tax on goods delivered to job site
Custom contractors that have supplies delivered to the job site pay sales tax on such orders based on the job site location. Custom contractors do not typically need to pay sales tax on construction materials that are incorporated into the real estate improvements.


Reseller permits

The purchase of materials by custom contractors that will become part of the completed project are purchases for resale (wholesale). Such purchases are not subject to retail sales tax. Custom contractors may also purchase subcontractor services for resale. To document that material purchases and subcontractor services are for resale, a prime contractor must give a valid reseller permit to the materials supplier or subcontractor.

Reseller permits are free and are issued to businesses that make wholesale purchases, including qualified contractors. The permits allow businesses to purchase items or services for resale without paying retail sales tax.

Contractors who make purchases for resale (wholesale purchases) must apply for a reseller permit. Applications are available online. Contractors use a separate reseller permit application that includes detailed information on materials and labor purchased.

All reseller permits for the construction industry are valid for two years.

A contractor may not use a reseller permit to purchase items which are consumed in performing construction. Examples of such purchases are equipment, equipment rentals, dyed fuels, tools, form lumber, or visqueen not incorporated into the structure, duplex nails, temporary silt fencing used for erosion control, and other supplies used in performing the construction. The contractor is the consumer of these items.

Contractors who use reseller permits to purchase items or services they use as consumers and do not pay deferred sales tax or use tax on such purchases to the department shall be assessed a misuse penalty of 50% of the tax due on the improperly purchased item or service (RCW 82.32.291). This is in addition to all other taxes, penalties, and interest due.

If the contractor gives a reseller permit to the seller and later uses the items purchased, or if the seller failed to collect the sales tax on items, the buyer must remit the deferred sales tax or use tax due to the department.

Retention of reseller permits: Contractors who accept reseller permits must retain all permits accepted for 5 years.

WAC 458-20-102


Use tax

Use tax is due if sales tax has not been paid on items the contractor uses as a consumer. Normally, use tax is due (if sales tax hasn't been paid) on the following: equipment, tools, supplies, and rentals of equipment, even if the cost for these items is passed along to the landowner. The manner in which the contractor bills to recover expenses of items used as a consumer is inconsequential. For example, the sales tax or use tax is due on the purchase of a specialized tool for a one-time job even though the purchase price is passed on to the customer as a line item.