Sales Tax State Activity Update - October 2005

You Say Contractor, I Say Speculator – Let's Call the Whole Thing Taxed

The Washington Department of Revenue recently ruled that a contractor's sales of condominium units were subject to retail sales tax because he was a prime contractor and not a speculative builder. The contractor paid retail sales tax on the purchase of materials used in construction activities and did not collect sales tax from customers. The contractor was assessed retail sales tax on the sales of the condominiums.

Background
A corporation (i.e. contractor) is a builder of residential housing in Washington. The corporation's shareholders purchased the land used to construct the condominiums. The corporation performed the construction activities that it financed with funds from a construction loan. Upon completion of the construction, the shareholders sold the condominium units to third parties.

Washington Law
Under Washington laws and regulations, a speculative builder is a person who builds for resale on land it owns. A custom builder is one who builds on land owned by another. The owner of the land is considered the consumer. A speculative builder pays retail sales tax on the purchase of materials and construction services used in construction activities. When a speculative builder sells or contracts to sell property upon which he is presently constructing a building, all construction done subsequent to the date of such sale or contract constitutes a retail sale and the portion of the sales price allocable to construction done after the agreement shall be subject to sales tax. Prime contractors are required to collect from consumers the retail sales tax measured by the full contract price.

The determining factor in this case is whether the corporation (i.e. contractor) or the shareholders are the owner of the real property. The Department established the shareholders are the owner of the land because the corporation didn't keep records evidencing ownership or liability for the purchase of the real estate.

Shareholders financed the land purchase with their own funds, shareholders and were the named sellers of the condominiums and reported the income from the sales. In addition there were no corporate records approving the sale of the condominiums. Since the corporation (i.e. contractor) is not the owner of the land, it is a prime contractor and sales of the condominiums are subject to retail sales tax.

The Ruling
In accordance with Washington laws and regulations, the Department permitted the corporation to deduct from the assessed amount sales tax paid on construction purchases as a prime contractor and sales costs incurred by the shareholders.

Visit the Washington State Department of Revenue website for further information.

(Washington Administrative Law Judge Ruling No. 05-0060, 24 WTD 433, 8/30/05)

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