Public road construction is the activity of building roads, streets, sidewalks, etc., owned by cities, counties, or political subdivisions of the state or the United States which are primarily used for foot or vehicular traffic. Both prime and subcontractors engaging in these activities are subject to public road construction B&O tax. Public road contractors do not collect retail sales tax.
Building roads which are owned by the state of Washington, privately owned, or owned by tribes on their Indian reservations, are not public road building. These activities are taxable as custom contracting. There is an exemption from retail sales tax for construction on land owned by tribes on their Indian reservations.
Public road building activities
The terms "building, repairing or improving of a publicly owned street, place, road, etc.," include all of the following:
- Clearing, grading, graveling, oiling, paving, and the cleaning thereof.
- Constructing of tunnels, guard rails, fences, walks, and drainage facilities.
- Planting of trees, shrubs, and flowers therein.
- Placing of street and road signs.
- Striping of roadways.
- Painting of bridges and trestles.
- Construction of road and street lighting systems, even though portions of such systems are also used for purposes other than street lighting.
- Construction of a drainage system in roads, even though such systems are also used for the carrying of sewage (storm sewage).
- Mining, sorting, crushing, screening, washing, and hauling of sand, gravel and rock taken from a public pit or quarry.
- Construction of certain mass transit buildings for mass transit authorities.
The terms "building, repairing, or improving of a publicly owned street, place, road, etc.," do not include:
- Constructing water mains, telephone, telegraph, electrical power, or other conduits or lines in or above streets or roads, unless such power lines become a part of a street or road lighting system.
- Constructing of sewage disposal facilities (sanitary sewers).
- Installing of sewer pipes for sanitation unless within, and a part of, a street or road drainage system.
- Construction, repairing, improving parking lots (unless part of a mass transportation facility).
Roads dedicated to the city or county
Additionally, construction of streets or roads dedicated to a city or county is public road construction. If the road is not finally dedicated to the public body within a reasonable period of time after the work is completed, retail sales tax applies.
The prime contractor or developer may provide a letter to a subcontractor certifying that the roads will be dedicated to the city/county at the end of the development. The letter should be signed by the contractor/developer or his/her designated agent. In this case, the subcontractor knows that the construction of the road requires them to bid, with use tax included in their cost considerations. Alternatively, the contractor/developer may give a subcontractor a copy of the city's acceptance letter of the roads for dedication. Both methods are acceptable proof of public road construction as opposed to custom construction.
Public road contractor as the consumer
Public road contractors (both prime and subcontractors) are consumers of materials they incorporate as an ingredient or component of a road. Public road contractors must pay retail sales or use tax on all materials they place in, or on, the road as well as on equipment and supply purchases. This applies to materials whether they are purchased, provided by others, or manufactured/extracted by the contractor.
Manufacturing/extracting materials by the contractor
Off-site asphalt plants: The production of asphalt away from the road construction site is a manufacturing activity. The value of the material produced is subject to the manufacturing B&O tax and use tax.
For periods prior to August 1, 2023, the value is based on the fair market value of the materials as provided in WAC 458-20-112. In the absence of comparable sales of similar products as a guide to value, the value is determined by totaling all costs incurred to produce the asphalt, including labor and overhead.
Method: The determination of comparable sales requires an evaluation of the following factors:
- Sales at comparable locations in this state.
- Similar products of like quality and character.
- In similar quantities.
- Under comparable conditions of sale.
- To comparable purchasers.
Effective August 1, 2023, the value of asphalt or aggregates is equal to the sum of all direct and indirect costs attributable to the asphalt or aggregates used, plus a public road construction market adjustment of 5% of those costs.
For more information, please see our Special Notice.
Rock: The removal of rock from either a pit owned by the road builder or from pits owned by or leased to the public authority is considered extracting. The value of the rock is subject to extracting B&O tax. If the contractor also applies the materials to the road, the value of the rock is subject to use tax. The value is based on the fair market value of the materials as provided in WAC 458-20-112. In the absence of sales of similar products as a guide to value, the value is determined by the total costs attributable to the extracted and processed rock, including raw material, extraction and processing costs, overhead, and any transportation costs between the extraction site and the processing site.
Job site plants: The production of asphalt at a public road construction job site pursuant to performing a road construction contract is not manufacturing. Sales tax or use tax is due on the value of the raw materials used to produce the asphalt.
Processing rock for placement by political subdivisions: The B&O tax does not apply to the cost of, or charge made for, labor and services performed in respect to the mining, sorting, crushing, screening, washing, hauling, and stockpiling of sand, gravel, and rock. This is true when such sand, gravel, or rock is taken from a pit or quarry which is owned by or leased to a county or city and is either:
- Stockpiled in said pit or quarry for placement on the street, road, or highway by the county or city itself using its own employees.
- Placed on the street, road, or highway by the county or city itself using its own employees.
- Sold by the county or city at actual cost to another county or city for road use.
A business which simply sells (doesn't apply or spread) materials without performing public road construction activity is not in the business of public road construction. They must collect retail sales tax on total charges for materials (including delivery charges) from the purchasing contractor.
Bifurcation of contract activity
Public road construction includes the business of building, repairing, or improving any street, place, road, etc., which is owned by a municipal corporation or political subdivision of the state or the United States. Road work completed on property owned by the state or an individual is not public road construction. The definition is based on ownership of the road, not who pays for the road work. Therefore, a road contract with the state which includes improvements to a passage of road owned by the United States is part retail and part public road construction. In this case, only part of the total construction is taxed as public road construction. The remainder is taxed as custom construction.