Do Contractors Charge Sales Tax on Labor in Washington State?
In Washington, sales tax on construction generally includes labor. Understand how the tax obligation changes between different types of building projects.
Whether contractors charge sales tax on labor in Washington depends on the nature of the work and the contract structure. Understanding these tax implications is important for budgeting and legal compliance for both consumers and contractors.
The General Rule for Taxing Contractor Labor
In Washington, the law treats most construction, repair, and installation services as “retail sales.” Consequently, contractors are required to collect retail sales tax from their customers on the total amount charged for a project.
The “total contract price” is a term defined by the Washington Department of Revenue. The taxable amount includes not only the cost of materials but also charges for labor, subcontractor fees, and equipment rentals. The contractor is responsible for calculating the tax based on this total price and remitting it to the state.
It is a legal presumption under Revised Code of Washington 82.08.050 that any contract price does not include sales tax unless stated otherwise. If a contract is silent on sales tax, the customer is still obligated to pay the applicable tax on top of the agreed-upon price. This makes it important for both parties to clearly address sales tax in their agreements.
The sales tax rate is not uniform across the state. Contractors must apply the rate effective in the jurisdiction where the work is performed. This local rate is a combination of the state sales tax and any applicable local taxes, which can vary from one city or county to another.
Differentiating Custom and Speculative Construction
The tax treatment of a construction project changes depending on who owns the land when the work is performed. The most common scenario is “custom construction,” which involves a contractor performing work on a landowner’s property and is considered a retail sale.
In a custom construction arrangement, the contractor collects retail sales tax from the property owner on the full contract price, which includes both labor and materials. The contractor can purchase materials that become a permanent part of the building without paying sales tax by providing their supplier with a reseller permit.
A different set of rules applies to “speculative construction.” This occurs when a contractor builds on land they own with the intention of selling the property upon completion. In this model, the builder is improving their own asset for future sale, not performing a retail service for a customer.
For speculative projects, the builder does not charge the final home buyer retail sales tax on the sale of the improved property. The sale of the real estate is subject to the Real Estate Excise Tax (REET). The builder is considered the “consumer” of all materials used and must pay sales tax on all material purchases or remit use tax to the state.
The Role of Subcontractors and Reseller Permits
When a prime contractor hires subcontractors for a custom construction job, the reseller permit is a key document. If the prime contractor provides a reseller permit, the subcontractor does not collect sales tax on their charges, as this is considered a wholesale sale. The prime contractor then incorporates the subcontractor’s charges into the total contract price charged to the final customer. The prime contractor is ultimately responsible for collecting sales tax from the property owner on this all-inclusive price.
If the prime contractor does not provide a reseller permit, the subcontractor is required to treat the job as a retail sale. They must collect sales tax from the prime contractor on their charges. This can lead to tax being paid twice on the same portion of the project.
Tax Treatment for Specific Services and Projects
Washington also applies specific tax rules to various construction-related services. Services such as repair, remodeling, and installation are classified as retail activities. The contractor must collect sales tax from the consumer on the total charge, including both labor and materials.
Landscaping and horticultural services also fall under retail services and are subject to sales tax. This includes activities like lawn maintenance, planting, and design services. The provider must collect sales tax on their total billings to the client.
A significant exception to the retail sales tax rule is public road construction. When a contractor works on roads for government entities, they do not collect retail sales tax. Instead, the contractor is the consumer of all materials and must pay sales tax to their suppliers or remit use tax to the Department of Revenue. This tax model also applies to contractors building logging roads.