Wisconsin recently enacted several tax law changes of particular interest to construction contractors. Two of these changes modify the sales and use tax statutes - one relating to the method of taxing tangible personal property included in a real property construction contract, and the other relating to the purchase of building materials to be incorporated into a facility owned by a tax-exempt entity. Both of these provisions expand existing exemptions and thus generally provide cost saving opportunities, although not in all situations. Another law change creates a new personal property tax exemption for non-manufacturing machinery, tools and patterns.
Sales and Use Tax Exemption Regarding Tangible Personal Property Included in a Real Property Construction Contract
Under Wisconsin law, sales of tangible personal property and certain listed services (referred to together in this alert as "taxable products") are generally subject to sales tax, while sales of real property are not subject to sales tax. A contractor often sells both taxable products and real property under one contract, which can make it difficult to apply the above general rules. To at least partly address this concern, the Wisconsin statutes provide additional rules governing such mixed contracts. The tax treatment under these provisions turns on the relative value of the two types of property, whether the contract is a lump sum contract, and the date of the contract.
For several years, Wisconsin law has provided that if the value of the taxable products is less than 10% of the total contract price and the taxable products and real property are sold under a "lump sum" contract, the sale of the taxable products to the customer is not subject to sales tax. In this situation the contractor has been required to pay sales tax on its purchase of the taxable products (or their component parts) unless the taxable products are being sold to a tax-exempt entity. Taxable products sold to an exempt entity under a lump-sum contract may be purchased by the contractor tax-exempt for resale, provided the products are not consumed by the contractor in its real property construction activities. For this purpose a "lump sum" contract is one where the contractor quotes one price for labor, services of subcontractors, tangible personal property and taxable services, including a contract in which the contractor separately itemizes the charges for these various elements as part of a schedule of values or similar document.
Expansion of the Exemption
Under the recently enacted legislation, the exemption for sales of taxable products with a value less than 10% of the total contract prices is in essence extended to all contracts (including, for example, "time and materials" contracts), instead of being limited to "lump sum" contracts. Under the new exemption, if the total value of tangible personal property and services transferred to the customer is less than 10% of the total contract price, the sale of the tangible personal property and services to the customer is not subject to sales tax, regardless of the type of contract. As with the prior "lump sum" exemption, in this situation the contractor generally must pay sales tax on its purchase of the taxable products (or their component parts) transferred to the customer unless the taxable products are sold to a tax-exempt entity. The expanded exemption is effective December 1, 2017 for contracts entered into, extended, modified or renewed on or after that date.
The new legislation also provides that the exemption extends to sales of taxable products by a subcontractor to a prime contractor, or to another subcontractor for eventual sale to the prime contractor, if either (i) the total sales price of the tangible personal property and services is less than 10% of the total amount of the subcontractor's construction contract or (ii) the taxable products will be sold by the prime contractor to its customer in a sale qualifying for the exemption under the statute. In either case, the subcontractor must pay sales tax on its purchase of the taxable products (or their component parts) transferred to the prime contractor (or to another subcontractor) unless the prime contractor's contract is with a tax-exempt entity and the taxable products will be transferred to the entity by the prime contractor.
Under the first of these alternatives (where exemption is determined by the subcontractor), it appears advisable for the prime contractor to obtain some documentation supporting that the tangible personal property and services are less than 10% of the total contract amount, such as a statement to this effect in the contract documents or, preferably, an itemization of values in the billing documents. Under the second of the alternatives (where exemption is determined by the prime contractor), the subcontractor should obtain an exemption certificate from the prime contractor stating the products are exempt under Wis. Stat. 77.54(60).
Assume a residential home builder contracts to construct a home for a customer for a total cost of $100,000, consisting of $98,000 of real property construction and $2,000 for a clothes washer and dryer. The builder purchases the washer and dryer from a retailer for $1,500. Because the value of the washer and dryer ($2,000) is less than 10% of the total contract, the contractor does not need to charge sales tax on the sale of these items to its customer. Instead, the builder is required to pay sales or use tax on the $1,500 it paid for the appliances. If the contract is dated on or after December 1, 2017, this tax treatment applies to all types of contracts; prior to that date it only applies to lump sum contracts.
Example Involving a Sub-Contractor
Assume a commercial builder contracts to construct an office building for a non-exempt customer for a total cost of $1,000,000, consisting of %950,000 of real property construction and %50,000 for landscaping services (which are generally taxable services in Wisconsin), under a contract dated on or after December 1, 2017. The builder obtains the landscaping services from a sub-contractor, who charges the builder $40,000 for the services.
Because the total value of taxable personal property and services (%50,000) is less than 10% of the total contract with the customer, the builder does not need to charge sales tax on its sale of the landscaping services. Furthermore, the builder can provide the landscaper with an exemption certificate, allowing the builder to purchase the $40,000 of landscaping services tax-free. The landscaper, however, is required to pay sales or use tax on its const of materials (e.g., seed, topsoil and mulch) incorporated into the services provided to the builder.
For the landscaper, this differs from a typical transaction, where a landscaper purchases its materials to be incorporated into a job tax-exempt and charges sales tax on its charges to its customer. As a result of the new rule, the landscaper is required to pay sales or use tax out of pocket on its materials, which will result in a lower profit margin on the job for the landscaper unless the landscaper has built the cost of the tax on the materials into the price quoted to the builder.
