Washington Sales Tax for Contractors: Labor Is Taxable Too

Short answer: Washington is the outlier. Construction is a retail sale here, so a custom prime contractor collects retail sales tax from the landowner on the gross contract price — permits and other fees, labor, profit, materials, and charges for subcontractors, with no deduction for costs. That income is reported under the Retailing B&O classification, and B&O itself is charged on gross income with no deduction for labor, materials or taxes. Register with the Department of Revenue once gross income reaches $12,000 a year.

Most advice written for American contractors starts from the premise that services are untaxed, materials are taxed, and the contractor is the final consumer who pays at the supply house and charges nothing to the customer. In Washington that premise is backwards, and following it means under-collecting on every job. The authority is the Washington Department of Revenue for state excise taxes and the IRS federally. Registration is a separate matter, covered in Washington contractor license requirements, and the bond and insurance side sits in Washington contractor insurance requirements.

Is contractor labor taxable in Washington?

Yes. Washington treats custom construction performed on someone else’s land as a retail sale of a service, which puts it squarely inside retail sales tax. DOR is explicit: a prime contractor collects retail sales tax from the landowner on the gross contract price, without deducting the costs it incurred to do the work.

That means your labor line is taxable. So is the markup on it. There is no capital-improvement exemption to reach for and no repair-versus-improvement distinction to argue about, because both sides of that line are retail here. A contractor who moves to Washington from a state where labor is exempt and keeps invoicing the same way is short on every single job, and the shortfall is the contractor’s, not the customer’s, when DOR reviews it.

What goes into the taxable amount?

Everything you bill. DOR describes the taxable measure for retail construction services as including charges for permits and other fees, labor, profit, materials, and charges for subcontractors.

Line on your invoice	Inside the taxable amount?
Labor and crew time	Yes
Your markup and profit	Yes
Materials incorporated into the job	Yes
Building permits and other fees you pass through	Yes
Amounts you pay subcontractors and rebill	Yes
Equipment and tools you buy for your own use	You pay the tax on them as consumer

The pass-through lines catch people. A permit fee rebilled at cost is still part of the selling price, and so is the subcontractor invoice you forwarded to the homeowner. There is no netting. Where a contract holds retainage, DOR’s rule is that sales tax is computed before deducting those amounts — the tax follows the contract price, not the cash you have received.

Do Washington contractors pay sales tax on their own materials?

Not on materials that become part of the customer’s building. On a custom job you are reselling those materials into a taxable retail sale, so you buy them wholesale using a reseller permit and charge the tax downstream. The tax is collected once, from the landowner, on the full price.

The permit has a hard boundary. DOR lists what a reseller permit may not buy: “items used in the business, such as supplies and equipment,” “items used by the business in performing the business activity even if billed to customers,” and “tools or equipment, (unless you are in the business of directly reselling or renting out such items).” Read the middle one twice — rebilling a consumable to the customer does not convert it into a resale. A nail gun bought on your reseller permit is not saved tax, it is a use tax liability.

Subcontractors work the mirror image. DOR is explicit that “subcontractors on custom construction projects (a wholesaling activity) must obtain a reseller permit from the prime contractor or another subcontractor,” and that “income from custom subcontracting is reported under the Wholesaling B&O tax classification.” So the sub does not charge retail sales tax to the prime; the prime carries the retail collection duty on the whole job. If you sub and you have been charging the prime sales tax, you have been double-taxing a job the prime already taxes in full.

What changes if you build on land you own?

Almost everything, which is why Washington gives it a separate name. A speculative builder — someone building on their own land to sell — is not making a retail sale of construction services to anyone. DOR’s position is direct: “A speculative builder is the consumer of all material incorporated into the real estate,” and speculative builders cannot use reseller permits for construction materials.

	Custom construction (client’s land)	Speculative building (your land)
Who pays tax on materials	Buyer, through your invoice	You, at purchase
Reseller permit on materials	Yes	No
Retail sales tax collected from the customer	Yes, on the gross contract price	No — the sale of real estate is not subject to retail sales tax
B&O on the sale	Retailing, on the construction income	The sale of real estate is not subject to B&O
Tax on the sale itself	—	Real estate excise tax on the selling price

Contractors you hire onto your spec project still charge you sales tax on their total contract price. You are their customer, and you absorb it.

How should sales tax appear on a Washington invoice?

Separately stated. DOR’s requirement is that billing invoices must separately state the sales tax, so a lump “total including tax” line is not compliant, and it also destroys your own ability to reconcile the excise return later.

