The construction industry is a special animal when it comes to sales and use tax.
Regulations are complicated and vary by state. Tax liability changes depending on the type of project, the contractor’s role (sub or general), the services involved and the end customer.
Different interpretations can yield very different results. And if you don’t plan properly on the front end of the job, you could find yourself on the hook for an unexpected (and profit-draining) tax bill.
What’s more, we’ve seen an increase in audit activity over the last few years. Sales and use tax audits present an attractive revenue opportunity for the state. Complex regulations mean mistakes — and therefore taxes and penalties — are common.
Contractors should understand their sales and use tax responsibilities before entering into a contract and even while the project progresses. You need to know the sales and use tax implications of each project to ensure you can build those costs into your bids, if necessary.
Do contractors charge sales tax in Wisconsin?
Per Wisconsin law, if a contractor purchases construction materials for use in a real property construction project or repair, the contractor is considered the end user of those materials. That means the contractor must pay sales or use tax on those purchases, and the contractor’s sale to their customer is not taxable.
However, when a contractor sells, installs or repairs tangible personal property, they are considered the retailer of the property. That means they should purchase it exempt from sales tax (by providing their vendor an exemption certificate claiming the resale exemption) and charge sales tax to their customer.
Construction contract exemption
Because contractors often sell real property and taxable products under one contract, it can be difficult to apply the correct tax rules.
To help alleviate that burden, Wisconsin tax law provides that if the taxable product value is less than 10% of the total contract price, the customer is not subject to sales tax. When this is the case, the contractor is then the consumer of all materials and pays the sales or use tax on all taxable products incorporated in the construction contract.
Note: Previously, the construction contract exemption only applied to lump sum contracts. But under Act 59 legislation, this exemption was extended to all construction contracts entered into on or after December 1, 2017.
Distinguishing between real property and tangible personal property
But how do you determine whether an item is classified as tangible personal property or real property? That can get tricky. Here are some tests and guidelines:
Is it permanently attached to the real estate?
- Yes: More likely to be real property
- No: More likely to be personal property
Can it be removed without major structural damage to the real property or item itself?
- Yes: More likely to be personal property
- No: More likely to be real property
Does it serve the purpose of the real estate to which it is attached? Yes = real property. Examples:
- Furnaces that heat a building
- General lighting
- Cabinets and countertops in a residential setting
- Cabinets and countertops in a bathroom, kitchen or breakroom in a commercial setting
Does it serve a process function for a business? Yes = tangible personal property. Examples:
- Furnaces that heat raw materials
- Special lighting for a manufacturing process
- Cabinets and countertops in a commercial setting
Examples of real property construction jobs:
- Installing walls, floors, ceilings, doors and windows
- Central heating and air conditioning (installation)
- Installing plumbing and fixtures
- Installing cabinets and countertops in a residence
- Installing land improvements such as decks, patios, driveways, sidewalks and in-ground pools
Examples of personal property jobs:
- Selling services or materials without installation, for example:
- Repairing personal property (in general)
- Replacing a ballast in a light fixture
- Servicing HVAC equipment
- Voice and data wiring in a non-residential setting
- Installing trade fixtures
- Landscaping and lawn maintenance services
Purchases from Wisconsin vendors
Construction companies typically work with a variety of vendors over the course of a project. Here again, the contractor needs to know which services are taxable and who is bearing the liability for those taxes. Review your tax practices for vendor services like these:
- Data communication wiring/cabling
- Interior decorators/design services
Landscaping activities are subject to sales tax and are generally not considered real property. Consult Wisconsin Publication 210 to review the treatment of landscaping, because it’s not always obvious what is and is not a taxable landscaping service.
Fine grading is taxable, but rough grading isn’t. Lawn mowing is taxable, but snowplowing isn’t. Tree trimming is taxable … unless trimming is being done for utility right of way.
Due to new economic nexus standards following the landmark Wayfair ruling, you should review your tax practices with any business partner outside the state. If you have historically paid use tax on vendor invoices, revisit those invoices to determine how tax is now charged to prevent double taxation.
Contractor-subcontractor tax responsibilities
If a contract is deemed a real property construction activity, the party that converts the materials from unattached personal property to attached real property will be responsible for the sales/use tax.
Notably, Act 59 extended the construction contract exemption to taxable sales by a subcontractor. If a contract is deemed the sale and installation of personal property, the subcontractor may purchase property exempt from tax for resale and then is obligated to charge sales tax to the general/prime contractor unless a resale exemption certificate is issued. In this case, the general contractor would charge sales tax to the end customer, unless the end customer is able to claim an exemption.
Here’s what the contractor-contractor tax relationship looks like for real property and personal property construction jobs:
- Real property construction job
- General contractor hires subcontractor to perform work (subcontractor owns materials)
- Subcontractor is responsible for sales/use tax on the cost of the materials
- Subcontractor does not charge general contractor sales/use tax
- General contractor does not charge end customer sales/use tax
- Personal property construction job
- General and subcontractor are acting as retailers
- Subcontractor may purchase materials exempt from tax for resale
- Subcontractor liable to charge general contractor tax unless general contractor issues resale exemption certificate
- General contractor charges sales tax to the end customer on materials and labor, unless customer issues exemption certificate
Sales and use tax for a tax-exempt entity
Act 126 created a sales and use tax exemption for building materials that become part of a facility owned by a qualifying exempt entity.
Qualifying exempt entities include the following, when located in Wisconsin:
- Any county, city, village, town
- Any public school district
- A county-city hospital
- A sewerage commission or district
- Any joint local water authority
- Any exempt entity organized and operated exclusively for religious, charitable, scientific or educational purposes, or the prevention of cruelty to children or animals
- Technical colleges and UW system or UW-Extension (For contracts entered into on or after July 1, 2018)
NON-qualifying exempt entities:
- Federal government
- State government
- Non-Wisconsin exempt entity
The definition of facility is very specific and must be examined to determine what qualifies for the exemption.
Manage sales and use tax with Wipfli
Wipfli’s state and local tax group has significant experience in construction tax strategies. We can help you implement a proactive approach to your company’s sales and use tax program to help you optimize exemptions and limit your exposure. Contact us for a consultation.
If you’re being audited, seek professional support. We provide sales tax audit help, from construction specialists who know your industry.