A Washington contractor who has been filing B&O under Service and Other Activities usually does not know it is wrong until the Department of Revenue says so. By then, several years of returns may need to be revisited.

The classification does not depend on what trade you work in. It depends on who hired you and whether you have the right paperwork for each job.

Are You a Retailing Contractor or a Wholesaling Contractor?

Your B&O classification depends on who hired you, not what kind of work you do. If a property owner hired you directly, you are a Retailing contractor. If a general contractor hired you, and the GC gave you a valid reseller permit before the job started, you are a Wholesaling contractor on that job.

That is the whole rule. The type of trade does not change it. A plumber doing a bathroom remodel for a homeowner is Retailing. The same plumber doing rough-in work for a GC, who handed over a reseller permit, is Wholesaling.

The B&O rates are close: 0.471% for Retailing and 0.484% for Wholesaling. The gap is not where the money is. The classification matters because it determines whether you collect retail sales tax.

The Reseller Permit Is What Switches the Classification

Without a reseller permit from the general contractor, a subcontractor defaults to Retailing. The permit is the legal document that converts the transaction from a retail sale to a wholesale sale. If the GC never gives you one, plan on treating that job as Retailing.

Some subcontractors assume they are always Wholesaling because they work under a GC. That is not how it works. The permit is what supports the Wholesaling treatment, so keep a valid copy on file for each job where you work as a sub.

If you work as both a GC and a subcontractor across different projects, the classification follows each contract individually. You can be Retailing on three jobs this quarter and Wholesaling on two others. Your B&O return reflects whichever classification applies to each contract.

Does a Washington Contractor Collect Retail Sales Tax?

Retailing contractors collect retail sales tax from the property owner. Wholesaling contractors with a valid reseller permit do not collect sales tax from the GC. The GC handles the retail transaction with the property owner.

The part that catches contractors off guard: in Washington, retail sales tax on a construction contract applies to the full contract price, labor included. If you are a Retailing contractor doing a job for a homeowner, you collect sales tax on everything you charge, not just the materials.

This is different from how most service businesses work. A management consultant who invoices a client does not collect sales tax on those fees. A contractor with a retail construction contract does. The DOR's position is that the labor component of a retail construction contract is part of a taxable retail sale.

The sales tax rate depends on the project location. The DOR maintains a rate lookup tool on its website where you enter the address and get the current combined state and local rate. Use that rate on your invoice, collect it from the customer, and remit it with your return.

What Happens With Materials You Buy

How you buy materials affects whether you pay sales tax at the supplier, and getting it wrong can mean paying tax twice or not at all. Keep supplier invoices organized by job so you can show what tax was paid on what.

If you are a Wholesaling subcontractor and the GC supplies the materials, your tax picture on those materials is different. The details depend on how the supply relationship is set up, and they come up in audits. Good records of who supplied what, and when the reseller permit was received, are the cleanest defense.

Use Tax: The Quiet Liability

Any materials you buy from out-of-state vendors that did not charge Washington sales tax can create a use tax obligation, whether you bought from an online supplier or a distributor in another state.

This accumulates. Contractors who source specialty equipment, fixtures, or materials from out-of-state suppliers often have a use tax backlog that grows quietly over years, because it is easy to forget when the vendor's invoice shows no Washington tax charged.

If you have never filed use tax, a conversation with a tax advisor is worth having before an audit raises the question.

Service and Other Activities Is Not for Contractors

Some contractors report their B&O under Service and Other Activities, reasoning that their work is a service, specifically labor. The DOR disagrees. Service and Other Activities applies to service businesses: attorneys, accountants, engineers providing professional services, and similar. Construction work, including labor-only construction jobs, goes under Retailing or Wholesaling.

Service and Other Activities is tiered as of October 1, 2025: 1.5% for prior-year taxable income under $1 million, 1.75% from $1 million to just under $5 million, and 2.1% above that. All three tiers exceed the Retailing rate of 0.471%. So a contractor filing under Service and Other Activities has likely been overpaying on B&O. That sounds like the minor problem.

The bigger problem is what usually goes with it. Contractors who believe their work is a service often also conclude that their labor is not subject to retail sales tax, because services are generally not taxed. That conclusion is wrong for construction. When the DOR reclassifies, the uncollected retail sales tax on years of retail contracts becomes the actual liability, often with interest on top.

If you have been filing under Service and Other Activities for construction work, reviewing your past returns before the DOR does is the practical step.

City B&O Taxes

Washington's B&O structure does not stop at the state level. A number of Washington cities charge their own local B&O tax on gross receipts from work within their limits, and each sets its own thresholds and rates. Before starting work in a new city, it is worth checking whether that city has a local B&O tax.

Contractors who work across city lines in the greater Seattle area undercount their city exposure because they track projects by customer or by job address without separating which city each project sits in. Apportionment is the method for allocating receipts across cities, and the details vary by city.

Our B&O mistakes article covers the city B&O picture in more detail. If you are doing significant work in a city with its own B&O tax, the city piece adds up separately from your state return.

A Note on Who This Does and Does Not Affect

Smaller contractors may also qualify for the state's Small Business B&O Tax Credit, which the DOR lists among its most common B&O credits. Whether it applies depends on your numbers, so check it before you file.

The more pressing issue for most contractors is not the B&O rate itself. It is the sales tax collection obligation that comes with the Retailing classification, and whether the books actually support it. If you are doing $800,000 in retail contracts a year and have not been collecting or remitting retail sales tax, the exposure is real.

Getting the classification right, tracking reseller permits for each job where you work as a sub, and filing use tax on out-of-state material purchases are the three places most contractors have room to improve.

For more on how accounting services cover contractor tax compliance in Washington, the accounting services page covers what monthly accounting typically includes for trades and service businesses in the state.

Questions owners ask about this

Does a Washington contractor always have to collect retail sales tax?

Not always. If you are a subcontractor and the general contractor gives you a valid reseller permit before the job starts, your work is a wholesale sale and you do not collect retail sales tax from the GC. Without that permit, you are Retailing and must collect sales tax on the full contract price. Prime contractors working directly for property owners collect retail sales tax on their retail contracts.

What B&O classification do Washington contractors use?

Most Washington contractors use either Retailing (0.471%) when hired directly by a property owner, or Wholesaling (0.484%) when working as a subcontractor with the general contractor's reseller permit. Service and Other Activities does not apply to construction, even for labor-only jobs. Misapplying it can leave a contractor exposed to uncollected sales tax, which is usually the larger liability.

What happens if I filed my B&O under the wrong classification?

If the Department of Revenue finds the classification was wrong, it can assess the tax that should have been reported, and uncollected sales tax can become a liability for the contractor. The earlier you catch it, the more options you have, so it is worth reviewing past returns with a tax advisor before an audit starts.

Do Washington contractors owe use tax on materials?

Yes. If you purchase materials from an out-of-state vendor that did not collect Washington sales tax, or from any supplier where Washington tax was not charged, you owe use tax to the state. This applies however you bought the materials, so keep track of any purchase where Washington tax was not charged.

Does my B&O classification change from job to job?

Yes, it can. If your company acts as the general contractor on some projects and as a subcontractor on others, the classification follows each individual contract, not your company overall. You track the reseller permit for each job. A company reporting in the same quarter under both Retailing and Wholesaling is common for contractors who move between GC and sub roles.