This is the first in a multi-post analysis regarding tax saving opportunities available in Washington to “Speculative Builders.”  Prior to the economic downturn, the Seattle office of a large accounting firm promoted tax saving opportunities on Washington projects though formation of joint ventures structured to appear as a “Speculative Builder,” a single entity with both the developer and construction contractor as members.  The objective was to avoid B&O Tax and Washington State Sales Tax on the portion of the construction “self-performed” by the Speculative Builder entity.  Under this program, a project specific entity was created with the developer entity holding a significant percentage interest and the construction contractor holding a small membership percentage in the entity.  This became the “Speculative Builder” entity. 

Not surprisingly, the Department of Revenue (“DOR) took the position that the Speculative Builder tax exemption was being abused, and as would be expected when tax revenue declined due to the economic downturn, challenged many of these structures.  This has resulted in tightened requirements that must be met in order to qualify as a Speculative Builder. 

This post explains what a Speculative Builder is, while subsequent articles will address steps the Washington legislature has taken to narrow the availability of speculative builder tax treatment and our analysis of the structure and terms that will be required in order to pass DOR scrutiny.

What is a Speculative Builder?

WAC 458-20-170 provides an exemption for Washington State Sales Tax and B&O Tax on a Speculative Builder’s self-performed work, profit and overhead.  Key provisions of the code definition of a Speculative Builder follow:

      (2) Speculative builders.

      (a) As used herein the term “speculative builder” means one who constructs buildings for sale or rental upon real estate owned by him.  

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      (e) Speculative builders must pay sales tax upon all materials purchased by them and on all charges made by their subcontractors.

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      (f) Persons, including corporations, partnerships, sole proprietorships, and joint ventures, among others, who perform construction upon land owned by their corporate officers, shareholders, partners, owners, co-ventures, etc., are constructing upon land owned by others and are taxable as sellers under this rule, not as “speculative builders.”

A person who constructs buildings for sale or rental on real estate owed by that person is a Speculative Builder.  WAC 458-20-170(2)(a).  Speculative Builders are the consumers of the materials and construction services they purchase.  WAC 458-20-170(2)(c).  While a Speculative Builder must pay sales tax on all materials purchased and all charges by subcontractors, it does not have to pay sales or use tax on its own labor and overhead.  The following diagrams illustrate this:

Traditional Owner-Contractor Transaction:

Owner Pays Retail Sales Tax on

Full Contract Value

General Contractor Pays B&O Tax on

Full Contract Value

Subcontractors and Suppliers

Speculative Builder Transaction:


[No sales or use tax on its own labor or overhead]


Subcontractors and Suppliers

[Sales tax is paid on all charges by Subcontractors and Suppliers]


If a Speculative Builder self-performs significant aspects of a project – concrete and steel for example – the tax savings on this self-performed scope can be significant and give a competitive advantage. The key is that the contractor is part of the owner entity, not a construction contractor to the owner entity.

The next article on this topic will explore RCW 82.32.655, enacted by the legislature effective May 1, 2010, known as the “tax avoidance” statute, which has significantly narrowed the ownership structure that DOR will deem to qualify as a Speculative Builder.

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