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. 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.
For public works contracts entered into as of September 1, 2010 or later, public agencies in the State of Washington must include language addressing the requirements of Engrossed House Bill 2805, approved by the Legislature in the spring. 
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