Public agencies in the
State of Washington are required, with limited exceptions, to obtain
both a Payment Bond and a Performance Bond for each public works
project.
The Question:
- Is it required that the dollar amount of these bonds include
sales tax that is added to each progress payment paid to the contractor?
or
- Is it acceptable for a contractor to submit the bonds without the sales tax amount?
A lower dollar amount of the bonds may result in a lower bond
premium amount the contractor is required to pay to the surety, and thus
a lower cost to the public agency.
Current Practices:
From what I've gathered, some public agencies require the sales tax
amount be included, while others exclude it from the amount of the
bonds.
What is the "Full Contract Price"? RCW 39.08.030 states that the Payment Bond and Performance Bond must be "in an amount
equal to the full contract price agreed to be paid for such work or
improvement." Does the "full contract price" include or exclude sales
taxes paid separately by the public agency to the contractor?
While
RCW 39.08.030
does not specifically address sales tax, it states that the "full
contract price" is for the "work or improvement" defined in the
specifications - which I would interpret to be the physical construction
work, and not sales taxes. Based on this, a public agency could make
the argument that the amount of the Payment Bond and Performance Bond
does not need to include sales tax.
Payment Bond: RCW 39.08.010 states that under a Payment Bond the bonding company guaranties that
the contractor shall "pay all laborers, mechanics, and subcontractors
and material suppliers." Payment to the State Department of Revenue of
sales taxes by the contractor from such amounts paid separately by the
public agency to the contractor is not listed as one of the protections
of the Payment Bond, (unless the project is a federally funded transportation project in which case the Payment bond must protect the Departments of Revenue, Employment Security and Labor and Industries since
no retainage may be withheld on these projects). The Department of Revenue is a beneficiary of
Retainage withheld by public agencies for unpaid taxes, but is not
protected by the Payment Bond.
Another way to look
at this issue is to ask whether the Department of Revenue would be
successful in collecting from a bonding company for unpaid sales taxes,
if the language of the Payment Bond mirrored the language of RCW
39.08.010
in ensuring payment to "all laborers, mechanics, and subcontractors and
material suppliers." It seems unlikely that the Department of Revenue
would be able to make a successful argument with the bonding company
that unpaid sales taxes should be paid by the bonding company under the
Payment Bond.
Performance Bond: RCW 39.08.010 states that the purpose of the Performance Bond is for the bonding
company to guaranty that the contractor "shall faithfully perform all
the provisions of such contract."
There are two ways to understand this. First, the "provisions" of the
contract can be understood to include all of the provisions of the
contract documents for performing the physical work. Second, you could
also understand that requirement to pay sales tax is a "provision" of
the contract, and that the amount of the Performance Bond should
therefore include sales tax. However, it seems to me that sales tax is
more an issue of whether it is paid than whether it is performed.
Options: A public agency can take one of at least three positions with respect to the amount of the Payment Bond and Performance Bond:
- Require that the amount of the bonds include sales tax.
If an agency chooses this approach, the language of the Payment Bond
should specify that payment of sales taxes is protected under the
Payment Bond. Likewise, the language of the Performance Bond should
specify that payment of sales taxes is considered an issue of faithfully
performing all the "provisions" of the contract. I don't know how
bonding companies would respond to requests for this supplemental
language in the bonds. Note that under this option, payment of sales
tax would be covered under both the Payment Bond and the Performance
Bond.
- Require that the amount of the Payment Bond includes sales tax, but not the amount of the Performance Bond.
This option recognizes that it is easier to make the argument (through
added Payment Bond language) that sales tax is covered under the Payment
Bond. This option also recognizes that it is more difficult to make
the argument that the Performance Bond should include payment of taxes.
Finally, under this option, coverage of sales tax isn't doubled up under
both bonds.
- Require the amount of both bonds exclude sales tax. This option recognizes the language of RCW 39.08.010
that does not include sales tax as a protected category for the Payment
Bond, and acknowledges that payment of sales tax is not a performance
issue for the contract, at least as performance is typically understood.
Consult Your Attorney:
Public agencies have a variety of practices on this issue. You should
consult with your attorneys to help you understand the best option for
your agency. It is important for agencies to think deliberately about
their comfort level with each of the options.
Other States: Obviously
other states have different laws relating to Payment Bonds and
Performance Bonds, and I would likewise be very interested in hearing
how other states address this issue.
Feedback: I am
very interested in hearing what your practice is and what you ultimately
decide to require as the amount of your Payment and Performance Bonds.
Please contact me with with your thoughts and questions.
Note: This blog posting is a repeat of one from August 30, 2010.
Mike Purdy's Public Contracting Blog
© 2010-2013 by Michael E. Purdy Associates, LLC
http://PublicContracting.blogspot.com
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