Could a concrete contractor avoid tax on unreported sales and public-road materials without resale documents, sales records, or receipts showing tax was paid?

Plain-English summary

The Washington Department of Revenue upheld retail sales, B&O, and use tax against a concrete contractor that lacked records explaining unreported income and material purchases.

For the income discrepancy, the contractor produced no resale certificates, reseller permits, delivery records, or other evidence showing that the sales were wholesale. The seller bears the burden of proving wholesale treatment, so the unreported amounts were treated as retail sales.

For municipal public-road jobs, the contractor was the consumer of materials incorporated into the roads. It claimed vendors had charged sales tax but kept no receipts. The Department reasonably estimated materials at 25% of each contract, consistent with industry costing guidelines, and assessed use or deferred sales tax on that amount.

Result: petition denied.

What this means for you

Contractors making wholesale claims

Retain the correct resale certificate for pre-2010 sales and reseller permit for later sales, together with invoices and delivery records showing the transaction's nature.

Public-road contractors

You generally consume materials incorporated into government-owned roads. Keep vendor invoices proving retail sales tax was paid or expect use-tax exposure.

Construction accounting teams

Reconcile books to excise returns and preserve job-cost records separating private construction, wholesale subcontracting, and public-road work.

Common questions

Q: Who had to prove that an unreported sale was wholesale?

A: The seller. Without resale documentation or other evidence, the Department treated the sale as retail.

Q: Why were public-road materials taxable to the contractor?

A: Washington treated the contractor as the consumer of materials incorporated into public roads.

Q: Why was the 25% estimate upheld?

A: The contractor kept no purchase records, and the percentage matched industry costing guidance.

Citations and references

• RCW 82.04.050, RCW 82.04.190(3), and RCW 82.04.470(1) (construction, consumption, and wholesale proof)
• RCW 82.08.020 and RCW 82.12.020 (retail sales and use tax)
• RCW 82.32.070 and RCW 82.32.100 (records and estimated assessments)
• WAC 458-20-170 and WAC 458-20-171 (private and public-road construction)
• WAC 458-20-254 (recordkeeping)

Source

• Landing page: Washington Tax Decisions ZIP files
• Original PDF: 34WTD234.pdf
• Source archive: Volume 34 ZIP (member 34 WTD 234.pdf)

Original ruling text

Det. No.14-0338, 34 WTD 234 (April 30, 2015)

234

Cite as Det. No. 14-0338, 34 WTD 234 (2015)
BEFORE THE APPEALS DIVISION
DEPARTMENT OF REVENUE
STATE OF WASHINGTON
In the Matter of the Petition for Correction of )
Assessment of
)
)
...
)
)
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DETERMINATION
No. 14-0338
Registration No. . . .

[1]
RULE 254; RCW 82.04.470, RCW 82.32.100: B&O TAX – USE TAX – RESALE CERTIFICATES – RESELLER PERMITS – BURDEN OF PROVING A WHOLESALE SALE IS ON THE SELLER. The burden of proving a sale is at wholesale lies with the seller. Moreover, the burden is on the taxpayer to provide documents and other evidence that a tax assessment is incorrect. Headnotes are provided as a convenience for the reader and are not in any way a part of the decision or in any way to be used in construing or interpreting this Determination. Weaver, A.L.J. – A contractor, engaged in the custom construction of concrete structures, walkways, and roads, challenges an assessment of retail sales tax, retailing business and occupation (B&O) tax on unreported income, and use tax and/or deferred sales tax on construction materials. Because the contractor has not provided records documenting its unreported income or receipts proving it paid retail sales tax on materials used in its public road construction jobs, we deny the petition.1 ISSUES

1. Whether, under RCW 82.32.100 and WAC 458-20-254, a contractor was correctly assessed
   retail sales tax and retailing B&O tax on amounts it underreported to the Department.
2. Whether, under RCW 82.32.100 and WAC 458-20-254, a contractor was correctly assessed
   use tax and/or deferred sales tax when the taxpayer did not keep records showing it paid retail sales tax on materials used in its public road construction jobs. FINDINGS OF FACT
   [Taxpayer] is engaged in the custom construction of concrete structures, walkways, and roads. The Audit Division (Audit) of the Department of Revenue (Department) examined Taxpayer’s books and records for the period of January 1, 2009 through June 30, 2012. Audit compared amounts recorded in Taxpayer’s business records with the amounts reported to the Department 1

Identifying details regarding the taxpayer and the assessment have been redacted pursuant to RCW 82.32.410.

