WA DOR Franchise Fees: A Guide for Tri-Cities Contractors

If you're a home builder in Pasco, Kennewick, or Richland, you've probably run into the WA Department of Revenue's franchise fee rules. And if you're like most contractors we meet, you're probably getting part of it wrong — either over-collecting sales tax from your buyers (which makes your bids less competitive) or under-collecting (which means you're eating the difference out of your own pocket).

At Steadfast Accounting, we work with Tri-Cities home builders every day. DOR franchise fees are one of the first things we audit when we take on a new construction client — and almost every time, we find something that needs fixing. Here's the plain-English guide we walk every client through.

What Is the DOR Franchise Fee?

In Washington State, when a contractor builds a new home on land they own (or will own during construction), the construction is treated as a retail sale. That means you — the builder — are responsible for collecting 6% retail sales tax on the selling price of the house.

This is what the DOR calls a "speculative builder" or "owner-builder" situation. The sales tax you collect is officially called the retail sales tax on construction services, but everyone in the industry just calls it the "franchise fee."

What's Taxable vs. What's Exempt

This is where most contractors get tripped up. The 6% applies to the house — but WA State law recognizes a long list of exempt scopes that aren't subject to the sales tax. If you're collecting 6% on everything, you're overcharging your buyers. If you're collecting 0%, you're undercollecting and the DOR will come after you for the difference.

Generally Taxable (6% applies):

• The house structure itself (framing, roofing, siding, etc.)
• Built-in appliances (dishwashers, ovens, built-in microwaves)
• Permanent fixtures (cabinets, light fixtures, flooring)
• HVAC systems
• Permanent electrical and plumbing systems

Generally Exempt Scopes (no sales tax):

• Building permits — passed through at cost
• Water wells and well systems — including pumps and related equipment
• Excavation and grading — site prep that isn't part of the structure
• Landscaping — when billed as a separate scope (sod, irrigation, trees, hardscaping)
• Septic systems — including drain fields and tanks
• Turnkey scopes — certain completed subsystems that can be itemized separately

How Draws and Change Orders Affect the Franchise Fee

Most Tri-Cities builders work on a draw schedule — the buyer pays in stages as construction progresses. Here's how the sales tax works with draws:

You collect the sales tax on each draw, proportionally. If draw #1 is $50,000 for foundation and framing, you collect 6% ($3,000) at that draw. If draw #2 includes exempt excavation work, that portion of the draw doesn't have sales tax.

This means your draw schedule needs to separate taxable and exempt scopes. If your draw schedule is just "25% at framing, 25% at drywall" with no scope breakdown, you'll end up collecting too much or too little tax.

Change Orders

Change orders follow the same rules as the original contract. If a change order adds an exempt scope (like additional landscaping), no sales tax. If it adds taxable structure (like an extra bathroom), collect 6%. Document everything — the DOR will compare change orders to your final sales tax remittance.

Reporting and Remitting to the DOR

The sales tax you collect on new home construction is reported on your WA State DOR Excise Tax Return. Depending on your volume, you'll file monthly or quarterly. The tax you collected from the buyer gets remitted to the DOR, categorized by the jurisdiction (Pasco, Kennewick, Richland each have slightly different local tax rates that stack on top of the 6% state rate).

Common mistakes we see:

• Not remitting at all — the builder collects the tax but doesn't realize they need to file and send it to the DOR. This is the most expensive mistake. Penalties and interest compound fast.
• Remitting late — DOR late penalties are 9% interest plus up to 39% penalty on the tax owed. These aren't deductible.
• Wrong jurisdiction — a house in Pasco has different local sales tax than one in Richland. Filing under the wrong city creates a mess.
• Not separating exempt scopes — results in over-collecting from the buyer, who may ask for a refund later.

How Steadfast Accounting Helps Contractors

We do the following for every construction client:

• Review your contracts to ensure exempt scopes are properly separated
• Set up QuickBooks with proper job costing and sales tax tracking per draw
• File DOR reports monthly or quarterly — on time, every time
• Track draws and change orders so sales tax collection matches the contract at every stage
• Prepare for DOR audits — because clean records are the best audit defense

If you're a Tri-Cities contractor and you're not 100% confident your DOR franchise fee setup is correct, let's talk. The consultation is free — and it's a lot cheaper than a DOR audit.