Improving real property – services provided in respect to construction
When you provide both design services and perform actual improvements to the real property, the taxability of the activity is determined by the predominant activity performed for the entire contract.
- If the predominant activity under the contract is design services, then the income earned from the contract is subject to B&O tax under the Service and Other Activities classification.
- If the predominant activity under the contract is improving real property, then the income earned from the contract is subject to B&O tax under the Retailing classification. In addition, you must collect sales tax from your client on the entire contract amount.
The term “improving real property” means decorating, refurbishing, renovating, remodeling, or other activities that change or alter real property. An improvement activity is presumed to be the predominant activity over design services if, at the time the design services are performed, the parties contemplate that the designer will also be responsible for making the improvements.
Examples of real estate improvement activities include:
- Interior renovations or remodeling
- Installing window coverings, carpets, cabinets or lighting
- Painting, wallpapering, stenciling or sponging
Interior designers making real property improvements should provide a reseller permit to material suppliers and subcontractors performing the real property improvements. (See RCW 82.04.051 for additional information on services provided in respect to construction.)
Real estate “staging”
Charges for "staging" or "showcasing" real property are subject to the B&O tax under the service and other activities classification. For purposes of state taxation, “staging” or "showcasing" is considered to be temporary changes made to a home typically for purposes of showcasing the home or similar homes for sale. It includes arranging of decorative displays, provided by the designer for no additional fee. It also includes arranging of the home owner’s furnishings. Staging does not include charges for renting furnishings to the home owner.
If you charge a fee for supplying furniture or household accessories, those charges are taxable as retail sales. You must collect retail sales tax on the charge for providing furnishings or other tangible personal property to clients. In addition, the income is subject to B&O tax under the Retailing classification. A designer may purchase furniture that will be used exclusively for renting, may use a reseller permit to purchase such items without paying sales tax.
“Staging” does not include making improvements to real property, such as painting walls, stenciling, wallpapering, etc. You must collect sales tax on charges to make improvements to real property. In addition, the charges are subject to B&O tax under the Retailing classification.
Example 1: Donna’s Decorating is hired by Bob, a homeowner, to help him sell his house. Under the agreement, Donna will provide her professional skill in staging the house. Donna will arrange Bob’s furniture and household goods in such a way to make the house more appealing to potential buyers. Donna will also provide decorative items such as candles, vases and flowers that are incidental to the arranging activities for no additional charge. (Donna owes sales tax on these decorative items.)
The income received by Donna for staging is subject to the B&O tax under the Service and Other Activities classification.
Example 2: David’s Design is hired by Joe, a homeowner, to help him sell his house. Under the agreement, David will use some of his own furniture because Joe has already moved most of his furniture out of the house. David will charge Joe a rental fee of $100 per week and a one-time fee for staging of $400.
The income received by David for staging is subject to the B&O tax under the Service and Other Activities classification. The rental charge is subject to the B&O tax under the Retailing classification and David must charge sales tax on the rental fee. David may purchase the rental furniture with a reseller permit and not pay sales tax if the furniture is exclusively held for rental.
Example 3: Sally’s Staging is hired by Karen, a homeowner, to help her sell her vacation home. Under the agreement, Sally will repair holes in the walls, paint the interior, and arrange the furniture and household goods in such a way to make the house more appealing to potential buyers. Sally charges $800 for the repairs and painting and $400 for the staging.
The entire $1,200 charge is subject to B&O tax under the Retailing classification and sales tax applies. Because Sally is making improvements to real property by repairing walls and painting, the gross contract price is considered a retail sale. Sally cannot breakout her fees for staging even if she separately itemizes or bills for these services.
Example 4: Sam’s Design is hired by a builder that needs her expertise in showcasing model homes at a new development. To help showcase the model homes Sam will provide and charge for furniture and household accessories on a long term (i.e., month to month) basis. Sam will also hang pictures and mirrors on the walls to enhance the look of the model homes. Sam will charge an initial fee of $500 for arranging and showcasing the home. She will continue to charge the builder a $200 monthly fee for the furniture and household accessories.
In this case, the charges for furniture and household accessories of $200 each month will be subject to sales tax and the income received will also be subject to the B&O tax under the retailing classification. Sam is considered to be renting the furniture and household accessories.
The initial fee of $500 is subject to the B&O tax under the service and other activities classification. This fee is considered to be for staging services.
Sam is not considered to be making improvements to real property because the pictures and mirrors are only temporarily hung on the walls for display purposes.
Example 5: Sandra’s Showcasing is hired by a homeowner that is selling their home. Sandra generally provides staging activities for her clients. However, the homeowner, trying to cut costs and save money, has asked Sandra to merely supply furniture and accessories for them so that they can arrange the home in their own way. Sandra charges a fee to the homeowner for the furniture.
The income received by Sandra for the rental charges is subject to the B&O tax under the Retailing classification and Sandra must charge retail sales tax on the charges.
Purchasing and using items for display
You must pay retail sales tax or use tax on items, such as furnishings, rugs, art, or other goods purchased or used as displays for your business for places such as showrooms, model homes, galleries, etc.
You do not need to pay sales tax or use tax on such items if they are only rented to clients (see above). Additionally you do not need to pay retail sales tax or use tax on items that are inventory items purchased for resale unless the item is carried on your books as display merchandise or is used so extensively for display purposes that it can no longer be sold as new merchandise.
If you have questions about the correct tax application for a specific activity, you can request a tax ruling. Letter rulings are binding on the taxpayer and the Department, based on the facts provided in the request. Generally, you will receive a reply within ten working days.
For more information
If you have general questions you can contact us or call our Telephone Information Center at 360-705-6705.