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On September 1, 2020, the Washington Department of Revenue issued information on sales and excises taxes related to custom construction.
The notice provides details and examples related to:
Equipment rental by contractors is one transaction that often creates confusion under Washington law.
The rental of equipment without an operator is subject to retail sales tax when "sold" to the contractor. There is no sales tax deduction available from the taxable amount that the contractor charges their customer, if the contract is subject to sales tax.
The rental of equipment with an operator is presumed to be subject to retail sales tax unless the contractor can show that the operator was acting in the capacity of a subcontractor and was providing a service where the operator was responsible for installing or connecting construction materials to the project.
The Washington DOR guidance provides an example of a construction company renting equipment with an operator:
"A business is hired by a prime contractor to provide a crane and a crane operator to work under the direction of the prime contractor to move construction materials and equipment to various locations at the construction site."
Even though this crane rental service comes with an operator, because the service provider has no obligation to install any construction materials on the jobsite, they must charge sales tax to the construction company on the rental. Their job was to lift something from "point A" to "point B," but there was no responsibility to install or affix materials on the jobsite.
If the crane service was obligated to construct something, then it may be considered a subcontractor arrangement with the prime contractor. If this were the case, then the crane service could be considered to be performing the service as a subcontractor and would report the sale as a wholesale sale, which is not subject to sales tax.
As a reminder, transactions between related entities are treated the same way as transactions between unrelated entities and generally are taxable.
If you have questions or need more information related to any of the above custom construction concerns, please reach out to Delap Partner Joe Seifert (503-974-5687) or Delap Partner Harriet Strothers (971-327-4750).