Tax paid at source deduction

Custom construction contracts

Washington Administrative Code (WAC) 458-20-102 (11)(b) discusses the procedures to be followed when a contractor has paid Washington sales tax on goods incorporated into a custom contract.

If a contractor pays Washington sales tax on purchases of materials and subsequently resells a portion of the materials as components of a custom contract, the contractor may claim a deduction on the retail sales tax line of the excise tax return for the amount paid for the materials, not including the sales tax. The contractor is still required to collect sales tax on the total contract price from their customer based on the job site location.

When completing the excise tax return, the deduction under the retail sales tax must be itemized on the deduction detail as "taxable amount for tax paid at source.” Failure to properly identify the deduction may result in the deduction being disallowed. When completing the local sales tax portion of the tax return, the deduction must be computed at the local sales tax rate paid to the seller, and credited to the same location code reported by the seller. 

Example

A custom contractor purchases materials costing $100,000 from a supplier located in the City of Tacoma. The contractor picks up the materials at the supplier’s location and pays retail sales tax to the supplier based on the Tacoma tax rate. The contractor later uses the materials in a $200,000 retail (custom) construction project in the City of Seattle. The contractor is required to collect from its customer sales tax at Seattle's tax rate. Tax is collected on the total contract price of $200,000. To recover the sales tax paid on materials purchased from the Tacoma supplier, the contractor is entitled to claim the "taxable amount for tax paid at source" deduction, and the local tax deduction must be coded to the City of Tacoma.

In reporting the retail construction income, the contractor must code the income to the City of Seattle. The net result of this procedure is to collect and remit retail sales tax based on the location of the construction service (Seattle). By coding the "tax paid at source" deduction to the location where sales tax was paid on the purchase of materials (Tacoma), the local sales tax for retail construction services is properly applied in full to the place where the construction activity occurs.

The construction income in this example would be reported on the excise tax return as follows:

Retailing B&O tax (Gross Amount) $200,000
No Deduction
Retailing, Net (same as gross) 200,000

 

Retail Sales Tax - State Rate (Gross Amount) $200,000

Taxable Amount for Tax Paid at Source deduction (100,000)

Net taxable amount $100,000

 

Local city and/or county sales and use tax

City of Seattle - location code 1726 $200,000

City of Tacoma - location code 2717 ($100,000)

 

This reporting procedure results in a corresponding reduction of local sales tax distribution to the City of Tacoma. This is proper since sales tax was not actually due on the purchase of materials from the Tacoma supplier, and sales tax is actually due based on the location of the construction activity.

Sales tax paid to other states

Sometimes out-of-state contractors purchase materials in another state and pay that state’s sales tax. If such a contractor is the consumer of the materials (e.g., a speculative builder) the contractor may take a credit against their Washington use tax liability for another state’s sales or use tax paid on the materials used in Washington.

However, if the contractor is performing custom construction, the contractor is required to collect Washington sales tax from his customer on his gross contract price. There is no provision under Washington law by which a credit can be given against the sales tax due on the contractor's sale for another state’s sales or use tax paid by the contractor. Further, the deduction under the retail sales tax classification for Taxable Amount for Tax Paid at Source is only for the cost of materials on which Washington sales tax was paid. No deduction is allowed if sales tax was paid to another state on such materials.

Other construction scenarios include:

Public road construction

Sales tax applies to construction materials installed in public roads owned by cities, counties, municipal subdivisions and in road construction for the federal government. The local sales tax is based on the location where the contractor receives the materials from the supplier. In the above example, the local sales tax would be coded to the City of Tacoma (Code 2717).

Government contracting

In construction of buildings and other structures for the United States government, local sales tax applies to the construction materials based on the location where the contractor receives the materials from the supplier. In the above example, the local sales tax would go to the City of Tacoma.

State (or private) road construction

In construction of state or private roads, local sales tax applies to the construction charges based on where the construction activity occurs. If a contractor pays sales tax to a supplier when purchasing materials used in this type of construction activity, the contractor is entitled to take a "taxable amount for tax paid at source" deduction, as noted above under Custom Construction. With this procedure, the proper amount of local sales tax revenue is distributed to the location where the construction activity takes place.