Custom construction (continued)

Rental of equipment by the contractor

Contractors sometimes rent equipment for construction projects. When this happens, the contractor is the consumer of the rented item and owes retail sales tax to the rental company.

This is no different than purchasing a tool the contractor must have in order to perform its services and passing the cost on to the customer. The sales tax paid by the contractor to the rental company is a cost of doing business and, if it is passed on to the customer, it is considered to be part of the gross contract price that is subject to sales tax.

In this case, there are two separate transactions. First transaction is between the contractor and the rental company. The contractor is the consumer of the rental equipment and must pay sales tax to the rental company. Second transaction is between the contractor and its customer. The customer is the consumer of the construction services and must pay sales tax to the contractor on the total contract price which includes the equipment rental charges, even if they are passed on to the customer with an itemized charge on the invoice/receipt provided to the customer.

The sales tax rate depends on the following:

Single payment

If a single payment is made and the contractor picks up the equipment at the location of the rental company, then the location of the rental company determines the sales tax rate and location code.

If a single payment is made but the equipment is delivered to the contractor at another location, the sales tax rate and location code is determined by the location where the contractor receives the equipment.

If you use line item billing to invoice your customers, see our discussion on line item billing.


Periodic payments

If the item is rented or leased for a length of time and periodic payments are made, the first payment is coded to the location where the contractor receives the equipment, normally the location of the rental company. All subsequent payments are coded to the location where the equipment is primarily used by the contractor.


Rental of equipment with operator services vs. subcontractor services

Rental of equipment with operator services

The department presumes that providing equipment along with an operator to a construction contractor is a retail sale unless it can be demonstrated that the business providing the equipment with operator is responsible for installing, connecting, or affixing construction materials or equipment to land or improvements.

Example A

A business is hired by a prime contractor to provide a crane and a crane operator to work under the direction of the prime contractor to move construction materials and equipment to various locations at the construction site. The business providing the crane and crane operator must charge sales tax to the prime contractor because this activity is considered the rental of equipment with an operator (not a construction service) since that business has no responsibility to actually install or affix materials or equipment to the real property under construction. In addition, the charges for this service are taxable under the retailing B&O tax classification. The crane business cannot accept a reseller permit or a resale certificate from the prime contractor.


Subcontractor services

If the business providing the equipment and operator is contractually responsible for the completed construction, such as installing, connecting, or affixing materials to land or buildings, then it must report its income based on the nature of the activities performed (for example, wholesaling, government contracting, or public road construction, as the case may be). For a custom construction contract, a business providing the equipment and operator can accept a reseller permit or resale certificate from the prime contractor and not collect sales tax. In this limited case, it reports under the wholesaling B&O tax classification and sales tax does not apply.

However, where the construction is taxable as government contracting or public road construction, the charges for providing the subcontractor services are taxable under the government contracting or public road construction B&O tax classification (not wholesaling). Subcontractor services performed in Indian Country for a prime contractor are subject to B&O tax under the wholesaling classification. The subcontractor does not qualify for exemption for construction in Indian Country unless they have contracted directly with the Tribe or a Tribal member.

Example B

A crane operator is hired by a prime contractor to install the HVAC system on the top of a commercial building and must bolt the HVAC system to the roof top framework. In this case, the business providing the equipment and operator is taxable as a subcontractor and may accept a reseller permit or resale certificate from the prime contractor and report under the wholesaling B&O tax classification (sales tax will not apply).


Working directly for landowner

Fees for providing equipment with an operator to a landowner (for example, speculative builder) is taxable as a retail sale regardless of whether such services are considered rental of equipment with operator services or “subcontractor services.”

For further information, see the Indian tax guide.

Concrete pumping services

Note: Effective Apr. 1, 2020, see the department's interim guidance statement on the tax treatment of concrete pumping services.

 

Services rendered in respect to construction

Services rendered in respect to constructing means those services that are directly related to the constructing, building, repairing, improving, and decorating of buildings or other structures and that are performed by a person who is responsible for the performance of the constructing, building, repairing, improving, or decorating activity.

Responsible for the performance means that the person is responsible for the completed construction without regard to who actually performs the construction. A person who only reviews work related to construction but who does not supervise or direct the work is not providing “services rendered in respect to constructing.”

A contract to perform professional services (such as engineering, architectural, surveying, etc.) will not be considered "services rendered in respect to constructing" if a subsequent construction contract is awarded separately to the same person. The contracts will be considered as awarded separately, if at the time the professional services contract is awarded, the parties did not contemplate that the same person would be “responsible for the performance” of the construction.

When a single contract calls for both professional services and “services rendered in respect to constructing,” the total contract price is subject to tax according to the predominant activity performed under the contract.

Land development and management services

Effective June 11, 2020, HB 2229 amended RCW 82.04.051 by excluding “land development and management” from “services rendered in respect to” construction activities if provided by a person that is not also responsible for the construction activities. This amendment does not change the department’s current and prior position of how land development and management services are taxed.

“Land development or management” is defined in RCW 82.04.051 as:

… site identification, zoning, permitting, and other preconstruction regulatory services provided to the consumer of the constructing, building, repairing, improving, or decorating services. This includes, but is not limited to, acting as an owner's representative during any design or construction period, including recommending a contractor, monitoring the budget and schedule, approving invoices, and interacting on the behalf of the consumer with the person who has control over the work itself or responsible for the performance of the work.

