Monday, August 22, 2011

Are Pre-Construction Services Under a GC/CM Contract Subject to State Sales Tax?

Under a General Contractor/Construction Manager (GC/CM) contract in the State of Washington, the public agency contracts first with the contractor for pre-construction services, and then after successful negotiation of a Maximum Allowable Construction Cost (MACC), contracts for construction services.

The Sales Tax Question:  A frequently asked question is whether the pre-construction services, which are essentially consultant or professional services that would not typically be subject to state sales tax, are subject to state sales tax under a GC/CM project.

State Law:  RCW 82.04.051 addresses this question by affirming that pre-construction services under a GC/CM contract are subject to state sales tax.  While the law doesn't specifically mention GC/CM, nor does the Department of Revenue's more plain English version, it is clear that this is the intent.  Discussions with the Department of Revenue also confirm that pre-construction services under a GC/CM contract are subject to state sales tax, even if the pre-construction contract is a separate, stand-alone contract.

Revenue's Statement:  In material prepared by the Department of Revenue, they note the following:
"A contract to perform professional services (such as engineering, architectural, surveying, etc.) will not be considered "services rendered in respect to constructing" if a subsequent construction contract is awarded separately to the same person.  The contracts will be considered as awarded separately, if at the time the professional services contract is awarded, the parties did not contemplate that the same person would be "responsible for the performance" of the construction."
Pre-Construction Activities Subject to State Sales Tax:  Under a GC/CM project, of course, the parties do contemplate at the time of execution of the pre-construction (professional services) contract that the contractor will be performing the construction, subject to successful negotiation of the MACC.  Thus, pre-construction services under a GC/CM contract are subject to state sales tax, as is the construction portion of the contract.
Mike Purdy's Public Contracting Blog 
© 2011 by Michael E. Purdy Associates, LLC


Anonymous said...

So applying the same rule, where the construction contract is exempt from sales tax per Rule 171, the precon contract would aslo be exempt.

Mike Purdy said...

Yes, I think you're right about the preconstruction contract being exempt from sales tax if the construction contract under Rule 171 is exempt from sales tax.