A new law will exempt Wisconsin contractors from sales tax for goods used on a nonprofit or local government construction project. Highway, street, or road projects are ineligible.

Tax strategies

Sales Tax Exclusion Coming for Some Wisconsin Contractors

  • 12/17/2015

Wisconsin contractors will soon be exempt from sales tax on materials they buy for construction projects for tax-exempt organizations or municipal governments. The change comes from Wisconsin Senate Bill 227, which was signed by Governor Scott Walker on December 16, and is effective January 1, 2016.

Local governments and nonprofits already qualify for this exemption under current law, but only if they purchase the materials directly. The new legislation allows the exemption to apply even if the contractor purchases the materials.

“Quoting jobs for exempt organizations will now be much more straightforward for contractors,” says Mark Gelhaus, a tax principal with CliftonLarsonAllen. “Contractors will no longer have to burden the exempt organization with purchasing materials directly to utilize the nonprofit entity’s sales-tax-exempt status. And contractors will now be more competitive with others who have set up separate supply entities to purchase materials for exempt projects.”

Benefits for contractors, nonprofits, and governments

In general, contractors are considered to be the end users of materials that are incorporated into real property under contract, and are required to pay sales tax on the purchase of those materials; the contract is then not subject to sales tax. But then the normally exempt nonprofit or government entity has the added burden of paying more, since the cost of the sales tax is passed on to them in a higher contract price.

In effect, this legislation allows nonprofits and local governments to extend their Wisconsin sales tax exemption to their contractors as if they were purchasing the materials themselves.

“Wisconsin joins the growing list of more than 20 states that allow contractors to purchase materials free of sales tax based on the exempt entity’s status,” says Gelhaus. “But there were also some carve outs for certain entities, including the State of Wisconsin and its instrumentalities, Indian tribes, and certain local districts. The law should be reviewed based upon your facts to ensure it will apply.”

Exemption is for facilities, but not roads

The new legislation specifies that goods must be incorporated into a “facility,” which is defined as “any building, shelter, parking lot, parking garage, athletic field, athletic park, storm sewer, water supply system, or sewerage and waste water treatment facility, but does not include a highway, street, or road.”

Tax strategy for 2016

If you contract with sales-tax-exempt entities and purchase materials in Wisconsin for work performed in the state, ask for additional documentation from your exempt customers to take advantage of this opportunity.

Similarly, nonprofits that are planning new construction in Wisconsin will be able to highlight the potential cost savings to their contractor, and possibly negotiate a lower contract price.

How we can help

CliftonLarsonAllen’s experienced tax professionals can help contractors, nonprofits, and local governments in Wisconsin navigate the rules for this newly passed legislation so you can understand the potential cost savings available to you.