Det. No.14-0338, 34 WTD 234 (April 30, 2015)

235

on Taxpayer’s excise tax returns. The taxable differences between the two were classified by Audit as unreported retail sales, and retail sales tax and retailing B&O tax was assessed on those amounts. Taxpayer maintains it reported tax on all its gross receipts, but has offered no explanation for the discrepancy between the amounts recorded in its business records and the amounts reported on its excise tax returns. Audit also identified certain Taxpayer’s contracts as public works construction contracts. Taxpayer reported wholesaling B&O tax on the gross receipts from those contracts. Audit reclassified the gross receipts from Taxpayer’s public works construction contracts under the public road construction tax classification. Audit correspondingly granted Taxpayer a credit for wholesaling B&O tax paid on gross receipts from Taxpayer’s public works construction contracts. Audit then assessed use tax and/or deferred sales tax on materials purchased by Taxpayer with respect to its public works construction business. Taxpayer did not provide records of materials purchased with respect to its public works construction jobs and it likewise did not provide records that sales tax was paid on materials used in its public works construction. In the absence of those records, Audit estimated the cost of materials incorporated in identified public works construction contracts. Audit estimated 25% of the total amounts awarded in each contract were used to purchase construction materials, which was in line with the costing guidelines for Taxpayer’s industry. Audit assessed use tax and/or deferred sales tax on the estimated amount of those material purchases. Taxpayer states it had its concrete vendor charge retail sales tax on materials used in its public road construction contracts. Taxpayer further states it identified which concrete deliveries were for public road construction, as opposed to Taxpayer’s wholesaling business, on a job-by-job basis. However, Taxpayer kept no books and records to show retail sales tax was actually paid on its purchases of concrete for its public road construction jobs. On September 26, 2013, Audit issued Assessment No. . . . to Taxpayer, totaling $. . . . The assessed amount included $. . . in retail sales tax, $. . . in retailing B&O tax, a wholesaling B&O tax credit of $. . . , $. . . in use tax/deferred sales tax, $. . . in public road construction tax, $. . . in interest, and an assessment penalty of $. . . . Taxpayer filed a timely appeal. Taxpayer did not provide any additional records on appeal. ANALYSIS RCW 82.08.020 imposes a retail sales tax on each retail sale in Washington. The term “retail sale” includes the constructing of structures on real property of or for consumers, including the construction of highways, easements, etc., on property owned by private persons. RCW 82.04.050(2)(a); WAC 458-20-170 (Rule 170). Rule 170 explains that prime contractors, who are persons performing construction for consumers, are making retail sales. Generally taxpayers who perform construction for prime contractors, are engaging in wholesaling activity (sales for resale). Purchases by these subcontractors of materials, which become part of the improvement to the real estate, are generally considered purchases for resale not subject to the retail sales tax.

Det. No.14-0338, 34 WTD 234 (April 30, 2015)