The rate is not your office rate. DOR’s rule is that “contractors performing retail services must collect sales tax based on the tax rate of the jurisdiction where they perform their services,” so a crew crossing city or county lines charges different rates on jobs in the same week. Look up the rate by job-site address instead of reusing the last one. The usual rules for what to include on an invoice apply on top: legal business name, L&I registration number, job address, and a tax line naming the rate applied.

When must you register with the Department of Revenue?

Sooner than most sole proprietors expect, and almost certainly already. DOR requires a business license if any of these are true, among others: your gross income is $12,000 per year or more; you sell a product or provide a service that requires the collection of sales tax; you are doing business under a name other than your full legal name; you plan to hire employees within the next 90 days; or your business is required to pay taxes or fees to the Department of Revenue.

For a Washington contractor, the second condition is triggered on the first custom job regardless of size, because that job requires you to collect sales tax. Registration also produces the UBI number that L&I requires before it will register you as a contractor, so in practice the DOR step comes first.

If Washington has no income tax, why does this feel expensive?

Because the headline is true and incomplete. Washington has no personal income tax. It has a business and occupation tax instead, and B&O is measured on gross income — DOR states plainly that businesses cannot deduct expenses such as labor, materials, taxes, or other costs of doing business.

Custom prime contracting is reported under Retailing B&O and custom subcontracting under Wholesaling, both computed on gross. So on a job where materials and subs eat most of the contract, you pay B&O on the whole figure and collected retail sales tax on the whole figure too. A low-margin Washington job can carry a heavier state burden than the same job in an income-tax state, because an income tax at least lets you subtract what you spent. Rates differ by classification and a Small Business B&O Tax Credit exists — check the current rate table on dor.wa.gov rather than a figure quoted in an article.

What records does this leave you holding?

More than the average state. You need the job-site address for every invoice because it drove the rate; the separately stated tax amount; reseller permit documentation for materials; proof you paid tax on tools bought as a consumer; and subcontractor invoices, since those amounts sat inside the taxable measure. A DOR review is a document-matching exercise, and how long to keep tax records stops being theoretical when the tax was collected on someone else’s behalf.

Keel is an iOS app that holds that trail on the device itself — no account, no bank connection, no cloud sync, and an App Store privacy label reading Data Not Collected. It builds invoice PDFs with custom numbering, your logo, and a payment-link QR code; captures receipts read on-device with Apple Intelligence; tracks mileage; and stores everything in an append-only, hash-chained ledger with a one-file-per-year export and an Accountant Pack. Free is $0 with unlimited invoices, receipts, and mileage; Keel Pro is a one-time $249.99 Lifetime purchase.

Keel does not calculate your Washington rate, file your excise return, or claim your B&O credit. It is a record keeper — what it hands your bookkeeper is an ordered set of invoices and receipts instead of a shoebox.

Frequently asked questions

Is labor taxable for contractors in Washington?

Yes. Washington treats custom construction on a customer’s land as a retail sale, so retail sales tax applies to the gross contract price including labor. This is unusual — most states exempt construction labor — and it is the single most common mistake made by contractors relocating into Washington. Confirm the current treatment for your work on DOR’s construction industry guide before pricing a job.

Do Washington contractors pay sales tax on materials?

Not on materials that become part of a customer’s building on a custom job; you buy those with a reseller permit and collect tax from the landowner instead. You do pay tax on anything you consume yourself — tools, shop supplies, fuel, equipment. Speculative builders are different again: they are consumers of all materials incorporated into the real estate and cannot use a reseller permit.

Which sales tax rate does a Washington contractor charge?

The rate for the jurisdiction where the services are performed, not where your office is. That means the same crew can owe three different local rates in one week across three job sites. Look up the rate by job-site address each time and show the tax as a separate line on the invoice, which DOR requires.

Does a subcontractor charge sales tax to the general contractor?

Not on a custom construction job. The sub takes a reseller permit from the prime and reports the income under the wholesaling classification, while the prime collects retail sales tax from the landowner on the entire contract price, including what it paid the sub. Charging the prime sales tax on top of that taxes the same work twice.

When do I have to register with the Washington Department of Revenue?

Once any registration condition is met — gross income of $12,000 per year or more, providing a service that requires collecting sales tax, trading under a name other than your legal name, hiring employees within 90 days, or owing taxes or fees to DOR. Custom contracting triggers the sales tax condition immediately, and DOR registration is also how you get the UBI number L&I requires.

Does Washington’s lack of income tax make it cheap for contractors?

Not automatically. There is no personal income tax, but B&O tax applies to gross income with no deduction for labor, materials, taxes or other costs of doing business, and construction income falls under Retailing or Wholesaling B&O. On a low-margin, materials-heavy job that combination can cost more than an income tax would have, because an income tax is levied on profit rather than turnover.

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This article is general information, not legal or tax advice. Rules change — confirm with the authority named above.