On June 20, 2023, Gov. Tony Evers signed Assembly Bill 245, now known as 2023 Wis. Act. 12 (the “Act”), into law. Among other things, the Act permits Milwaukee County to impose an additional 0.4% sales tax (on top of the previously existing 0.5% county sales tax) and permits the City of Milwaukee to impose a new 2.0% sales tax.  In July, both Milwaukee County and the City of Milwaukee passed measures to adopt these additional taxes, effective January 1, 2024. The bottom lines as to the City of Milwaukee and Milwaukee County taxes on and after the effective date generally are as follows: (1) a sales tax rate of 7.9% will apply to taxable sales sourced to the City of Milwaukee (to the extent within Milwaukee County) and (2) a sales tax rate of 5.9% will apply to taxable sales sourced to Milwaukee County (but outside the City of Milwaukee). 
Construction Contractors’ Dilemma on Sales Tax Obligation
Many Wisconsin construction contractors have asked about the application of these additional taxes to construction contracts for projects in Milwaukee County (and in the City of Milwaukee) that chronologically straddle the January 1, 2024 effective date. Subject to an important transitional rule discussed immediately below, these additional taxes are applied, as of January 1, 2024, to the purchase price of tangible personal property used in “constructing, altering, repairing, or improving real property,” if such tangible personal property becomes a part of the real property at a site located in the relevant taxing jurisdiction. Wis. Stat. § 77.71(3).
Transitional Rule Provides Guidance
Without anything more, the new City of Milwaukee sales tax and increased Milwaukee County sales tax would apply to all such purchases occurring on or after January 1, 2024. However, a long-standing transitional rule – on the books since 1985 when the Legislature first authorized Wisconsin counties to adopt a separate 0.5% county tax – exempts certain purchases from these new taxes. 
Under this limited transitional rule, the sale of building materials to construction contractors will be exempt from these additional taxes if all of the following requirements are met:
- The contractor irrevocably entered into a written contract or irrevocably submitted a formal written bid accompanied by a bond or other performance guaranty prior to the effective date of the county or city tax (i.e., prior to January 1, 2024) to construct, alter, repair, or improve real estate for another person.
- The written contract is for a fixed price that cannot be changed or the formal written bid cannot be altered or withdrawn.
- The building materials purchased on or after the effective date of the additional Milwaukee County or new City of Milwaukee tax are affixed and made a structural part of real property in fulfilling the written contract or formal written bid.
Wis. Stat § 77.77(3); Wis. Admin. Code Tax § 11.14(13)(a); see www.revenue.wi.gov.
To be clear, this transitional rule applies only with respect to the increased 0.4% Milwaukee County rate and the new 2.0% City of Milwaukee tax. It does not exempt purchases from any rate currently in effect, e.g., the 5% state rate and the ordinary 0.5% Milwaukee County rate.
Given that the transitional rule above applies only with respect to irrevocable contracts or bids for a fixed price without regard to the costs incurred in performing under the contract, there is a question as to how this rule applies when a construction contract is subject to a change order. Long-standing guidance under Wis. Tax Bulletin No. 53 (Oct. 1, 1987) provides as follows:
If there are change orders entered into after the county tax is in effect which increase the total contract price or the bid price, these change orders are not entitled to this exemption. However, change orders entered into before the county tax is in effect do not affect the exemption.
Example: if a job was bid for $4,000,000 before the tax was in effect and a change order increases the total bid price to $4,300,000 after the county tax is in effect, building materials used in the $300,000 addition do not qualify for exemption [citation omitted]. However, if a change order merely substitutes one type of fixture for another type of fixture and the total contract price does not change, the exemption . . . continues to apply.
Based on informal discussions with the Wisconsin Department of Revenue (“WDOR”), this guidance is still in effect and applies to both the increased 0.4% Milwaukee County rate and the new 2.0% City of Milwaukee tax. This guidance indicates that if a change order that is entered into on or after January 1, 2024 relates to additional building materials not covered by the original contract, those additional building materials will be subject to the new City of Milwaukee sales tax and the increased Milwaukee County sales tax, but the existing materials under the original contract would not be subject to those additional taxes. However, in informal discussions with the WDOR, the WDOR stated that if the change order relates to building materials already accounted for in the original contract and the change order relates to an increase in the cost associated with those building materials, then all of the building materials covered by the original contract would be subject to the new City of Milwaukee sales tax and the increased Milwaukee County sales tax.
As a consequence, with respect to real property contracts entered into before the January 1, 2024 effective date, change orders entered into on or after the effective date generally should be treated as follows:
- With respect to a change order to purchase additional building materials entered into on or after January 1, 2024, the increased county rate/new city rate will apply to the entire purchase price of those additional building materials.
- With respect to a change order applicable to building materials already accounted for under the original contract resulting from a change in the cost of those building materials, the increased county rate/new city rate will apply to the entire purchase price of all of the building materials under the original contract (and not just the building materials covered by the change order) because the price of the contract was not irrevocably fixed prior to January 1, 2024.
- With respect to a change order substituting one type of building material for another that does not change the cost under the original contract, the increased county rate/new city rate will not apply to the entire purchase price of those existing building materials because the price did not change on or after January 1, 2024.
If a construction contractor determines that the transitional rule applies and wishes to claim an exemption, it should provide a Form S-207CT-1 to the seller with respect to the purchase.
The above explanation will hopefully provide guidance for the construction industry on how this transitional rule should apply. For owners and developers, whose construction projects are about to come online, timely and proper contracting prior to year-end may provide an opportunity for tax savings on materials to be purchased at a later date. In addition, care should be taken to ensure that change orders entered into on or after January 1, 2024 do not cause purchases that would otherwise have been exempt to fall outside the transitional rule. Both contractors and owners should consider legal review of these dynamics promptly for existing and imminent projects.
 As a technical matter, the Act authorizes imposition of the county tax increase by “a county in which a 1st class city is located” and creation of the city tax by a “1st class city.” Wis. Stat. §§ 77.70(2)(a) and 77.701(1). A “first class city” is defined by Wisconsin law as a city with a population of 150,000 or more that has taken certain discretionary steps to become a 1st class city. Wis. Stat. § 62.05(1)(a), (2). Currently, while both Milwaukee and Madison have populations in excess of 150,000 according to the most recent federal census data, Madison has not taken steps to become a 1st class city. Wis. Stat. § 62.05(2); Wis. Stat. § 990.001(15); see www.lwm-info.org. In addition, while portions of the City of Milwaukee are located in Washington County and Waukesha County, the Act also provides that no county can adopt the additional 0.4% sales tax unless the county makes an election to join the Wisconsin Retirement System (“WRS”) for all new employees on or after March 2, 2016. Wis. Stat. § 77.70(2)(a); Wis. Stat. § 40.21(7)(a). Since Washington and Waukesha Counties previously adopted the WRS prior to March 2, 2016, those counties appear to be ineligible to adopt the additional 0.4% sales tax.
 With respect to sales sourced to the City of Milwaukee within Waukesha County, a 7.0% sales tax rate would apply since Waukesha County has not adopted the 0.5% county rate. See www.revenue.wi.gov. With respect to sales sourced to the City of Milwaukee within Washington County, a 7.5% sales tax rate would apply since Washington County has adopted the 0.5% county rate. Id.
 Since 1985, a total of 68 Wisconsin counties have adopted the 0.5% county tax. Only four counties have not: Waukesha, Racine, Winnebago, and Manitowoc. A complete listing of the Wisconsin counties that have adopted the county tax, and their various effective dates, is available at www.revenue.wi.gov.