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However, construction of roads owned by a municipal corporation, a political subdivision of the state, or the United States, is not classified as a retail activity. RCW 82.04.050(10). Generally, construction of roads owned by such entities is classified as “public road construction.” WAC 458-20-171 (Rule 171). Contractors and subcontractors constructing for those entities are themselves considered the consumers of the materials they incorporate as an ingredient or component of the public road or right-of-way. RCW 82.04.190(3). Therefore, the retail sales tax or use tax applies to sales of construction materials to those contractors and subcontractors engaged in public road construction.2 RCW 82.08.020 and 82.12.020. Taxpayers have a duty to maintain their records in such a manner their tax liabilities can be determined. RCW 82.32.070. This includes a specific obligation to generate, maintain, and preserve records and documentation necessary to establish tax liability. RCW 82.32.070(1); WAC 458-20-254(3)(b). Taxpayers must keep and preserve suitable records, and make them available for examination by the Department for five years. RCW 82.32.070; RCW 82.32A.030. Thus, according to these principles, the burden rests on Taxpayer to maintain records that establish whether its purchases of materials were purchased for resale or for public road construction subject to retail sales tax. As an initial matter, Audit assessed retail sales tax and retailing B&O tax on gross receipts Taxpayer failed to report to the Department on its excise tax returns. Taxpayer contends Audit erred when it assessed retail sales tax on the additional income Audit determined the Taxpayer received. However, Taxpayer has not provided resale certificates, reseller’s permits, delivery records, or any other documentation to establish the nature of the unreported income. Sellers making retail sales are required to collect and remit retail sales tax under RCW 82.08.050(1). If the seller fails to collect or remit the retail sales tax, the seller is liable for the tax. RCW 82.08.050(3). Taxpayer paid wholesaling B&O tax on all its gross receipts and contends it made no retail sales during the audit period. The burden of proving a sale is a wholesale sale rather than a retail sale is on the seller. RCW 82.04.470(1). For sales occurring prior to January 1, 2010, sellers were required to obtain resale certificates to substantiate the wholesale nature of their sales. WAC 458-20-102A. For sales after December 31, 2009, a seller may meet its burden of proving a sale is a wholesale sale rather than a retail sale by taking from the buyer, at the time of sale or within a reasonable time after the sale as provided by rule of the department, a copy of a reseller permit issued to the buyer by the Department under RCW 82.32.780 or 82.32.783. RCW 82.04.470(1). With respect to the unreported income, Taxpayer has not provided any resale certificates, reseller’s permits, delivery records, or any other documentation to establish the nature or location of the unreported sales. The law is clear. The burden of proving a sale is at wholesale lies with the taxpayer. RCW 82.04.470(1). Because the taxpayer has not met this burden, the sales are not exempt from retail sales. We conclude Audit properly assessed retail sales tax on the taxpayer’s unreported sales. 2

In general, public road construction contractors are taxable under the public road construction B&O tax classification on the total contract price. Rule 171. Taxpayer reported B&O tax under the wholesaling B&O tax classification. Both classifications have rates of .00484. See http://dor.wa.gov/content/findtaxesandrates/bandotax/bandorates.aspx (last accessed September 23, 2014.)

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Additionally, Taxpayer contests the assessment of use tax and/or deferred sales tax on materials related to its public works construction jobs. Audit estimated 25%of the total amounts awarded in each contract were used to purchase construction materials, which was in line with the costing guidelines for Taxpayer’s industry. Audit assessed use tax and/or deferred sales tax on the estimated amount of those material purchases. Taxpayer contests the assessment of tax on those materials, claiming it paid its vendors retail sales tax on the materials at the time of purchase. However, Taxpayer has provided no books, records, or receipts to support the claim that it paid retail sales tax on those materials. Tax assessments are presumed valid and the burden is upon the taxpayer to come forth and provide documents or other evidence that the tax assessment is incorrect. RCW 82.32.100; see also RCW 82.32.070; WAC 458-20-254; Automobile Club of Washington v. Dep’t of Revenue, 27 Wn. App., 781, 786, 621 P. 2d 760 (1980). If records are not provided, RCW 82.32.100 authorizes the Department to proceed, “in such manner as it may deem best, to obtain facts and information on which to base its estimate of the tax.” After reviewing the taxpayer’s petition and the record, we conclude the taxpayer has not presented sufficient documents or other evidence for an adjustment of the tax assessment. For those reasons, we deny the taxpayer’s petition. DECISION AND DISPOSITION Taxpayer's petition is denied. Dated this 24th day of October, 2014.