Construction attorneys rarely encounter state and local tax issues. However, in a recent negotiation over a disputed change proposal, an Owner’s attorney argued that Washington prohibits recovery of B&O tax as a separately-billed line item in the change proposal. Given that itemization of B&O surcharges seemed a fairly common business practice, I was initially skeptical of the position. Upon further review, it became apparent that the Owner’s argument was indeed correct and that many contractors may be unknowingly violating the law by separately itemizing and adding a percentage for B&O tax to their billings or change proposals.
Without belaboring the extensive case law history of the B&O tax recovery issue, the Washington Supreme Court in 2012, in the context of a Consumer Protection Act class action suit against Cingular Wireless, held that the carrier could not collect a line item for B&O tax surcharge on its billings to its customers even though the cellular carrier had disclosed in agreements and plan documents it would be collecting the surcharge. The Court’s decision stemmed from an interpretation of RCW 82.04.220, which provides that the B&O tax is intended to be a tax upon businesses to be absorbed as part of their overhead and is not a tax to be collectible from the customers of the business (like sales tax).
In deciding the issue against Cingular Wireless, the Washington Supreme Court held that a business cannot recover B&O tax regardless of prior agreement, but nonetheless can factor in or include B&O tax into determining its final price, or its overhead or profit margin. Given the blanket prohibition on separate billing for B&O tax, contractors in Washington may internally include B&O tax in their final pricing, or overhead and profit markups, but should refrain from separately itemizing B&O tax in any billing or change proposal to its customers.
Contractors with specific questions on how their practices comply or may run afoul of Washington’s law are encouraged to consult their accountants or legal counsel.
 The Washington Supreme Court’s decision in Peck v. AT&T Mobility, 275 P.3d 304 (Wash. 2012) appears to have been a departure from past court decisions which had for many years allowed B&O tax recovery from customers under certain limited circumstances.