Update on Wisconsin Sales and Use Tax Information for Contractors

Erin Horman, CPA, Tax Senior Manager   email
November 2011

 
The Wisconsin Department of Revenue (WDR) recently updated its Publication 207, Sales and Use Tax Information for Contractors, which makes now an excellent time to review the rules. Determining what is taxable or tax exempt from a sales tax perspective can be a complex process for contractors. Wisconsin Publication 207 includes a helpful overview of Wisconsin sales and use tax issues impacting contractors and also offers several useful examples. This article provides a general overview of the sales and use tax treatment for contractors in Wisconsin.

The first step for contractors is to understand the distinction between real property and personal property. Generally, the selling or servicing of tangible personal property is subject to sales tax; whereas, engaging in real property construction activities are not subject to sales tax. In several cases, however, a contractor should assess or charge sales tax. Generally, a contractor should charge sales tax in the following situations:

• Selling tangible personal property, including building materials, without installation;
• Repairing, servicing, altering, fitting, cleaning, painting, coating, towing, inspecting and maintaining tangible personal property;
• Selling or installing tangible personal property which remains tangible personal property after installation (Publication 207 includes a list in on pages 5-7 (Part II, B, 3, e.) of various items that fall into this category);
• Performing services to real estate which is ordinarily considered real property but is deemed to have retained its character as tangible personal property for repair and maintenance purposes (e.g., air conditioner or furnace); and
• Performing other taxable services, such as landscaping services.

 Further, an exemption from sales and use tax on the purchase of tangible personal property sold to customers is available.

Example 1. A furnace is installed in a customer's residence and then later repaired. The furnace itself would be considered tangible personal property, but becomes part of the real property once it is installed. How are these transactions treated for sales tax purposes?

• The original installation of the furnace is considered a real property construction activity and is not subject to sales tax. This would include the furnace and materials cost, the installation costs, and any delivery or mileage charges. Please note that the contractor would be charged sales tax on the purchase of the furnace to be installed.
• The repair of the furnace would be subject to sales tax. This would include any replacement parts, labor charges, delivery charges or mileage charges. Please note that the contractor's purchase of the replacement parts would be exempt from sales tax (as in this case, the contractor would in turn be re-selling the parts to the customer).
• The original installation or the complete replacement of many items is nontaxable if such installation or replacement is a real property construction activity. The furnace is considered tangible personal property, but the original installation or replacement would be considered nontaxable under the above rule. The furnace retains its tangible personal property status after installation, which is why the repair would be subject to sales tax. The same would hold true for many items, such as air conditioners, furnaces, bathroom fixtures, carpeting and appliances.

Example 2. A roofing contractor is hired to tear down and replace a roof on an individual's home. That same contractor is called back a few years later to repair hail damage to the roof. What is subject to sales tax in this situation?

• The roof is considered a structural component of a building. Therefore, none of the contractor's activities in this example are subject to sales tax. However, the contractor would pay sales tax on the purchase of the materials used in both the construction of the roof and for the repair of the roof.
• Many contractors find themselves performing a job that may involve both real property and tangible personal property, so they should exercise caution in making the differentiation.

Example 3. A contractor is hired to wire a new factory, including installing a new piece of machinery and its related wiring. What is subject to sales tax in this case?

• The contractor's charge for installing the piece of machinery would be subject to sales tax as it involves personal property, and this would also include any materials, labor and delivery charges. Sales tax on personal property is not imposed if the property is classified as manufacturing property, as it is in this case.
• The contractor's charge for wiring the new factory, including wiring from the machine to the power source, is not taxable because it is a real property activity.

As you can see in just these few examples, the sales tax treatment can vary depending in the specific details of each situation. It is important to determine what is happening in each case. Get all the facts. This updated version of Publication 207 could serve as a good starting point in your analysis, but there are other materials and resources as well. Please contact Erin Horman at ehorman@KolbCo.com or your Kolb+Co. adviser if you have any questions or would like further information.