Ask whoever enforces the rule.

Not unless someone from the Building Official's office says so. Then ask them to explain how a retaining wall becomes part of a building, and what can be done so that the wall isn't considered part of a building.

In my area retaining walls are not considered part of the home structure but as PFF mentioned it is worth asking the code enforcer.

Virgil Carter Fine ArtThat's an excellent idea. It is a unique rule and the building office is at a loss themselves.

Is the retaining wall connected to the building? If so, can it be decoupled?

No, it is not connected to the house. There is a graveled walkway between the wall and the house. I think I can do without the wall if it comes to that. Not sure how to bring this up diplomatically not looking smarty pants. So far, I kept calm but I am running out of patience.

How did this become an issue?

Why isn’t your architect working with the nincompoops, er officials, at the building department? Or your contractor? They both should have an idiot to English dictionary handy. It gets employed a lot on builds.

Virgil Carter Fine ArtThe architect put 18' to the retaining wall by what must be an error. There's no way it could be 18' looking at other fixed reference points. That led the officials thinking it is 18' to the retaining wall. It was corrected in the draft but the draftsman didn't mark the distance to the building pad leaving everyone still thinking it is 18' to the wall. I became aware of it about a month ago when we had a meeting with official. I made the point during the meeting that it is 18' to the building. I thought we were on the page since they didn't ask to change that. They did ask to revise a few other things. It all came out when we were staking the site with a surveyor.

Time for a building inspector to visit the job site? Have drawings handy.

The town stuck to including the retains wall in the building. After moving things around we found 4' and got the permit! I was beginning to think the permit was never going to happen.