An owner rightfully withheld a general contractor's retainage to address several liens on the property the general contractor failed to address (due to its failure to pay subs) on a project. The general contractor is insolvent and will likely file a Chapter 7 bankruptcy? Setting aside all of the bankruptcy issues, how should the payment of sales tax be addressed to the soon to be secured subcontractor be addressed? The retainage does not include sales tax because it has already been drawn by the contractor. If the owner pays the subcontractor's sales tax, it pays twice; and if it withholds the sales tax and requires the sub to pay it, the state potentially recovers sales tax twice.
I'll have to second Sarah's comment - considering the complex nature of bankruptcy and tax laws, it'd be wise to consult the Washington Dept. of Revenue, as well as local tax and bankruptcy attorneys. Hopefully a Washington construction or tax lawyer will be able to chime in here with some insight, though.
Still, it's worth noting that the Washington Dept. of Revenue's general position on retainage and sales tax is that sales tax should be calculated prior to retainage being deducted, not after. That's briefly discussed here, about half way down the page: Sales Tax and Construction in Washington . This resource discusses things in greater detail, beginning around page 5: Washington State Construction Tax Guide (admittedly, this guide is a bit dated - it's from 2005).
So, if that wasn't done, tax specialists may be necessary to right the situation. If the tax was properly withheld, then I don't know that there will be additional considerations for the owner. Regardless, a Washington tax attorney would be in the best position to advise you on the matter.