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SUBJECTS › PUBLIC WORKS › Purchasing and Bidding: Sales and Use Tax Issues
Updated 09/04

Purchasing and Bidding: Sales and Use Tax Issues

Sales and Use Tax Issues

Sales taxes apply to every sale of tangible personal property (and some services) to all persons, including local governments. For purposes of determining whether a purchase or project exceeds an agency's, bid limits, sales tax must be included when determining the cost of a public work, or when calculating the cost of materials, supplies, and equipment purchased separately from a public work.

However, there are some sales and use tax exemptions for certain public works projects. The exemptions include:

  • Labor and services rendered for the building, repairing, or improving of any street, place, road, highway, easement, right-of-way, mass public transportation terminal or parking facility, bridge, tunnel, or trestle owned by a city or town which is used primarily for pedestrian or vehicle traffic. Materials used in constructing these projects are not exempt from the sales and use tax.
  • Labor and services for the processing and handling of sand, gravel, and rock taken from city and/or county pits and quarries when the material is for publicly owned road projects.

MRSC has prepared a table - WAC 458-20-171Matrix - which attempts to summarize WAC regulations regarding sales and use tax applicability to public works contracts. For almost all local government public works contracts, the sales and use tax issue boils down to this:

Does the contractor include sales and use taxes, as applicable, in his/her unit prices or lump sum bid or does the agency include a line item in the contract for sales tax, either on the whole amount or on items not included in the exemptions?

When developing contract documents, it may be useful, in the bid proposal (bid item listing), to group those items that are subject to sales tax. Then, in a separate line item labeled "sales tax," reference that group, making it clear that in all other bid items, sales and use taxes, as applicable, are to be included in the unit price or lump sum bid.

Notes:

  • If an agency furnishes materials to a contractor for use in public works contract, it either must have paid applicable sales tax on the items furnished or must specifically instruct the contractor to pay use taxes on the items.
  • Labor and services in the construction of a pedestrian pathway in a park are probably not exempt from sales and use tax. RCW 82.04.050(7) does exempt any "street, place, road . . . easement, right of way . . . which is used or to be used primarily for foot or vehicular traffic." However, the Department of Revenue believes that any such path or sidewalk must be in the street right-of-way to qualify for the exemption.  Similarly, unless a public parking lot is used for mass transit, it is not exempt.
  • The Department of Revenue has a very good online disucussion of taxes due on public roads construction at http://www.dor.wa.gov/content/taxes/industry/construction/Construct_PublicRoad.aspx

In the WSDOT/APWA Standard Specifications for Road, Bridge and Municipal Construction, (2004 edition), which many agencies use as the basis for their public works contract documents, the following language is used:

Section I-99
SECTION 1-07.2 IS DELETED AND REPLACED BY THE FOLLOWING:
1-07.2 State Sales Tax (APWA only)
1-07.2(1) General (APWA only)
The Washington State Department of Revenue has issued special rules on the State sales tax. Sections 1-07.2(1) through 1-07.2(4) are meant to clarify those rules. The Contractor should contact the Washington State Department of Revenue for answers to questions in this area. The Contracting Agency will not adjust its payment if the Contractor bases a bid on a misunderstood tax liability.

The Contractor shall include all Contractor-paid taxes in the unit bid prices or other contract amounts. In some cases, however, state retail sales tax will not be included. Section 1-07.2(3) describes this exception.

The Contracting Agency will pay the retained percentage only if the Contractor has obtained from the Washington State Department of Revenue a certificate showing that all contract-related taxes have been paid (RCW 60.28.050). The Contracting Agency may deduct from its payments to the Contractor any amount the Contractor may owe the Washington State Department of Revenue, whether the amount owed relates to this contract or not. Any amount so deducted will be paid into the proper State fund.

1-07.2(2) State Sales Tax - Rule 171 (APWA only)
WAC 458-20-171, and its related rules, apply to building, repairing, or improving streets, roads, etc., which are owned by a municipal corporation, or political subdivision of the state, or by the United States, and which are used primarily for foot or vehicular traffic. This includes storm or combined sewer systems within and included as a part of the street or road drainage system and power lines when such are part of the roadway lighting system. For work performed in such cases, the Contractor shall include Washington State Retail Sales Taxes in the various unit bid item prices, or other contract amounts, including those that the Contractor pays on the purchase of the materials, equipment, or supplies used or consumed in doing the work.

1-07.2(3) State Sales Tax - Rule 170 (APWA only)
WAC 458-20-170, and its related rules, apply to the constructing and repairing of new or existing buildings, or other structures, upon real property. This includes, but is not limited to, the construction of streets, roads, highways, etc., owned by the state of Washington; water mains and their appurtenances; sanitary sewers and sewage disposal systems unless such sewers and disposal systems are within, and a part of, a street or road drainage system; telephone, telegraph, electrical power distribution lines, or other conduits or lines in or above streets or roads, unless such power lines become a part of a street or road lighting system; and installing or attaching of any article of tangible personal property in or to real property, whether or not such personal property becomes a part of the realty by virtue of installation.

For work performed in such cases, the Contractor shall collect from the Contracting Agency, retail sales tax on the full contract price. The Contracting Agency will automatically add this sales tax to each payment to the Contractor. For this reason, the Contractor shall not include the retail sales tax in the unit bid item prices, or in any other contract amount subject to Rule 170, with the following exception.
Exception: The Contracting Agency will not add in sales tax for a payment the Contractor or a subcontractor makes on the purchase or rental of tools, machinery, equipment, or consumable supplies not integrated into the project. Such sales taxes shall be included in the unit bid item prices or in any other contract amount.

1-07.2(4) Services (APWA only)
The Contractor shall not collect retail sales tax from the Contracting Agency on any contract wholly for professional or other services (as defined in Washington State Department of Revenue Rules 138 and 244).

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