Tax on Construction May Apply To Separately Contracted Design Services in Washington

Friday, June 8th, 2018

Construction contractor working on design.

The Washington Department of Revenue recently ruled that design services were taxable as part of a construction contract.

The taxpayer was a residential contractor that performed construction and design services. The design and construction work were performed under separate contracts. Additionally, the taxpayer received what it described as a "commission" for acting as an "investor" on a project for which it was the contractor.

Washington taxes the construction or improvement of new or existing buildings, but it does not impose tax on design services. However, when a service provider contracts to perform nontaxable services relating to construction, and then contracts to perform the construction, the entire charge is taxable if the parties "contemplated" at the time of the first contract that both contracts would be awarded to the service provider. The ruling found that (1) the design services were taxable because the parties contemplated that both contracts would be awarded to the taxpayer, and (2) the "commission" payment was for taxable construction services rather than investment purposes.

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