Wipfli Alerts & Updates: Wisconsin Proposes Sales Tax Changes Related to Construction Contractors

December 14, 2011
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Public Hearing Scheduled for December 15 at Wisconsin State Capitol
State Representative Andre Jacque (R-Frances Creek) and State Senator Glenn Grothman (R-West Bend) are introducing Assembly Bills (AB) 380 and 381, which could change the treatment of construction projects for exempt entities and how lump-sum contracts are treated. These bills have been introduced previously, but now they have been scheduled for a public hearing.

Assembly Bill 380
Currently, contractors must pay use tax on materials used in performing real property improvements for exempt entities. In order for exempt entities to avoid the tax, they were required to purchase the materials directly from the contractor’s suppliers. This is a challenge for the contractors who assist in the selection, inspection, and approval of the purchase and for the exempt entities that fund the direct purchases.
This bill would allow exempt entities to pass their exemption through to the contractor when the materials are purchased. Many other states (including Illinois, Iowa, and Michigan) allow applicable exemptions of the exempt entity to be utilized by the contractor when securing construction materials for the project. Many argue that the bill does not create a new sales tax exemption but just simplifies the process. Unfortunately, the bill will likely have a revenue loss attributed to it because many contractors are assessed tax on these items in audits because the transactions were not properly handled.

Important note: In a Draft Assembly Substitute Amendment to Assembly Bill 380, an amendment was introduced that a flow through sales and use tax exemption would not be allowed for contractors involved in constructing a highway, street or road.  This draft bill, as it currently reads, would be applicable for a construction contractor who creates a ‘facility’ i.e. any building, shelter, parking lot, parking garage, athletic field, athletic park, storm sewer, or water supply system.

Assembly Bill 381
Currently, contractors are allowed to transfer a small amount of tangible property in a lump-sum contract if the amounts are not separately stated. In those cases, the contractor just pays sales tax on the purchase. 
The Department of Revenue has argued that an AIA document, which breaks down the contract by components, is effectively, separately stating the sale of those items. This situation is not handled consistently by auditors in their audits of contractors. Some contractors have adopted the Department’s position, while others have not adopted it. AB 381 would clarify the definitions of “lump sum contract” and “sales price” to correct this potential problem.
Public Hearing
A public hearing is scheduled for 10:00 a.m. on Thursday, December 15, 2011, in Room 328 NW of the Wisconsin State Capitol. If either of these bills impacts your business, please consider attending to testify or to register your support of the bills.
Please contact
Craig Cookle, Daryl Ohland, or your Wipfli relationship executive with questions or to discuss further.

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