HB 2229 defines land development or management as “site identification, permitting, and other preconstruction regulatory services provided to the consumer of the constructing, building, repairing, improving, or decorating services.” It includes acting as an owner’s representative during any design or construction periods by:
- Approving invoices
- Controlling the work itself
- Monitoring the budget
- Recommending a contractor
Whether land development or management services are subject to retail sales tax depends on whether they’re included or excluded from the definition of services rendered in respect to construction.
Land development and management activities are not construction services — and are therefore not subject to retail sales tax — if the person or entity providing the services is:
- Not responsible for the building, constructing, decorating, improving, or repairing services; or
- Responsible for the building, constructing, decorating, improving, or repairing services, but the initial contract was only for land development or management services, and the person can prove that at the time of the first contract, “it was not contemplated by the parties … that the same person would be awarded both contracts.”
The first point is straightforward. A company that doesn’t provide building, construction, decorating, improvement, or repair services won’t be subject to tax on the land development or management services it does provide.
The second point is more nuanced. Taxability essentially hinges on the intent of the two parties — what they contemplated — when the contract was drawn and signed.
The Washington Department of Revenue provides several examples to help taxpayers understand. The cast of characters in all scenarios are fictional companies XYZ Development and Land Inc.
Scenario 1
In the first scenario, XYZ Development hires Land Inc. to conduct preconstruction land development services (e.g., budget estimate, engineering, permits, and site feasibility).
Land Inc. is not responsible for the actual construction project, so the land development services it provides “are not considered services rendered in respect to construction” and are not subject to retail sales tax.
Scenario 2
In the second scenario, XYZ Development hires Land Inc. to conduct preconstruction land development services. At the time, neither XYZ Development nor Land Inc. contemplate having Land Inc. handle the actual development.
Later, after a bidding process, XYZ Development hires Land Inc. to manage all building and construction activities. Retail sales tax does not apply to the initial agreement because “it was not contemplated by either party that the same person would be awarded both contracts.” However, the separate construction contract is subject to sales tax.
Scenario 3
In the third scenario, XYZ Development hires Land Inc. to provide preconstruction services and to complete the construction project if site approval goes through.
If Land Inc. is awarded the construction project, both the preconstruction land development services and the construction services are subject to sales tax because, “at that point,” land development becomes “services rendered in respect to construction.”
Scenario 4
In the fourth and final scenario, XYZ Development hires Land Inc. to provide preconstruction services and to complete the construction project if site approval goes through, as in the third scenario.
However, the site is not approved for development and the construction project can’t move forward. Thus, the preconstruction land development services that were performed are not subject to sales tax.
