Current through Register Vol. 24-06, March 15, 2024
(1)
Introduction. This rule explains the taxation of businesses
engaged in "government contracting"; i.e., constructing, repairing, decorating,
or improving new or existing buildings or other structures under, upon, or
above real property of or for the United States, its instrumentalities, or a
county or city housing authority created pursuant to chapter 35.82 RCW. It also
explains the reporting requirements for persons engaged in these activities.
(a)
Examples. Examples included
in this rule identify a number of facts and then state a general conclusion;
they should be used only as a general guide. The tax consequences of all
situations must be determined after a review of all the facts and
circumstances.
(b)
Other
rules that may apply. The following rules may contain additional
relevant information for persons engaged in government contracting or persons
working with or for government contractors:
(i) WAC
458-20-134
Commercial or industrial use;
(ii)
WAC
458-20-170
Constructing and repairing of new or existing buildings or other structures
upon real property;
(iii) WAC
458-20-171
Building, repairing or improving streets, roads, etc., which are owned by a
municipal corporation or political subdivision of the state or by the United
States and which are used primarily for foot or vehicular traffic;
(iv) WAC
458-20-178
Use tax and the use of tangible personal property;
(v) WAC
458-20-190
Sales to and by the United States and certain entities created by the United
States-Doing business on federal reservations-Sales to foreign
governments;
(vi) WAC
458-20-211
Leases or rentals of tangible personal property, bailments.
(c)
Definitions. The
definitions in WAC
458-20-170
apply equally for this rule, as appropriate. In addition, the terms "clearing
land" and "moving earth" include any grading or clearing of land, including
razing buildings or other structures, as well as well drilling, core drilling,
and digging holes, regardless of whether or not casing materials are
installed.
(2)
Business and occupation tax.
(a)
Manufacturing. Government contractors that manufacture or produce
any tangible personal property for their own commercial or industrial use in
performing government contracting activities must report the value of the
property manufactured under the manufacturing B&O tax classification. See
RCW
82.04.240. In these circumstances, the
government contractor is considered the consumer of the manufactured product
and should not report the value of the manufactured product on either the
retailing or wholesaling B&O tax classifications. The multiple activities
tax credit is not allowed on this transaction.
(b)
Government contracting.
Persons, including subcontractors, engaged in constructing, repairing,
decorating, or improving new or existing buildings or other structures under,
upon, or above real property, including installing or attaching tangible
personal property therein or thereto, and clearing land or moving earth, of or
for the United States, its instrumentalities, or county or city housing
authorities of chapter 35.82 RCW are taxable under the government contracting
B&O tax classification, on the gross income from those activities. See
RCW
82.04.280(1)(g). The measure
of the tax is the gross contract price.
(3)
Retail sales tax.
(a)
Government contracting activities
excluded. The retail sales tax does not apply to any portion of the
contract price for any business activities taxable under the government
contracting B&O tax classification described in subsection (2)(b) of this
section.
(b)
Materials. Prime and subcontractors engaged in government
contracting are "consumers" under
RCW
82.04.190 and must pay retail sales tax or
use tax on all purchases of materials. Examples of common materials on which
sales or use tax would apply include prefabricated and precast items,
equipment, and other tangible personal property installed, applied, attached,
or otherwise incorporated in their government contracting work. Sales tax
applies to the contractor's purchases notwithstanding that the full purchase
price of the property will be reimbursed by the government or housing authority
in the gross contract price, and notwithstanding that the contract provides
that the title to the property vests in the government or housing authority
immediately upon its acquisition by the contractor.
(c)
Tools and consumables.
Government contractors must pay retail sales tax on purchases and leases or
rentals of tools, consumables, and other tangible personal property they use as
consumers in performing government contracting as described in subsection
(2)(b) of this section.
(4)
Use tax.
(a) Use tax applies to the value of all
materials, equipment, and other tangible personal property a government
contractor purchases at retail, acquires as a bailee or donee, or manufactures
or produces for commercial use or industrial use and upon which the contractor,
its bailor, or its donor paid no retail sales tax.
(b) Government contractors are required to
remit use tax on the value of government-provided tooling as well as property
provided by the federal government to the contractor for installation or
inclusion in the contract work.
(c)
Either the prime contractor or a subcontractor may be held responsible for
payment of the applicable use tax unless there is proof that one of these
persons has paid the tax to the department because both persons are "consumers"
of the tooling/property under
RCW
82.04.190(6).
Example 1. Prime Contracting LLC contracts
directly with the United States government to construct a new mess hall on a
military base. As part of the project, Prime Contracting LLC manufactures
custom wall cabinet storage units at their workshop, then delivers and installs
the units in the newly constructed kitchen. Prime Contracting LLC must report
the value of the manufactured cabinets under the manufacturing B&O tax
classification. Prime Contracting LLC is also subject to use tax on the value
of the cabinets. The gross income from the government contract must be reported
under the government contracting B&O tax classification.
Example 2. Assume the same facts as Example 1,
except Prime Contracting LLC, after manufacturing the cabinets, hires a
subcontractor, Classy Cabinets Ltd., to install them. If Prime Contracting LLC
does not report and remit use tax on the value of the cabinets, Classy Cabinets
would be responsible for paying the use tax. Both Prime Contracting LLC and
Classy Cabinets Ltd. will report their income from the project under the
government contracting B&O tax classification.
Example 3. Assume the same facts as Example 1,
except Prime Contracting LLC hires subcontractor, Classy Cabinets Ltd., to
build and install the custom cabinets. In this scenario, Classy Cabinets Ltd.
is the manufacturer of the cabinet units and must report the value of the
manufactured cabinets under the manufacturing B&O tax classification. Both
Prime Contracting LLC and Classy Cabinets Ltd. will report their income from
the project under the government contracting B&O tax classification. Classy
Cabinets Ltd. is also subject to use tax on the value of the cabinets. If
Classy Cabinets Ltd. does not report and remit use tax on the value of the
manufactured cabinets, Prime Contracting LLC would be responsible for paying
the use tax.
Example 4. Assume the same facts as Example 3,
except the United States government provides Classy Cabinets Ltd. with a tool
necessary to install the manufactured cabinets. Classy Cabinets Ltd. is subject
to use tax on the value of the tool used. See
RCW
82.12.010(7) and WAC
458-20-178(4)(f)
for information on the use tax value of articles used in bailment situations.
If Classy Cabinets Ltd. does not report and remit use tax on the value of the
tool used, Prime Contracting LLC would be responsible for paying the use
tax.
(5) This
rule does not apply to public road construction. See WAC
458-20-171.
Statutory Authority:
RCW
82.32.300. 86-10-016 (Order ET 86-9), §
458-20-17001, filed 5/1/86.