Transactions Not Qualifying for the Above Treatment
If the value of the tangible personal property and services is 10% or more of the total contract price, the contractor must charge its customer sales tax on the taxable products ( unless an exemption applies, such as if the customer is a tax-exempt entity), and the contractor's purchase or the taxable products (or their component parts) is exempt from sales tax as a purchase for resale. If the contract specifies separate prices for the taxable products and the real property, the contractor is to charge tax on the specified prices for the taxable products. If the contractor charges one lump sum amount for both the taxable products and the real property, the contractor must make a reasonable allocation of the value of the taxable products and the real property and charge tax on the value allocated to the taxable products.
The exemption for the sale of tangible personal property and services comprising less than 10% of the value of a construction contract provides contractors with two benefits. It simplifies the contractor's compliance burden by eliminating the need to charge, collect and remit tax on the sale to the customer. In addition, assuming the contractor's purchase price of the taxable products is less than the price the contractor charges its customer for the products, the exemption results in a lower total amount of tax being imposed on the taxable products than if the exemption did not apply, resulting in an overall lower cost for the project. However, the contractor is required to pay tax on its purchases of the taxable products (or their component parts), instead of purchasing these items tax-free for resale. The contractor should keep that tax in mind in pricing its contract.
The new legislation in essence extends the previous exemption to additional situations by (i) expanding the scope of the exemption from only "lump sum" contracts to all types of contracts and (ii) establishing alternative methods by which subcontractors may qualify for the exemption. The legislation also permits subcontractors to avoid tax on the purchase of taxable products when the prime contractor's contract is with a tax-exempt entity and the taxable products will be transferred to that entity.
Sales and Use Tax Exemption for Building Materials Incorporated Into a Facility Owned by a Tax-Exempt Entity
Wisconsin Law Provides a sales and use tax exemption for a contractor's or subcontractor's purchase of building materials (e.g., bricks, lumber, plumbing piping and fixtures, HVAC equipment, etc.) to be incorporated into qualifying facilities owned by specific types of tax-exempt entities. Effective for contracts entered into on or after July 1, 2018, the types of entities covered by this exemption has been expanded to cover technical college districts and the University of Wisconsin system. The materials being purchased must become a component of a "facility"located in Wisconsin and owned by the qualifying entity. "Facility" for this purpose is generally defined in the statutes to include a building, shelter, parking lot, parking garage, athletic field, athletic park, storm sewer, water supply system, or sewerage and waste water treatment facility. It does not include a highway, street, or road.
We will address this expanded exemption in more detail in a future alert closer to the provision's July effective date.
Property Tax Exemption for Machinery, Tools and Patterns Not Used in Manufacturing
Beginning January 1, 2018, there is a property tax exemption for machinery, tools, and patterns that are not used in manufacturing. For this purpose, "machinery" is rather broadly defined as "a structure or assemblage of parts that transmits force, motion, or energy from one part to another in a predetermined way by electrical, mechanical, or chemical means," although machinery" does not include a building.
This exemption will be significant for many contractors due to the broad scope of "machinery" and "tools." Contractors should ensure they no longer report such items on their personal propery returns, beginning with the returns due March 1, 2018.
At BDO, our Wisconsin sales and use tax and property tax experts have considerable experience in sales and use tax and property tax laws, with extensive experience with contractors. Our professionals are former state auditors and/or have industry experience. We understand the rules and know how to deal with complex contractor issues. In fact, we have often found that many contractors are paying more taxes than legally required.
If you are under audit, uncertain about your tax compliance, would like some training for your team or have a general question, feel free to contact us. Jim San Fillippo can be reached at (414)615-6774 or firstname.lastname@example.org, and Art Oberst can be reached at (414)287-1129 or email@example.com.
Material discussed in this publication is meant to provide general reference and should not be acted on without professional advice tailored to your individual needs. BDO USA, LLP is not, by means of this communication, rendering professional advice or service, and hereby disclaims any loss whatsoever sustained by any person who relies on this communication.
 Wis. Stat 77.54(60)(b) (pre-2017 amendments). This treatment is effective for contracts entered into on or after October 1, 2013
 Wis. Stat. 77.54(60)(c) (pre-2017 amendments).
 Wis. Stat. 77.54(60)(a) (pre-2017 amendments).
 Wis. Stat. 77.54(60)(b) and (c), as amended by Act 59, Laws 2017; Wis. Stat. 77.51(11d)
 Act 59, Laws 2017, 9338(18) [initial applicability] and 9438(3) [effective date].
 Wis. Stat. 77.54(60)(bm)1, as added by Act 59, Laws 2017.
 Wis. Stat. 77.54(60)(bm)2 and (60)(c), as added and amended by Act 59, Laws 2017.
 Lump-Sum Contract Exemption vs. Construction Contract Exemption, Wis Tax Bulletin 200 (Jan. 2018), pp. 19-21; Septic System Installers Updated - Taxable Items Less Than 10% of Contract Price, Wis. Dept. of Revenue website (Jan. 2, 2018) (both regarding the use of an exemption certificate).
 See Publication 207, Sales and Use Tax Information for Contractors, Wis. Dept. of Revenue (Jan. 2014), p. 13.
 See Wis. Stat. 77.54(9m).
 Wis. Stat. 77.54(9m), as amended by Act 59, Laws 2017; Wis Stat. 36.05(6m) and 36.05(9); Act 59, Laws 2017, 9338(18d) [initial applicability] and 9438(3d) [effective date].
 See Wis. Stat 77.54(9m).
 Wis. Stat. 70.111(27), as amended by Act 59, Laws 2017.