By Darcy Kooiker
As part of its effort to bridge the current budget shortfall the Washington State Legislature passed Senate Bill 6173 which makes substantial changes to the wholesale purchasing process. Beginning in 2010 buyers will be required to use sellers permits rather than resale certificates as documentation supporting wholesale purchases. This change dramatically affects construction contractors who will have special annual reporting requirements and in some cases may face additional administrative burdens. It will also affect retailers manufacturers and other businesses that purchase goods or retail services for resale. The Department of Revenue estimates these changes will improve taxpayers compliance with sales and use tax laws and generate over $100 million in revenue in the next biennium.
Buyers will be required to apply for and obtain their sellers permit directly from the Department of Revenue. Only businesses expected to make purchases for resale in their normal course of business will be granted a permit. The Department of Revenue also may deny a business a sellers permit if it determines that denial would be in the best interest of collecting taxes due. The legislation does not affect purchases under other exemption programs such as the manufacturing machinery and equipment exemption.
Contractors will be required to reapply for a sellers permit annually. As part of the application process contractors will be required to report their construction-related purchases of labor and materials over the preceding 12 months by activity type including retail construction public road construction speculative construction and government contracting activities. Contractors who have not engaged in business over the previous 12 months will be required to provide estimates of their costs by activity type.
Contractors purchasing less than 25 percent of their labor and materials for retail construction projects will be denied a sellers permit and will instead be allowed to take a credit for sales tax paid on qualifying purchases for resale.
As initially written Senate Bill 6173 would have prohibited contractors from obtaining sellers permits. Instead contractors would have been required to pay sales tax on all purchases and then claim a credit on their state excise tax return for all sales tax paid for purchases of construction labor and installed materials.
Had the bill passed in its original form the administrative burden on the construction industry would have been substantial. Contractors would have had to pay the sales tax up front potentially forcing them to borrow more money from banks which may be difficult in this economic climate. Contractors would have the additional administrative burden of tracking and claiming the appropriate amount of tax credit and in many cases would need to purchase software to track this additional data. Finally contractors may have faced a potential tax assessment in a Department of Revenue audit if source documents showing the sales tax paid were lost or destroyed.
Once the impact of this legislation became clear a grassroots effort was quickly launched and led by AGC. By providing testimony to the House Finance Committee and flooding representatives with email and phone calls opposing the bill this grass roots effort was successful in removing the prohibition on sellers permits for contractors from the legislation.
Contractors still face the possibility of being refused a sellers permit if they have been caught making significant tax reporting errors. Spending time this year to review Washingtons sales and use tax laws involving the classification of construction activities and your purchasing procedures can help ensure your sellers permit will not be at risk.
Darcy Kooiker CPA is Principal and Director of State and Local Tax Services at Berntson Porter & Company. She testified on behalf of AGC at a legislative hearing on SB 6173.