Lump-Sum Contract Exemption vs. Construction Contract Exemption

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 exemption.

Lump-Sum Contract Exemption (applies to contracts entered into on October 1, 2013 through November 30, 2017)

When a contractor sells both a real property improvement and tangible personal property or taxable services in a single contract, the contract is a lump-sum contract if the contractor quotes one price for all of its various charges (labor, services of subcontractors, tangible personal property, items or property under sec. 77.52(1)(b) or (c), Wis. Stats. (2015-16). A lump-sum contract may include a contract for which the contractor itemizes its various charges as a part of a schedule of values or similar document.

The lump-sum contract exemption applies if the contractor's sales price that relates to the taxable products and services are less than 10% of the total contract price. When the lump-sum contract exemption applies:

  • The contractor's sale to its customer is not taxable.
  • The contractor's purchase of materials and supplies is taxable. (See Exception, below.)

Construction Contract Exemption (first applies to contracts entered into or extended, modified, or renewed on December 1, 2017)

The lump-sum contract exemption for contractors was expanded to include sales and purchases by subcontractors. Sales of products and services sold by "prime contractors" and "subcontractors" as part of a real property construction contract, which includes lump-sum and time and materials contracts, are exempt from tax if the taxable products and services are less than 10% of the total contract price.

The construction contract exemption applies as follows:

For the "Prime Contractor"

If the taxable products and services of the prime contractor's construction contract are less than 10% 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 materials and supplies relating to the taxable products and services. (See Exception, below.)

    In order to purchase taxable products and services 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 taxable products and services of the subcontractor's construction contract (includes time and materials jobs) are less than 10% 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 materials and supplies relating to the taxable products and services. (See Exception, below.)
  • The subcontractor must pay sales or use tax on its purchase of materials and supplies relating to the real property improvements.

"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.

"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 lump-sum contract or 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 lump-sum contract or a construction contract with any customer, including an exempt entity, may not be purchased by the contractor or subcontractor without tax.

The article titled Septic System Installers – Taxable Items Less Than 10% of Total Contract Price explains how Wisconsin sales and use tax applies to sales and purchases of property and services by persons installing septic systems where the sale of taxable items by the contractor are less than 10% of the total contract price.

February 7, 2018