The Wisconsin Department of Revenue (DOR) recently issued guidance on Section 77.54(9m), Wis. Stats., which exempts the purchase of certain building materials by contractors and subcontractors when such materials are transferred to and become a part of a “facility” owned by a “qualifying exempt entity”. The DOR’s guidance addresses, in part, (i) what is and is not a qualifying entity; and (ii) what types of projects the exemption applies to. Although the Wisconsin legislature made the exemption under Section 77.54(9m), Wis. Stats., generally effective as of January 1, 2016, this new guidance consolidates and restates the DOR’s views on certain aspects of the exemption, thus providing a clearer pathway for construction contractors to minimize taxes and boost their bottom line.
Qualifying & Nonqualifying Exempt Entities
Summarizing the statute, the DOR identified over a dozen entities that constitute a “qualifying exempt entity” for purposes of the exemption, which include but are not limited to the following:
- Any county, city, village or town within Wisconsin
- Any public-school district within Wisconsin
- A county-city hospital established under Section 66.0927, Wis. Stats.
- Certain nonprofit organizations exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code and which hold a Wisconsin Certificate of Exempt Status (CES) number
- Certain church and religious organizations
- Technical colleges and certain other institutions and campuses in the University of Wisconsin System and the University of Wisconsin-Extension
- The University of Wisconsin Hospitals and Clinics Authority.
Additionally, the DOR specified that this exemption does not apply to work performed for certain entities, even if the entity holds a Wisconsin CES number, including but not limited to the following:
- A non-Wisconsin county, city, village or town
- A non-Wisconsin public school district
- State and federal governmental units
Eligible Projects and “Facilities”
In order for the purchase of materials to qualify for the statutory exemption, the contractor or subcontractor must transfer and incorporate them into a “facility” owned by a qualifying exempt entity in fulfillment of a real property construction contract. A “facility” means any building, shelter, parking lot, parking garage, athletic field, athletic park, storm sewer, water supply system, or sewerage and waste water treatment facility, excluding any highway, street, road, or anything else not specifically enumerated above.
Some confusion may exist as to whether a subcontractor can effectively “transfer” property to the exempt entity as the performance of its services is pursuant to a contract with the general contractor. However, the DOR made clear that subcontractors may claim the exemption under Section 77.54(9m), Wis. Stats., because the property is ultimately transferred to a qualifying exempt entity upon completion of the contract between the general contractor and the qualifying exempt entity.
The guidance further advises on the process for claiming the exemption, and the type of documentation those claiming the exemption should maintain. Please contact your Construction and Tax Law professionals at Michael Best concerning the various conditions and other requirements that must be met to claim the statutory exemption in order to maximize profitability on qualifying projects.
*As noted above, not all real property contracts with tax-exempt organizations qualify for the Section 77.54(9m) exemption. In certain of those situations, however, other planning structures may be available that allow the tax-exempt entity to purchase the materials without Wisconsin sales or use tax. Please contact your Construction and Tax Law professionals at Michael Best for further details.