Under Washington law, prime contractors perform construction for consumers, while speculative builders construct on property they own. The differentiation between these classifications is important because prime contractors are subject to Washington’s business and occupation (“B&O”) tax and retail sales tax, while speculative builders are not. In Lanzce G. Douglass, Inc. v. Department of Revenue, Lanzce G. Douglass, Inc. (“Douglass”), a Washington corporation, improperly classified itself as a speculative builder. After an audit, the Washington Department of Revenue (the “Department”) determined that Douglass was a prime contractor (not a speculative builder), and issued an assessment of $254,491, consisting of tax, penalties, and interest. Douglass appealed, and the case reached the Washington Court of Appeals.

Under the relevant facts, Douglass bought real property in Spokane, Washington. The next year, the property was deeded to Summerhill, LLC (“Summerhill”). Douglass was Summerhill’s sole member. Douglass built homes on the property owned by Summerhill and classified itself as a speculative builder for purposes of the construction and home sales. To qualify as a speculative builder, Douglass had to prove that it was “the owner of the property during construction.” Even though Douglass was the sole member of Summerhill, it was Summerhill, not Douglass, that held title to the property during construction. Accordingly, the Court concluded that Douglass was not a speculative builder.

This decision emphasizes the key distinction between speculative builders and prime contractors (ownership at the time of construction) and highlights the Department’s attempts to prevent property transfer schemes for purposes of avoiding tax liability. Developers must be careful before assuming that the speculative builder tax advantages apply to their projects. If you have questions about the prime contractor and speculative builder classifications, please contact a Stoel Rives Real Estate Attorney.

For reference, the case discussed in this post can be found at Lanzce G. Douglass, Inc. v. Department of Revenue, 25 Wn. App. 2d 893, 525 P.3d 999 (2023).