Land development and management services are excluded from the definition of “services rendered in respect to” construction activities, as long as the land development or management services are provided by a person who is:

  • Not responsible for the constructing, building, repairing, improving, or decorating activities; or
  • Responsible for the constructing, building, repairing, improving, or decorating activities, but all the following apply:
    • There are separate contracts for these activities and the land development or management services.
    • The initial contract was for the land development or management services.
    • The person can prove that at the time of the first contract, it was not contemplated by the parties that the same person would be awarded both contracts.

If either of the above conditions apply in their entirety, charges for land development and management services are subject to the Service and Other Activities B&O tax classification and retail sales tax is not due. For more information, see our Special Notice regarding land development and management services.

Construction management

Construction management services performed for a consumer are considered services rendered in respect to construction and the income is subject to retailing B&O tax and retail sales tax. This includes those management jobs where the management in substance is prime contracting. Statements in contracts that the "manager" does not have liability for payment of subcontractors or material billings, or does not have final choice over the vendors of these items, does not preclude the activity from being considered services in respect to construction.


Construction activities and related parties

Washington's tax structure imposes a tax on transactions. Whenever there is a transaction (purchase, sale) between two or more persons (entities), tax generally applies. For tax purposes, individuals as well as any separately organized entities (such as partnerships, corporations, joint ventures, etc.) are separate persons. For example, a corporate officer is a separate person from the corporation even though the officer may own all of the corporate shares. Transactions between related entities are treated the same way as transactions between unrelated entities. Persons who perform custom construction upon land owned by related entities are custom prime contractors and must collect sales tax on their charges.

When there is no contract price stated, no billings to support the contract price, or the receipts do not indicate taxable income, the taxable amount is the total amount of construction costs including any charges for licenses, fees, permits, etc., required for construction and paid by the contractor.


Solid fuel burning devices

Custom prime contractors must collect and remit the solid fuel burning device fee, $30 per device, from consumers for all such devices installed in construction improvements. A solid fuel burning device means any device for burning wood, coal, or any other non-gaseous and non-liquid fuel, including a woodstove and fireplace.


Other income

Income received under energy efficient housing credits or union subsidized wages is taxable under the Service and Other Activities B&O tax classification.


Deductions

Following are some deductions applicable to custom construction activities. Some deductions are applicable to both the B&O tax and retail sales tax, however, many deductions are only applicable to one or the other tax.

Sales tax paid on materials: A deduction is allowed under retail sales tax for the purchase price of materials incorporated into the structure if sales tax was paid. For example, if materials costing $500 plus $40 sales tax are incorporated into a custom prime contracting job, then a deduction of $500 is allowed from retail sales tax under the deduction line "Taxable Amount For Sales Tax Paid At Source."

Construction performed outside this state: Neither B&O tax nor retail sales tax applies to income earned from construction activities performed outside of Washington.

Installation of manufacturing/research and development machinery and equipment: Charges for installing machinery and equipment for manufacturers at a manufacturing site are exempt of retail sales tax. In addition, the cost of the machinery and equipment is also exempt. A manufacturer's sales and use tax exemption certificate (pdf) must be secured from the manufacturer (RCW 82.08.02565).

High unemployment county sales and use tax deferral: The High Unemployment County Deferral/Exemption Program grants a waiver of sales/use tax on pre-approved construction of facilities used for manufacturing, research and development and/or commercial testing for manufacturers, and installation of qualified machinery and equipment. The facility must be located in an eligible county or community empowerment zone (CEZ). The contractor is not required to collect sales tax on such charges if the customer presents a deferral certificate from the Department. For more information see our Special Notice: High Unemployment County Sales and Use Tax Deferral Program (pdf).

Construction on Indian reservations: See Construction Services Performed in Indian Country by Nonenrolled Persons section.

Farmworker housing: Construction of qualifying farmworker housing is exempt from retail sales tax when performed for: agricultural employers, housing authorities, federal, state, and local government agencies, nonprofit community or neighborhood-based organizations that are exempt from income tax under 501(c) of the Internal Revenue Code of 1986, and for-profit providers of housing for farmworkers. A Farmer's certificate for wholesale purchases and sales tax exemptions must be secured from the farmworker housing provider.

Alternative housing for youth in crisis: Sales tax does not apply to materials (only) used in construction performed for health and welfare organizations or Alternative Housing for Youth in Crisis. The contractor must segregate materials from all other charges. All other costs and charges, such as labor, are subject to sales tax.


Other types of prime contracting

Technically, federal government contractors, public road contractors, and logging road contractors may also be prime contractors, however, the taxability of those particular activities is different from that of custom prime contracting jobs. Accordingly, those activities are discussed separately in other sections of this guide.


Subcontracting

Generally, a custom subcontractor is a contractor who is hired by a prime contractor to provide a portion of the construction services necessary to make improvements on real estate owned by a third party. Sales tax need not be collected on the subcontractor's charges if the subcontractor secures a reseller permit from the prime contractor. Income from custom subcontracting jobs is reported under the Wholesaling B&O tax classification. (The prime contractor will collect sales tax from the landowner on the total contract price which includes all subcontractors' charges.)

Subcontracting activities Generally, subcontractors perform: roofing, electrical, plumbing, concrete paving, asphalt paving, heat/ventilation/air conditioning, excavating/moving earth, windows, carpeting, lighting, interior decorating, drywall, plaster, tiling, fencing, finish work, and landscape installation.