Taxing questions: Lawmaker seeks sharper line between real, personal property

Ryan Gartman, a certified public accountant in Sheboygan, got a prime example recently of the sorts of quandaries contractors regularly struggle with when it comes to deciding if they themselves should be paying sales taxes on certain building materials or if they should instead be collecting the taxes from project owners.

Now that lawmakers in Madison are preparing to propose a series of simplifications to the state’s tax system, a story such as Gartman’s is likely to give them an “Exhibit A.”

Gartman, who works in the Shebogan office of the financial services firm Clifton Larson Allen, recently found himself helping a client who about two years before had become entangled with the state’s Department of Revenue in a dispute over the tax treatment given to a security camera installed at a manufacturing warehouse.

Although security cameras all fulfill the same basic function, they fall into two distinct categories in the state’s tax code. Cameras used to safeguard a building’s entrance or for similar purposes are generally considered to be part of the structure itself and are thus deemed “real property.”

Cameras used to monitor inventory, in contrast, are usually classified as “personal property,” a designation referring to parts of a structure that are not firmly attached and are easy to cart off. The trouble for Gartman’s client — which he declined to identify — was that the camera it installed could be swiveled about to keep tabs on both the warehouse’s front entrance and on inventory.

That meant the same camera could be classified as real property in some instances and personal property in others. The company’s initial choice was to treat the equipment as real property; officials at the state Department of Revenue disagreed, though.

Gartman and his client were eventually able to persuade the auditors to back down. But he wonders: Wouldn’t a simplification of the code have made the conflict avoidable altogether?

“It was up to the installer — the contractor — to determine if it was personal property or real property,” he said. “And in the end, how are they really supposed determine that?”

And it’s not just security cameras that are a source of bewilderment.

Electrical wiring when run behind a wall is treated as real property, but data cabling, when put in behind the same wall, is personal property. Cabinetry likewise is considered real property when installed in certain types of rooms, but personal property in others.

A legislative aide to state Rep. John Macco, R-Ledgeview, said Wednesday that his boss plans in coming months to put forward a bill aimed at dispelling the confusion forever, at least for certain materials and equipment. Among other things, Macco is proposing that all security cameras and related equipment, as well as communications and data cabling, and cabinets and countertops, be classified as real property — no matter how they are used or where they are installed.

John Schulze, director of government relations for the Associated Builders and Contractors of Wisconsin, said the simple change would help prevent contractors from having to act like part-time tax accountants.

“Just tell them what they are supposed to pay and they’ll pay it,” he said. “And then let them go do what they are supposed to do, which is build stuff.”

Jim Boullion, director of government affairs at the Associated General Contractors of Wisconsin, said larger companies many times have staff employees who specialize in tax compliance. Still, even for them, “It’s so convoluted and difficult, it’s hard to come out of an audit without there being a mistake.”

The distinction between the two types of property makes a big difference for tax purposes.

When building materials are deemed real property, it’s contractors themselves who are expected to pay sales and use taxes. When it comes to personal property, though, contractors are considered to be acting like a retailer selling something to a customer and thus are supposed to collect taxes from the project owner and then pass the money on to the state.

The real trouble comes when a contractor assumes that certain building materials fall into the real-property category and pay sales taxes, only to be told later by state auditors that they were in fact dealing with personal property. That puts the contractor in the difficult position of either having itself to pay the sales tax for the personal property or of trying to get the money from the project owner, sometimes years after the work has been completed.

What’s more, personal-property taxes apply not only to the building materials themselves, but also any labor and related expenses that went into their installation. For that reason, taxes on personal property tend to be higher than those on real property.

Because of the likelihood of confusion, some have worried that contractors might be paying taxes twice for the same set of building materials. The state does offer reimbursements meant to eliminate the chance of double taxation, but it’s unclear if contactors always know to take advantage of the system.

Besides drawing a sharper distinction between real and personal property, lawmakers are considering extending an exemption that prevents contractors from having to collect sales taxes on personal property in certain instances. Now, construction companies who enter into so-called lump-sum contracts need not collect sales taxes if the value of the personal property that they are installing is less than 10 percent of the total project.

The proposed change would make that exemption apply not only to lump-sum contracts but all sorts of contracts, including cost-plus agreements. A further change would let contractors take advantage of the exemption if they can show they stayed below the 10 percent threshold for a project in its entirety, rather than having to worry about the proportion of personal property to real property in each individual subcontract.