The construction industry in Wisconsin is comprised of a wide variety of businesses. Commercial general contractors, specialty subcontractors in multiple disciplines, roadbuilders, homebuilding firms, residential remodeling firms, landscapers, solar design firms, and others all share this space.

While different in many regards, they have one specific thing in common – the need to have a thorough understanding of Wisconsin’s sales and use tax laws.

What is the difference between sales tax and use tax?

Sales tax is what the seller charges to a customer for the sale or rental of taxable products or services in Wisconsin. When sales tax is imposed on taxable services, both material and labor charges are included as part of the selling price subject to tax.

Use tax is the assessment of tax to the purchaser of taxable products and services that are stored, used, or otherwise consumed in Wisconsin, and for which Wisconsin sales or use tax has not been previously paid.

What is unique about sales and use tax for contractors?

Contractors must first understand and be able to distinguish between “real property” and “personal property” activities. This determines whether the contractor is acting as a consumer or as a retailer.

1. Real property activities include the construction and improvement of buildings and other real estate. When providing construction services to real property, contractors are acting as a consumer and must pay use tax on materials and other taxable products that go into the project.
2. Personal property activities include selling materials, components, or other tangible items without installation, repairing and servicing items of tangible personal property, and certain landscaping services. When providing sales or services to personal property, contractors are acting as a retailer and must collect and remit sales tax on the entire invoice to the customer, unless a valid exemption certificate is received from the customer.  When acting as a retailer for personal property activities, the contractor does not need to pay sales or use tax when the personal property items are purchased from the vendor – instead, a resale certificate may be presented.

What if a contractor acts as both a consumer and a retailer on the same project?

A common situation occurs when a contractor acts as a consumer (real property activity) and a retailer (personal property activity) on the same project.  For example, a house is constructed which is mostly a real property activity, but it includes the sale and installation of appliances such as a washer and dryer. In this example, the general rule is that the contractor must collect and remit sales tax from the customer on the price of the appliances including installation labor. However, for situations like this, Wisconsin allows a “Lump Sum Contract Exemption” which would disregard the de minimis amount of personal property included in the total home sale price.  The lump sum contract exemption applies if taxable sales of personal property are less than 10% of the total contract price.  If the taxable sales price is less than 10% of the total contract price, the contractor is deemed to be the consumer of the personal property items and must pay use tax on those items when purchased from the vendor.

Is it easy to distinguish between real property and personal property items in a project?

There are very specific rules and examples that go into the determination of whether a particular item is considered real property or personal property for purposes of Wisconsin sales and use tax.  For example, there are many items that are considered real property when installed as part of new construction, but subsequent repair and servicing of those same items may be deemed to be personal property.  Other items may be treated differently when installed in commercial buildings versus residential buildings. The Wisconsin Department of Revenue has a helpful chart with examples of these items in Publication 207 (see resources).

What if a project is being constructed for a municipality or other exempt entity?

A sales and use tax exemption applies for contracts with certain exempt entities. A construction contractor does not need to pay use tax for being the consumer of materials and other taxable products that are used in a contract with certain exempt entities, if the materials become part of a “facility” in Wisconsin and owned by the exempt entity. There is a specific method for completing the exemption certificate in this situation. Examples of exempt entities for this purpose are local governments, public school districts, public universities and technical colleges, and certain nonprofit and religious organizations.

Is this it? Where can more detailed guidance be found regarding Wisconsin sales and use tax for contractors?

This article barely scratches the surface of the ins and outs of sales and use tax for contractors in Wisconsin! There are many other rules and exemptions that often apply. Fortunately, the Wisconsin Department of Revenue provides a few excellent publications and videos that can be used for further reference:

• Publication 207 “Sales and Use Tax Information for Contractors” 
• Publication 200 “Electrical Contractors” 
• Publication 210 “Sales and Use Tax Treatment of Landscaping Services”
• Video: “Construction Contracts with Exempt Entities”
• Video: “Understanding Sales Tax for Residential Personal/Real Property” 

Sales and use tax for contractors in Wisconsin isn’t easy, but thankfully there are some great resources to help point you in the right direction. For help navigating these and other tax planning considerations, like picking the right method of accounting, please reach out to a tax advisor that specializes in providing services to contractors.