Septic System Installers - Taxable Items Minor in Comparison to Total Contract Price

The purpose of this article is to explain how Wisconsin sales and use tax applies to the sales and purchases of property and services by persons installing septic systems.

Note: This article applies to contracts entered into prior to October 1, 2013. This article is currently being revised to reflect the tax treatment for contracts entered into on or after October 1, 2013.

Section Tax 11.68(7)(b), Wis. Adm. Code (November 2010 Register), provides that "If a few items of tangible personal property, items, property, or goods under s. 77.52 (1) (b), (c), or (d), Stats., or taxable services are minor in relation to the total amount of a contract and are sold as part of a contract which includes construction of a building or other real property improvement and no separate charge is made in any document provided to the customer for the taxable property, items, goods, and services, the cost of all such property, items, goods, and services to the construction contractor shall be used as the measure subject to sales tax. The tangible personal property, property, items, and goods under s. 77.52 (1) (b), (c), and (d), Stats., and taxable services are "minor in relation to the total amount of a contract" if, based on a reasonable allocation, the sales price of the taxable property, items, goods, and services included in the contract is 10 percent or less of the total contract amount. If a separate charge is made in any document provided to the customer, including a contract, contract addendum, appendix, or payment request, for any of the taxable property, items, goods, or services, the separate charge is subject to tax."

Example 1 – Septic Installer A enters into a contract with Customer B to install a mound septic system. The contract indicates that Septic Installer A will provide all materials and labor to install the mound septic system. The contract specifically identifies the taxable (sale and installation of tangible personal property and taxable services) and nontaxable items (i.e., real property construction activities) and the amounts associated with each line item as follows:

In this example, Septic Installer A is required to charge Wisconsin sales tax on the $500 to supply and spread the black dirt over the drain field and the $250 to fine grade, seed, and mulch the drain field since these are landscaping services. Septic Installer A may purchase the black dirt, seed, and mulch which it is reselling to Customer B as part of a landscaping service without tax because they are for resale. However, Septic Installer A would be required to pay the applicable Wisconsin sales or use tax on its purchases of the piping, pump, sand, and rock which Septic Installer A uses in installing the mound septic system (i.e., a real property improvement).

Example 2 – Septic Installer C enters into a contract with Customer D to install a mound septic system. The contract indicates that Septic Installer C will provide all materials and labor to install the mound septic system. The contract provided to Customer D identifies all of the activities and items which Septic Installer C is responsible for completing and a single amount to complete these activities (i.e., the amount listed is the total amount that the customer must pay for all of the work that is completed). The contract contains the following language:

Provide all labor and materials necessary to install complete mound septic system, including all labor and materials to install: (1) all necessary underground piping from house to drain field; (2) pump; (3) sand and rock in drain field; (4) black dirt for planting to cover drain field; (5) fine grading, seeding, and mulching of drain field.

Total contract amount for above materials and labor $8,000

Additional facts related to this transaction include the following: (1) Septic Installer C purchased the black dirt, seed, and mulch for $400; (2) Septic Installer C's employees spread and fine graded the black dirt and spread the seed and mulch; and (3) Septic Installer C's normal selling price of supplying and spreading the black dirt and fine grading, seeding, and mulching the drain field is $700.

Since the $700 relating to the supplying and spreading of the black dirt and the fine grading, seeding, and mulching of the drain field is 10 percent or less of the total contract amount, Septic Installer C may use its purchase price of the black dirt, seed, and mulch as the measure subject to sales tax (i.e., Septic Installer C owes sales tax on the $400 that Septic Installer C paid for the black dirt, seed, and mulch). Septic Installer C would be required to pay the applicable Wisconsin sales or use tax on its purchases of the piping, pump, sand, and rock which Septic Installer C uses in installing the mound septic system (i.e., a real property improvement).

Example 3 – Same as Example 2 above, except that Septic Installer C hires Landscaper X to supply, spread, and fine grade the black dirt and supply and spread the seed and mulch. Landscaper X charges Septic Installer C $600 and Septic Installer C's normal selling price of these items to its customer is $700.

Since the $700 relating to the supplying and spreading of the black dirt and the fine grading, seeding, and mulching of the drain field is 10 percent or less of the total contract amount, Septic Installer C may use its purchase price of these items from Landscaper X as the measure subject to sales tax (i.e., Septic Installer C owes sales tax on the $600 that Septic Installer C paid to Landscaper X). Septic Installer C would be required to pay the applicable Wisconsin sales or use tax on its purchases of the piping, pump, sand, and rock which Septic Installer C uses in installing the mound septic system (i.e., a real property improvement).

Example 4 – Same as Example 2 above, except that Septic Installer C gives Customer D two options with respect to the installation contract. The first option is as explained in Example 2 above. The second option is that the contract price will be reduced by $800 if Customer D wants to cover the mound with his own black dirt, fine grade, seed, and mulch the mound.

In this example, since Customer D is given the option of either paying $8,000 for the entire job or only paying $7,200 if Customer D wants to take care of covering the mound with black dirt, grading, seeding and mulching himself. If Customer D chooses the option of paying $8,000 for the entire job, the $800 difference is considered a separately stated charge for the landscaping services and the $800 would be subject to Wisconsin sales tax. Septic Installer C would be required to pay the applicable Wisconsin sales or use tax on its purchases of the piping, pump, sand, and rock which Septic Installer C uses in installing the mound septic system (i.e., a real property improvement).

Example 5 – Same as Example 2 above, except that progress payments will be made as Septic Installer C completes certain portions of the work. Before a progress payment is made, Septic Installer C provides a breakdown of what makes up the progress payment. This breakdown identifies the specific item and amount for which the payment is being requested.

Since Customer D is being provided a document that identifies the specific charges for the specific services being provided, this is considered separately stated and the contractor would be required to charge the applicable sales tax on the taxable charges, regardless of whether the taxable charges are more than 10% of the total contract price. Septic Installer C would be required to pay the applicable Wisconsin sales or use tax on its purchases of the piping, pump, sand, and rock which Septic Installer C uses in installing the mound septic system (i.e., a real property improvement).

For additional information relating to contractors that are providing both tangible personal property and/or taxable services along with nontaxable real property improvements, see pages 8 – 10 of Publication 207, Sales and Use Tax Information for Contractors, which is available on the Department's website at: revenue.wi.gov/pubs/pb207.pdf.

Last updated July 8, 2013