Gov. Scott Walker has signed into law Senate Bill (SB) 227 on Dec. 16, 2016, allowing contractors to purchase construction materials on behalf of certain tax-exempt clients without paying Wisconsin sales or use tax. The law applies to construction material contracts signed beginning Jan. 1, 2016. The new exemption applies to contracts with a Wisconsin county, city, village, municipality, school district, city or county hospital, and local sewer and water districts. It also covers real property construction jobs with religious, charitable, educational, and other nonprofit organizations that are themselves exempt under Wisconsin’s statutes. The bill excludes highway, street, and road projects from the scope of the sales and use tax exemption.
Note that contracts with the State of Wisconsin and its agencies, such as the University of Wisconsin Hospitals and Clinics Authority, are not exempt under the sales and use tax legislation. Further, real property contracts with federally recognized Native American tribes are outside the scope of the exemption.
Currently, if a contractor buys construction materials for use in a real estate construction project owned by a tax-exempt entity, the contractor is deemed the final consumer of those materials. The contractor must pay sales or use tax on their purchases. However, if a tax-exempt owner purchases these same materials from the supplier, the tax-exempt entity does not have to pay sales or self–assess use tax. A number of states permit the exempt status of the real estate owner to flow through to contractors and permit them to purchase building materials without tax.
As a result of this new law, contractors will have the opportunity to directly purchase construction materials “in fulfilment of a real property construction activity” for certain tax-exempt projects. This will operate similarly to the way a contractor can now buy and install items that retain their character as tangible personal property. These items can be purchased exempt and resold without charging any sales tax.. The real property construction materials must ultimately be transferred to Wisconsin elementary or secondary school districts, municipalities, or other nonprofit entities, and must be part of a facility located within the state.
SB 227 will reduce the extent to which construction businesses have to rely on captive or related purchasing companies to buy building materials without tax for exempt entity contracts. Although this is a welcome relief from existing administrative burdens related to exempt entity contracts, construction businesses will have to pay close attention to the new law’s requirements in order to get maximum benefit and avoid sales and use tax risk.
State Sen. Howard Marklein, who is not only a sponsor of the bill but also a CPA, worked to get the legislation passed this session in time for January implementation.
For more information on this topic, or to learn how Baker Tilly construction specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.