Tax bill drops attempt to better distinguish real, personal property

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A series of tax changes meant to benefit contractors and other businesses is moving forward without a provision that would have drawn a more marked line between the categories that construction materials are lumped into for tax purposes.

As first proposed, the tax package would have contained language meant to make it easier to decide whether a particular building component should be classified as real property or personal property. The distinction is important for tax purposes because it helps answer the question: Who should be paying sales and use taxes, the contractor or the project owner?

When it’s real property that’s in question, the contractor owes the tax. But when it’s personal property — which is generally defined as things that are easy to detach from a structure and cart off — the contractor is considered a retailer who must collect taxes from the project owner and then forward the money on to the state.

Confusion comes in when certain types of materials or equipment can be classified as real property in some contexts and personal property in others. Security cameras, for instance, count as real property when used to monitor entranceways but as personal property when they are pointed at inventory; electrical wiring behind a wall is real property but data cables behind the same wall are personal property; cabinetry can be either type of property depending on what sort of room it’s installed in.

Various contractors groups had originally hoped to clean up the rules in a way that would cause building materials of the same type to almost always fall neatly into one category of property or the other. But an assistant to one of the chief advocates for clarifying tax laws — state Rep. John Macco, R-Ledgeview — said his boss decided to back away from the proposal after seeing how much it might cost the state.

Ben Joniaux, a legislative aide to Macco, said a recent estimate from the Department of Revenue suggested the cost would be $12 million a year – far more than what lawmakers would be likely to accept this year.

“We had to take that piece out because it was way too large for what we wanted to do,” he said.

Terry Leasa, an owner of W.J. Leasa Electric, of Fond du Lac, said he wishes lawmakers had found a way to keep the provision around.

“Now you’ve always got make that decision of which type of property is which,” he said. “You always want to get it right but it can be really difficult, especially because how it applies can depend on: How are the properties used?”

At the same time, Leasa said he thinks some of the other changes lawmakers are considering are at least “steps in the right direction.”

Rather than trying to clarify property categories, Macco and other lawmakers are now moving forward with proposals that promise similar benefits but at a lower cost. The primary change being sought — one now formally included in Assembly Bill 623 and Senate Bill 503 — would let contractors simply go ahead and pay sales taxes on personal property in certain instances, rather than having to bother with collecting the money from owners.

The state’s previous budget contains a provision meant to help contractors who are working under so-called lump-sum contracts in which less than 10 percent of the total cost stems from personal property. Because of that provision, contractors can now avoid collecting taxes on that property and can instead just pay the state directly.

AB 623 and SB 503 would extend the 10-percent rule beyond lump-sum contracts, taking in cost-plus contracts and other sorts of 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.

The changes would not be without cost to the state. Because personal property is often marked up in price to take into account not only the cost of materials themselves but also the labor and related expenses that went into their installation, it tends to generate more sales tax than real property.

So the state, if it were to allow all materials used in certain projects to be treated as real property, could expect to see its tax revenue decrease by about $1.1 million a year, according to the DOR. For the same reason, counties and other local taxing authorities could expect to lose about $79,000 a year.

Fifteen contractor groups, including the Associated Builders and Contractors of Wisconsin, the Associated General Contractors of Wisconsin and the Wisconsin Builders Association, have signed on to a memorandum urging lawmakers to support AB 623 and SB 503. John Schulze, director of government relations at the ABC of Wisconsin, said some might perceive the proposals to be “half a loaf” without the re-classification provision.

Contractors, though, should not lightly dismiss the other proposed changes, he said.

“We still think this would cut down on red tape,” Schulze said. “It would let construction companies spend less time filling out paperwork and more time in the field.”

Jeff Beiriger, executive director of the Plumbing-Heating-Cooling Contractors Wisconsin Association, said his group is supporting the bills in the hope that they will help well-intentioned contractors avoid missteps.

“Even sometimes acting on good counsel and advice, we do something some way and then we find it’s being interpreted in a different way,” he said. “And then there’s a conflict that didn’t need to be there.”

Schulze said supporters are not giving up on trying to reclassify building materials.  But such a proposal, he said, might have to wait until lawmakers come back in 2017 to work on the state’s next budget.

“We are going to take another run at it next session,” Schulze said. Follow @TDR_WLJDan