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Clarification on taxes for design services: Two contracts may be better than one
from June 2021 Building Insight
by BIAW
by Jackson Maynard General Counsel
The Department of Revenue (DOR) has begun auditing contracts to enforce a new provision of law from 2019 that clarified how design services will be taxed. This could especially impact remodelers who engage in both construction and design work. Under state law, design services are taxed at 1.75% while construction work is taxed at a higher sales tax rate. However, in 2019, the legislature approved RCW 82.04.051 to capture “hybrid agreements.”
Under that provision, a contract or agreement under which a person is responsible for activities that are subject to tax as a service under RCW 82.04.290(2), and a subsequent contract or agreement under which the same person is responsible for constructing, building, repairing, improving or decorating activities subject to tax under another section of this chapter, shall not be combined and taxed as a single activity if at the time of the first contract or agreement, it was not contemplated by the parties, as evidenced by the facts, that the same person would be awarded both contracts.
In other words, if design services were part of a single contract that included construction work, it
will likely be taxed as a construction project. If the design work is a separate contract, but is also to be performed by the same entity as the construction work, then you still might be subject to the tax if DOR can conclude that the same person would have performed both contracts.
While DOR does not identify what types of evidence they might consider, it is possible that contracts signed the same day by the same party or design contracts that are not competitively bid might come under scrutiny.
The bottom line is that those who provide both design and construction services may want to consider how they are structuring agreements in order to ensure they are not over or under paying taxes. (Special thanks to Sherry Schwab for raising this issue to the Legal department.)
If you have any legal questions and are a BIAW member, please reach out to BIAW General Counsel Jackson Maynard at jacksonm@biaw.com or (360) 352-7800 ext. 108.
