Wisconsin contractors see expanded tax exemption

December 6, 2017|Brian Clark

Wisconsin sales and use tax applies to sales and purchases of property and services by contractors when the sale of taxable items by the contractor is less than 10% of the total contract price.

The original tax treatment, initially effective October 1, 2013, primarily impacted general contractors. This treatment has been modified and expanded to include all types of contracts and now applies to subcontractors.

Contracts entered into on and after October 1, 2013

A sales and use tax exemption was created for the consumption of taxable tangible personal property and services that are sold by a contractor as part of a lump-sum contract. The contractor is deemed the consumer of the taxable "products" sold, and must pay Wisconsin sales or use taxes on its purchases of such products unless the products are sold to an exempt entity. Taxable products sold to an exempt entity under a lump-sum contract may be purchased by the contractor without tax for resale. (Note: A contractor must still pay Wisconsin sales or use tax on the materials it purchases and incorporates into real property under a contract with any customer, including exempt entities.)

Contracts entered into on and after December 1, 2017

The new law contained within 2017 Wisconsin Act 59 expands the sales and use tax exemption for products sold in connection with real property construction activities as part of a lump-sum contract to all construction contracts.

Under prior law, there is a sales and use tax exemption for products sold by a contractor as part of a lump-sum contract for real property construction activities if the total sales price attributable to the taxable products is less than 10% of the total contract price. Under the new law, the exemption is expanded to apply to all construction contracts involving real property construction activities if the total sales price of taxable products and services is less than 10% of the total contract price. If the exemption applies, the contractor is the consumer of, and pays the sales tax on, the products.

Additionally, if the prime contractor qualifies for the exemption, the exemption applies to all contracts entered into with respect to the real property construction activities. If the exemption applies to a subcontractor, the subcontractor is the consumer of, and pays the sales tax on, the materials. In addition, under prior law for a construction contract between a contractor and a tax-exempt entity, the contractor may purchase, without tax for resale to the tax-exempt entity, any products that will be sold by the contractor to the tax-exempt entity as part of a construction contract. The bill extends that sales and use tax exemption to products purchased by a subcontractor for eventual resale to the tax-exempt entity.

Let’s look at an example

A subcontractor installs casework in a doctor’s office as part of a real property construction project (tangible personal property less than 10% of total contract). Prior to the law change, the subcontractor would purchase materials exempt from sales tax and then charge sales tax to the general contractor on the entire invoice because the casework would be treated as taxable tangible personal property. However, under this new law, the subcontractor should pay tax on purchase of the materials and then not charge tax on the invoices to the general contractor.

For the subcontractor to know to pay sales or use tax on purchases rather than charging tax to the general or prime contractor for tangible personal property and taxable services, the general or prime contractor must provide the subcontractor with a fully completed exemption certificate claiming the exemption. The general or prime contractor should check the box under "Other" for "Other purchases exempted by law" and enter "Exempt under sec. 77.54(60)." If the subcontractor does not receive an exemption certificate from the general or prime contractor, the subcontractor should charge tax.

Final thoughts

If it is later determined upon audit that the general or prime contractor was incorrect in meeting the 10% test, the general contractor would be liable for tax on its purchase of tangible personal property and taxable services from the subcontractor. The Wisconsin Department of Revenue would likely not impose tax on the subcontractor's sale for reliance on the properly completed exemption certificate received from the general or prime contractor.

For more information, please contact Brian Clark at 414-465-5629, or any member of the State and Local Tax team.


Brian Clark, CPA, MBA, is a supervisor on Schenck’s State and Local Tax team. His experience includes coordination of sales tax audits and reverse audits as well as research, planning and compliance related to sales and use tax.