Understanding Wisconsin sales tax rules for construction

Navigating Wisconsin sales and use tax can be challenging for contractors and construction firms. The state’s rules are complex, and missteps can lead to costly surprises — particularly when distinguishing between real and personal property or working with tax-exempt entities.

Whether you're renovating a nonprofit facility or installing equipment for a private client, it’s essential to understand how Wisconsin sales tax applies to construction materials, labor and contract structures.

Contractors should be clear on their sales and use tax responsibilities before contracts are signed — and remain vigilant throughout the project. Knowing how Wisconsin sales tax affects project services helps ensure tax costs are properly built into bids and that compliance is maintained from start to finish.

Do contractors charge sales tax in Wisconsin?

Per Wisconsin law, if a contractor purchases construction materials for use in a real property construction project or repair, the contractor is considered the end user of those materials. That means the contractor must pay sales or use tax on those purchases, and the contractor's sale to their customers is not taxable.

However, when a contractor sells, installs or repairs tangible personal property, they are considered the retailer of the property. That means they should purchase it exempt from sales tax (by providing their vendor an exemption certificate claiming the resale exemption) and charge sales tax to their customer. This is where understanding tax obligations and having a seller's permit becomes crucial for contractors engaged in retail sales.

Construction contract exemption

Because contractors often sell real property and taxable products under one contract, it can be difficult to apply the correct tax rules.

To help alleviate that burden, Wisconsin tax law provides that if the taxable product value is less than 10% of the total contract price, the customer is not subject to sales tax. When this is the case, the contractor is then the consumer of all materials and pays the sales or use tax on all taxable products incorporated in the construction contract.

Note: Previously, the construction contract exemption only applied to lump sum contracts. But under Act 59 legislation, this exemption was extended to all construction contracts entered into on or after December 1, 2017.

Distinguishing between real property and tangible personal property

But how do you determine whether an item is classified as tangible personal property or real property? That can get tricky. Here are some tests and guidelines:

Is it permanently attached to the real estate?

• Yes: More likely to be real property
• No: More likely to be personal property

Can it be removed without major structural damage to the real property or item itself?

• Yes: More likely to be personal property
• No: More likely to be real property

Does it serve the purpose of the real estate to which it is attached?

• Yes: Real property
  • Furnaces that heat a building
  • General lighting
  • Cabinets and countertops in a residential setting
  • Cabinets and countertops in a bathroom, kitchen or breakroom setting

Does it serve a process function for a business?

• Yes: Tangible personal property
  • Furnaces that heat raw materials
  • Special lighting for a manufacturing process
  • Cabinets and countertops in a commercial setting

Examples of real property construction jobs:

• Installing walls, floors, ceilings, doors and windows
• Central heating and air conditioning (installation)
• Installing plumbing and fixtures
• Installing cabinets and countertops in a residence
• Installing land improvements such as decks, patios, driveways, sidewalks and in-ground pools

Examples of personal property jobs:

• Selling services or materials without installation, for example:
  • Repairing personal property (in general)
  • Replacing a ballast in a light fixture
  • Servicing HVAC equipment
  • Voice and data wiring in a non-residential setting
  • Installing trade fixtures
  • Landscaping and lawn maintenance services

Purchases from Wisconsin vendors

Construction companies typically work with a variety of vendors over the course of a project. Here again, the contractor needs to know which services are taxable and who is bearing the liability for those taxes. Review your tax practices for vendor services like these:

• Data communication wiring/cabling
• Interior decorators/design services
• Landscaping

Landscaping activities are subject to sales tax and are generally not considered real property. Consult Wisconsin Publication 210 to review the treatment of landscaping, because it’s not always obvious what is and is not a taxable landscaping service. Fine grading is taxable, but rough grading isn’t. Lawn mowing is taxable, but snowplowing isn’t. Tree trimming is taxable, unless trimming is being done for utility right of way.

Due to new economic nexus standards following the landmark Wayfair ruling, you should review your tax practices with any business partner outside the state. If you have historically paid use tax on vendor invoices, revisit those invoices to determine how tax is now charged to prevent double taxation.

Contractor-subcontractor tax responsibilities

If a contract is deemed a real property construction activity, the party that converts the materials from unattached personal property to attached real property will be responsible for the sales/use tax. Notably, Act 59 extended the construction contract exemption to taxable sales by a subcontractor. If a contract is deemed the sale and installation of personal property, the subcontractor may purchase property exempt from tax for resale and then is obligated to charge sales tax to the general/prime contractor unless a resale exemption certificate is issued. In this case, the general contractor would charge sales tax to the end customer, unless the end customer is able to claim an exemption.

Here’s what the contractor-contractor tax relationship looks like for real property and personal property construction jobs:

• Real property construction job
  • General contractor hires subcontractor to perform work (subcontractor owns materials).
  • Subcontractor is responsible for sales/use tax on the cost of the materials.
  • Subcontractor does not charge general contractor sales/use tax.
  • General contractor does not charge end customer sales/use tax.
    
    

• Personal property construction job
  • General and subcontractor are acting as retailers.
  • Subcontractor may purchase materials exempt from tax for resale.
  • Subcontractor is liable to charge general contractor tax, unless general contractor issues resale exemption certificate.
  • General contractor charges sales tax to the end customer on materials and labor, unless customer issues exemption certificate.

Can a contractor charge tax on labor? Is labor taxed in Wisconsin? General contractors charge sales tax to the end customer on materials and labor charges, unless the customer issues an exemption certificate. It’s important to note that labor is taxable in Wisconsin for certain types of construction activities and services.

Sales and use tax for a tax-exempt entity

Act 126 created a sales and use tax exemption for building materials that become part of a facility owned by a qualifying exempt entity. Understanding tax exemptions and tax-exempt organizations is crucial for contractors working on these projects. Qualifying exempt entities include the following, when located in Wisconsin:

• Any county, city, village or town
• Any public school district
• A county-city hospital
• A sewerage commission or district
• Any joint local water authority
• Any exempt entity organized and operated exclusively for religious, charitable, scientific or educational purposes, or the prevention of cruelty to children or animals
• Technical colleges and UW system or UW-Extension

(For contracts entered into on or after July 1, 2018.)

Non-qualifying exempt entities:

• Federal government
• State government
• Non-Wisconsin exempt entity

The definition of facility is very specific and must be examined to determine what qualifies for the exemption.

Manage Wisconsin sales tax services with Wipfli

Wipfli’s state and local tax group has significant experience in construction tax strategies. We can help you implement a proactive approach to your company’s sales and use tax program to help you optimize exemptions and limit your exposure. We have experience with a wide range of taxable services in Wisconsin, helping to ensure you understand what services are taxable and how to manage your tax collection and reporting obligations. Contact us for a consultation.

If you’re being audited, seek professional support. We provide sales tax audit help from construction specialists who know your industry and can guide you through the complexities of Wisconsin’s tax rates and regulations for construction activities.