Construction Contract Exemption - Updated

NOTE: This article supersedes the article titled Construction Contract Exemption dated April 30, 2018.

Some contractors sell both real property improvements (not taxable) and tangible personal property (taxable). An exemption applies for certain contracts entered into October 1, 2013, through November 30, 2017, in which the contractor sells both real property improvements and tangible personal property for one price ("lump sum contract exemption"). This exemption has been expanded to certain construction contracts first entered into or extended, modified, or renewed on December 1, 2017 ("construction contract exemption"). This article summarizes the tax treatment of the new exemption. For information about the lump sum contract exemption, see the article titled, Septic System Installers - Taxable Items Less Than 10% of Total Contract Price.

The construction contract exemption applies to contracts entered into or extended, modified, or renewed on December 1, 2017, and thereafter.

Calculating the Threshold for a Construction Contract

The construction contract exemption applies if the total sales price of all "products" is less than 10 percent of the total amount of the construction contract (including change orders or additional work billed). This calculation is made without regard for any exemptions that may be provided by the customer (e.g., exempt entity, manufacturing, farming, etc.). "Products" includes tangible personal property, and items, property, and goods under sec. 77.52(1)(b), (c), and (d), Wis. Stats., and both taxable and nontaxable services. The calculation does not include real property construction activities.

Alternatively, the construction contract exemption applies if more than 90 percent of the total contract price relates to real property construction activities (including services to real property).

For the "Prime Contractor"

If the total selling price of the real property construction activities of the prime contractor's construction contract are more than 90 percent of the total contract price:

  • The prime contractor's sale to its customer is not taxable
  • The prime contractor must pay sales or use tax on its purchase of products that are not consumed in real property construction activities. (See Exception, below.)

    • To purchase products without tax from the subcontractor, the prime contractor must provide an exemption certificate to the subcontractor.

    • The exemption certificate's box for "other sales exempted by law" must be checked as the reason the purchase is exempt
    • The prime contractor should write "sec. 77.54(60), Wis. Stats." in the space provided
    • If no exemption certificate is provided by the "prime contractor" to the subcontractor, the subcontractor must pay tax on its sales of taxable products and services sold to the prime contractor

  • The prime contractor must pay sales or use tax on its purchase of materials and supplies relating to the real property improvements

For the "Subcontractor"

The construction contract exemption applies if either of the following applies:

  • The prime contractor provides the subcontractor with an exemption certificate claiming the exemption under sec. 77.54(60), Wis. Stats., OR
  • The total selling price of the real property construction activities of the subcontractor's construction contract (includes time and materials jobs) are more than 90 percent of the subcontractor's total contract price

    • If the construction contract exemption applies to the subcontractor's contract:

    • The subcontractor's sale to the prime contractor is not taxable
    • The subcontractor must pay sales or use tax on its purchase of products not consumed in real property construction activities. (See Exception, below.)
    • The subcontractor must pay sales or use tax on its purchase of materials and supplies relating to the real property improvements

    Tax Treatment if Subsequent Contract Changes Affect Applicability of Exemption

    The prime contractor must make a determination at the start of the contract whether he/she will be claiming a resale exemption or construction contract exemption, but not both. The liability for tax depends, in part, on whether the prime contractor gives an exemption certificate for its purchases.

    • If the prime contractor gives an exemption certificate claiming resale, and the contract qualifies for exemption under sec. 77.54(60), Wis. Stats., the prime contractor is liable for tax on its purchase price of the products and services purchased from the subcontractor
    • If the prime contractor gives an exemption certificate claiming the exemption under sec. 77.54(60), Wis. Stats., and the contract does not qualify for the exemption, the prime contractor must collect/remit tax on the sales price of the taxable products and services sold to the customer
    • If the subcontractor receives an exemption certificate from the prime contractor claiming resale, and the prime contractor's contract qualifies for exemption under sec. 77.54(60), Wis. Stats., the subcontractor is not liable for tax on the purchase price of the materials sold as products and services to the prime contractor as a part of the construction contract (the liability rests with the prime contractor). The subcontractor is still liable for tax on its purchase of materials used in real property construction activities.
    • If the subcontractor receives an exemption certificate from the prime contractor claiming the exemption under sec. 77.54(60), Wis. Stats., and the contract does not qualify for the exemption, the subcontractor may claim a refund on any tax paid on the purchase of materials sold as products and services to the prime contractor as a part of the construction contract. The claim for refund must substantiate that the prime contractor's contract did not qualify for the construction contract exemption, and that the prime contractor's purchases qualified for the resale exemption. Note: The subcontractor may not claim a refund on its purchase of materials used in real property construction activities.

    "Construction contract" means a contract to perform real property construction activities and to provide products.

    "Prime contractor" means a contractor who enters into a construction contract with an owner or lessee of real property, except for leased property under sec. 77.52(1)(c), Wis. Stats., to perform real property construction activities on the real property.

    "Product" includes tangible personal property, and items, property, and goods under sec. 77.52(1)(b), (c), and (d), Wis. Stats., and services.

    "Subcontractor" means a contractor who enters into a construction contract with a prime contractor or another subcontractor.

    Exception for contracts entered into with entities that are exempt from tax under sec. 77.54(9a), Wis. Stats.: Taxable products and services sold by a contractor as a part of a construction contract with an exempt entity, that are not consumed in a real property construction activity may be purchased by the contractor or subcontractor without tax, for resale. However, materials and supplies that are consumed in a real property construction activity under a construction contract with any customer, including an exempt entity, may not be purchased by the contractor or subcontractor without tax unless an exemption applies (e.g., building materials exemption for contracts with exempt entities).

July 6, 2018