Wisconsin Sales Tax Change Impacts Contractors with Disregarded Entities Part 1
Melissa Lutgen, CPA Tax Senior Manager email
April 2010
Effective July 1, 2009, significant changes have been made to the treatment of single-owner entities regarding sales and use tax for Wisconsin purposes. These changes have impacted contractors and other businesses doing business with certain tax-exempt entities. Previously, contractors could establish single-owner entities (usually a Limited Liability Company or a Qualified Subchapter S Subsidiary) to facilitate the purchase of materials used in real property construction so that one company could supply the materials to the exempt entity, and the other related entity could perform the construction work. In addition, single-owner entities that have been utilized as transportation companies or as leasing companies have also been impacted.
Prior Rules
Prior to July 1, 2009, a contractor could establish a single-owner entity, owned 100 percent by the contractor, which was considered a disregarded entity for income tax purposes. All of the activity for the single-owner entity was included on the contractor's income tax return. For Wisconsin sales and use tax purposes, however, the single-owner entity was treated as a separate entity from the contractor. Thus, the single-owner entity could purchase materials needed for construction of real property, and then sell the materials directly to the tax-exempt entity. No sales or use tax would be incurred because the single-owner entity purchased the materials for resale (purchases for resale are not subject to sales tax). In addition, goods sold to the tax-exempt entity would not be subject to sales tax. Further, the contractor would not be assessed any sales tax to install the materials, as the contractor was treated as a separate entity from the entity providing the materials even though they were related.
Also, a contractor or business could establish a single-owner entity, owned 100 percent by the business, to purchase machinery, equipment and vehicles. The purchase of these items, including parts and services, was exempt from Wisconsin sales and use tax as the purchaser was acquiring the assets to be used for its leasing business. The subsequent lease of these assets to the related contractor, however, would be subject to sales and use tax. Further, a contractor or business could also establish a single-owner entity to facilitate the transportation of goods. The purchase of a semi-trailer and transportation services were exempt from Wisconsin sales and use tax.
New Law
Effective July 1, 2009, single-owner entities are no longer recognized as a separate entity for Wisconsin sales and use tax purposes. Therefore, if a single-owner entity purchases materials for a contract with a tax-exempt entity and the related contractor installs the materials, the contractor is subject to sales tax on the purchase. A contractor who performs real property construction and is the purchaser of the materials is subject to sales and use tax. Since the single-owner entity and the contractor are now viewed as the same party for sales and use tax purposes, the tax is now owed by the contractor. In addition, a contractor or business using a single-owner entity as a leasing company will now have to pay sales and use tax on the purchase of the machinery, equipment and vehicles (since they are no longer being purchased for resale), as well as the parts and services for these items. A contractor or business using a single-owner entity as a transportation company will now have to pay sales and use tax on the purchase of the semi-trailer as well as parts and services.
As a result of the new law, single-owner entities are now disregarded for sales and use tax purposes. Wisconsin has provided some transitional provisions related to the law change. Please refer to the notice issued by the Wisconsin Department of Revenue (http://www.dor.state.wi.us/taxpro/news/090701.html).
While the use of disregarded entities to structure operations for Wisconsin sales tax savings has been abridged by this new law, new tax planning opportunities still may exist. The May edition of The Adviser will explore these opportunities in Part 2 of this series.
If you have any questions regarding these changes, please contact Melissa Lutgen.