Industry representatives are looking for a way to give contractors some peace of mind should the auditor come knocking after they’ve claimed a recently passed tax exemption for nonprofit groups’ projects.
State Sen. Howard Marklein, a Republican from Spring Green, put his name to a letter last month calling for the creation of a special form that contractors could use to prove to auditors that they have claimed the exemptions on the right sorts of projects. Marklein was among the authors of the new exemption law, which prevents contractors from owing sales and use taxes on projects commissioned by certain nonprofit entities.
The new exemption was originally to apply only to projects commissioned by schools, local governments and various nonprofit groups. Before being signed into law by Gov. Scott Walker, it was amended to also take in work performed for city and county hospitals, local sewerage districts and public water authorities.
In his letter, dated April 4, Marklein wrote that both general contractors and subcontractors have expressed concerns about their ability to prove that when they have claimed the exemptions, it has been only for qualified projects. Marklein noted that the state has a form that a contractor can provide to suppliers to show they had no need to collect sales and use taxes for materials bought for a nonprofit owner.
General contractors and subcontractors, though, have no equivalent form showing that they are exempted from paying taxes on the same materials. For proof, officials at the state Department of Revenue have advised contractors to hold onto contracts and invoices, as well as to keep on file the nonprofit owners’ official Wisconsin Certificate of Exempt Status number.
Marklein’s letter suggests that some contractors still have misgivings about their ability to show that they have stayed on the right side of the law.
“There is great concern that without a specific project exemption certificate, there will be exemption substantiation issues in the near future on prior purchases,” according to the letter.
John Schulze, director of legal and government affairs at the Associated Builders and Contractors of Wisconsin, said some contractors have been reluctant to take advantage of the new law out of a fear that they might not be able to prove that they had claimed the exemption for the right reasons. He said a specially drawn up state form would help quell some of those anxieties.
“By filling it out they will have answered all the questions an auditor will want to ask,” Schulze said. “It would save you heartache and headaches down the road.”
The Wisconsin Department of Revenue has responded to such requests by drawing up a draft version of a form that contractors could keep on file to prove they had claimed exemptions for the right sorts of projects. Schulze said he is now distributing the document to ABC members to see if they have any suggestions for improvement.
Walker signed the new tax exemption for nonprofit projects into law on Dec. 16. The law is meant to both eliminate red tape and lower the cost of construction work.
Construction representatives called for the new exemption law after contending that the old way of doing business could cause supposedly tax-exempt entities to bear tax costs, albeit in an indirect way. Formerly, the only way schools, local governments and nonprofit groups could avoid indirect tax costs on their projects was to buy the needed materials directly.
When contractors were instead used as intermediaries and made the purchases themselves — as often happens on building projects — the taxes applied. The fear was that when contractors did have to pay taxes, they were treating them as they do most expenses and passing them onto owners, regardless of tax-exempt status.
Some contractors managed to avoid the additional costs by setting up separate but affiliated entities that existed solely to help tax-exempt entities purchase construction materials directly. The new exemption is in large part meant to make such side arrangements unnecessary. Follow @TDR_WLJDan