For many years, Wisconsin's tax rules required local governments and school districts to purchase materials and supplies directly from vendors (as opposed from the contractor) for use in a public construction project if the materials and supplies were to be considered exempt from sales tax. In order to ensure that a contractor that specified what materials and supplies to use on the project remained legally responsible for the materials and supplies, many public agencies would work with a contractor to establish a separate entity that would apply for the sales tax exemption and operate as a purchasing agent. Absent a special purchasing agent entity, public agencies found themselves the recipients of sometimes hundreds of purchase orders that needed to be processed, approved and paid. Under either scenario, the administrative burdens were excessive and unnecessary – it seemed illogical that taxpayers would be forced to undergo such measures to avoid sales tax on a project already funded by taxpayer dollars.
The Wisconsin Legislature has now forwarded a bill (SB 227) to Governor Walker for signature that would allow contractors to directly purchase materials and supplies for public projects they are building and have the sales tax exemption apply. It appears as though the Governor is poised to sign the bill, at which point it will become law upon publication. If enacted, the new law will affect contracts entered into after December 31, 2015. Assuming the bill is signed into law, it will greatly simplify the process of buying materials and supplies on a tax exempt basis for local governments and school districts as the contractor will be able to purchase on a tax exempt basis if the materials and supplies are used in the public project.
One cautionary note is that the Department of Revenue rules implementing this change may not be drafted or published for a considerable period after January 1, 2016. Therefore, the existing regulations may continue to be at odds with the terms of the new law. However, since this law affects contractors, not owners, the burden of determining its applicability to construction contracts falls mainly on the contractor.
If you have any questions surrounding this Update, please contact either of the authors or a member of von Briesen's Government Law Group.
von Briesen & Roper Legal Update is a periodic publication of von Briesen & Roper, s.c. It is intended for general information purposes for the community and highlights recent changes and developments in the legal area. This publication does not constitute legal advice, and the reader should consult legal counsel to determine how this information applies to any specific situation.