Land development and management
This term actually comes from a ruling discussed in the section below. It encompasses site identification, zoning, permitting, and other preconstruction regulatory services provided to the consumer of the constructing, building, repairing, improving, or decorating services.
This includes acting as an owner's representative during any design or construction period — such as recommending a contractor, monitoring the budget and schedule, approving invoices, and interacting on behalf of the consumer with the person who has control over the work or is responsible for its performance.
Rulings and appeals
Discussed below are some limitations and how relevant authorities have interpreted these rules both in favor of and against taxpayers.
Washington tax determination ruling 99-346 (WTD 99-346)
In WTD 99-346, the Washington State Department of Revenue auditor asserted that the construction manager was providing services rendered in respect to construction and reclassified its income from the S&O classification to the retailing classification.
On administrative appeal, the Department of Revenue (DOR) Appeals Division disagreed and found that the taxpayer wasn’t providing services rendered in respect to construction for a short list of key reasons where the taxpayer:
- Didn’t actively and directly supervise the construction activity onsite, as in not in a foreman-like capacity
- Was paid based on an hourly pay rate not tied to the construction costs but rather was tied to the performance of administrative functions that arose from the construction activities performed by others
- Wasn’t a party to a contract where a separate licensed general contractor directly engaged with the landowner to provide construction services
- Didn’t have the contractual authority to select or engage the contractors but offered analysis and recommendations to the landowner on which contractors to hire
- Acted consistently, regardless of what the contract stated, with the intent to act as an advisor, not as an agent or contractor
Many of these concepts from WTD 99-346 were codified into the law in 2020 with the passage of House Bill 2229. Specifically, the legislature added language confirming a taxpayer isn’t providing services rendered in respect to construction if the services are limited to what’s referred to as land development or management.
Washington state board of tax appeal (BTA) west coast self storage, LLC v. Washington DOR
In this case decided in 2022, the taxpayer entered into affiliation agreements with third parties to develop, build, and manage self-storage properties — similar to the role of a franchisor in franchise agreements.
The taxpayer didn’t engage in the construction activity itself, but the terms of the agreements and the services provided led the court to find the taxpayer responsible for the construction activity and taxable as a contractor. A few key facts led to this finding:
- Development agreement required the taxpayer to identify suitable general contractors, negotiate construction contract terms, and obtain binding bid proposals
- Construction management agreement required the taxpayer to cause construction of the buildings in a good and workmanlike manner while not permitting the construction activity to be abandoned
Reporting retail sales and B&O tax
Construction management services can vary widely and whether a taxpayer must report retailing B&O tax and retail sales tax as a contractor depends heavily on the facts, the terms of the contracts, and the conduct of the parties.
Given the DOR’s continued focus on auditing for this type of issue, consider consulting your state tax advisor to help you understand Washington State’s tax treatment of your construction management contracts.
B&O tax for captive builders
With rising construction costs, developers are increasingly taking on the general contractor role through captive construction contractor entities.
To understand where the risks are, we must first understand the taxation of three key concepts:
- Speculative builders
- Custom contractors
- Intercompany transactions
Speculative builder
Speculative builders can generally be defined as contractors that construct buildings or other improvements on their own real property with the speculative intent to sell the finished building and land together for a profit. Speculative builders generally pay sales tax on materials and subcontractors but do not pay sales tax on their own employees’ wages.
Custom contractors
Custom contractors can generally be defined as contractors that construct buildings or other improvements on real property owned by another person for an agreed-upon price. Custom contractors generally charge the customer sales tax on the entire contract price but do not pay sales tax when they purchase materials and services from subcontractors for resale.
Intercompany transactions
With some very limited exceptions, Washington generally treats separate legal entities as separate taxpayers, regardless of their relationship or affiliations. Transactions between related entities are generally taxable, but for an applicable exemption or exclusion.
Despite 100% common ownership, the contractor and landowner being separate legal entities precludes the arrangement from being treated as a speculative construction activity.
The DOR audits this issue regularly due to this structure being a common business model.
Specific methods for reporting these transactions, planning for reduced tax costs, and dealing with audits can vary by company, depending on the facts, which call for a state tax advisor to help address intercompany transactions with captive builders.
