Contractors are often confused with their own identity when it comes to sales tax. Let me make it easy for you, you do not have to pick just one! You can do a variety of activities and qualify for various sales tax exemptions while identifying primarily as a contractor. Most sales tax exemptions are use-based. Criteria as to how materials or equipment are used determine whether the contractor’s purchases qualify for exemption.
Some exemptions a contractor’s purchases may qualify for (list not all-inclusive):
Contractor Exemptions – Construction Contract Exemption, Building Materials Exemption, Electronic and Information Technology Manufacturing Zone, Professional Sports and Entertainment Home Stadiums, Property Temporarily Stored in Wisconsin, Sports and Entertainment FacilityFertilizer Blending, Feed Milling, or Grain Drying – Building MaterialsFederal Preemption (Materials for Certain American Indian Tribe Projects)
Manufacturing – Machinery and Equipment, Consumables, Fuel and Electricity
Mobile Mixing Units
Off-Highway Heavy Logging Equipment
Packaging and Shipping Materials
Printing/Printed Material Exemptions
Property that Converts Energy
Waste Reduction or Recycling – Machinery and Equipment, Motor Vehicles
Waste Treatment Facility – Property
Each of these exemptions have specific criteria, or requirements, for purchases to qualify. Some of the exemptions are limited to contractors (e.g., construction contract exemption) or specifically state that a contractor’s purchases may qualify (e.g., waste treatment facility exemption). You will find published guidance on these exemptions in Wisconsin Department of Revenue (WI DOR) publications based on what industry most commonly uses the exemption but that does not mean they are limited to that industry. For example, WI DOR Publication 203, Sales and Use Tax Information for Manufacturers, provides detailed guidance on the manufacturing machinery and equipment exemption but it is not limited to manufacturers.
When I speak with contractors about the manufacturing exemptions, the most common response is that either their facility did not qualify as a manufacturing facility or that only a small portion qualified. This qualification process relates to property tax and income tax. I want to be clear that this certification has nothing to do with sales and use tax manufacturing exemptions. A contractor that produces cabinets in their shop or fabricates sheet metal in their shop qualifies for the machinery and equipment used in manufacturing exemption.
There are other situations where the manufacturing exemption applies and the business is retail or not even a business at all! A hardware store may purchase a key-cutting machine exempt using the machines and equipment exemption. The purchase of a generator (if it remains tangible personal property after installation) may qualify for the manufacturing machine exemption because it manufactures electricity (converts fuel to electricity). The exemption is about the machine and whether it is used exclusively and directly in manufacturing. In the case of a generator, the machine in itself is manufacturing.
There are limitations on what is considered “manufacturing” and a clear limitation that a contractor needs to be aware of is that manufacturing occurs at a “plant.” Meaning, it occurs at a set location, like your warehouse or shop. Manufacturing does NOT occur on-site. Therefore, cabinets made on the job site is not considered manufacturing. A key cutting machine on a work truck does not qualify for the manufacturing exemption.
Most contractors do not qualify for the manufacturing consumables exemption because of the additional criteria requiring the tangible personal property produced to be ‘for sale.’ A contractor that installs the property produced (e.g., cabinets or ductwork) is the consumer of those items it produced and not considered to be selling the installed property. If you are a contractor that fabricates sheet metal, you may purchase all of the sheet metal without tax, for resale, or exempt using the manufacturing consumables exemption. You must remit use tax on the sheet metal that is used in real property construction activities.
Overview of Criteria for Manufacturing Machines & Equipment Exemption:
1. Must be at a set location – plant, shop or warehouse – cannot travel to the job site
2. Must be used exclusively (at least 95% of the time) in manufacturing – non-manufacturing activities include maintenance (e.g., drill press used for building or other equipment maintenance activities), installation/on jobsite, other activities outside the “scope of manufacturing”
3. Must be used directly in manufacturing – touches/directly causes change in the item being manufactured, indirect machines/cleaning equipment does not qualify for exemption
Scope of manufacturing – starts when materials are moved from storage/delivery truck and put into the first step of the manufacturing process and ends when materials are taken from the final step of the manufacturing process and put into finished goods inventory/loaded onto a truck for shipping
NOTE: None of the requirements above require the facility to be certified as manufacturing. What exemptions might your purchases qualify for that you have not been utilizing? Contact Holly Hoffman today via phone (715.498.4164) or at firstname.lastname@example.org to schedule a Sales and Use Tax Compliance Assessment to find out.