Septic System Installers - Taxable Items Less Than 10% of Total Contract Price

This article explains how Wisconsin sales and use tax applies to sales and purchases of property and services by persons installing septic systems where the contract includes the sale of taxable items by the contractor that are less than 10% of the total contract price. The article explains the proper tax treatment for contracts entered into prior to October 1, 2013 and contracts entered into on and after October 1, 2013. The tax treatment changed effective October 1, 2013 due to the creation of sec. 77.54(60), Wis. Stats., by 2013 Wis. Act 20.

In situations where the sale of taxable items by the person installing the septic system are 10% or more of the total contract price, the contractor must charge and collect the applicable sales taxes on the full retail value of the taxable items, unless an exemption applies. See Publication 207: Sales and Use Tax Information for Contractors, Part II.D.1 and Part VI.C., for additional information. (Note: In this situation, the tax treatment is the same for contracts entered into prior to October 1, 2013 and contracts entered into on and after October 1, 2013.)

Contracts Entered Into Prior to October 1, 2013

Prior to October 1, 2013, sec. 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."

Contracts Entered Into On and After October 1, 2013

On and after October 1, 2013, sec. 77.54(60)(b), Wis. Stats., provides an exemption for the sale of, and the storage, use, or consumption of the otherwise taxable "products" sold by the contractor under a "lump-sum contract" if the total sales price of all such taxable products is less than 10 percent of the total amount of the "lump sum contract." The contractor is deemed the consumer of the taxable "products" sold, and must pay Wisconsin sales or use taxes on its purchases of such "products" unless the "products" are sold to an exempt entity. Section 77.54(60)(c), Wis. Stats., provides that taxable "products" sold to an exempt entity under a "lump-sum contract" may be purchased by the contractor without tax for resale. (Note: A contractor must still pay Wisconsin sales or use tax on the materials it purchases and incorporates into real property under a contract with any customer, including exempt entities.)

"Lump-sum contract" means a means a contract to perform real property construction activities and to provide tangible personal property, items or property under sec. 77.52(1) (b) or (c), Wis. Stats., or taxable services and for which the contractor quotes the charge for labor, services of subcontractors, tangible personal property, items and property under sec. 77.52 (1)(b) and (c), Wis. Stats., and taxable services as one price, including a contract for which the contractor itemizes the charges for labor, services of subcontractors, tangible personal property, items and property under s. 77.52(1) (b) and (c), and taxable services as part of a schedule of values or similar document.

"Product" includes tangible personal property, items, property, and goods under sec. 77.52(1)(b), (c), and (d), Wis. Stats., and services.

In each of the following examples, the tax treatment is explained as it applies for contracts entered into prior to October 1, 2013 and for contracts entered into on and after October 1, 2013.

Example 1 – Septic Installer A enters into a contract with Customer B to install a mound septic system. Customer B is not an exempt entity. 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:

Supply and install underground piping from house to tank $1,000
Supply and install pump in septic tank $2,750
Supply and install underground piping from tank to drain field $  500
Supply and install piping, sand and rock in drain field $3,000
Supply and spread black dirt for planting over drain field $  500
Fine grade, seed and mulch drain field $  250
Total $8,000

Contract entered into prior to October 1, 2013

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 without tax because they are for resale. Septic Installer A is required to pay Wisconsin sales or use tax on its purchases of the piping, pump, sand, and rock Septic Installer A uses in installing the mound septic system (a real property improvement).

Contract entered into on or after October 1, 2013

The contract is a "lump-sum contract." Septic Installer A's charges of $750 for taxable products (i.e., landscaping services of $500 to supply and spread the black dirt over the drain field and $250 to fine grade, seed, and mulch the drain field), are exempt, since the selling price of the taxable products ($750) is less than 10% of the total price of $8,000 under the lump-sum contract. Septic Installer A is the consumer of the black dirt, seed, and mulch which it transfers to Customer B as part of a landscaping service, and is required to pay Wisconsin sales or use taxes on its purchases of these items. Septic Installer A is required to pay the applicable Wisconsin sales or use tax on its purchases of the piping, pump, sand, and rock Septic Installer A uses in installing the mound septic system (a real property improvement).

Example 2 – Same facts as Example 1, except that Customer B is an exempt entity.

Contract entered into prior to October 1, 2013

Septic Installer A's charges to the exempt entity for 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 are for landscaping services. Septic Installer A's charges to Customer B are exempt since Customer B is an exempt entity. Septic Installer A may purchase the black dirt, seed, and mulch without tax because they are for resale. Septic Installer A is required to pay Wisconsin sales or use tax on its purchases of the piping, pump, sand, and rock Septic Installer A uses in installing the mound septic system (a real property improvement).

Contract entered into on or after October 1, 2013

The contract is a "lump-sum contract." Septic Installer A's charges to Customer B of $750 for taxable products (i.e., landscaping services of $500 to supply and spread the black dirt over the drain field and $250 to fine grade, seed, and mulch the drain field), are exempt, since the sale is to an exempt entity. Septic Installer A may purchase the taxable products sold to Customer B (i.e., the black dirt, seed, and mulch which it transfers to Customer B as part of a landscaping service) without tax for resale. Septic Installer A is required to pay the applicable Wisconsin sales or use tax on its purchases of the piping, pump, sand, and rock Septic Installer A uses in installing the mound septic system (a real property improvement).

Example 3 – Septic Installer C enters into a contract with Customer D to install a mound septic system. Customer D is not an exempt entity. 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.

Contract entered into prior to October 1, 2013

Since Septic Installer C would normally charge $700 relating to the supplying and spreading of the black dirt and the fine grading, seeding, and mulching of the drain field, and this amount 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 $400, the amount Septic Installer C paid for the black dirt, seed, and mulch). Septic Installer C may purchase the black dirt, seed, and mulch without tax for resale. Septic Installer C is required to pay Wisconsin sales or use tax on its purchases of the piping, pump, sand, and rock Septic Installer C uses in installing the mound septic system (a real property improvement).

Contract entered into on or after October 1, 2013

The contract is a "lump-sum contract." Since Septic Installer C would normally charge $700 for the taxable products (i.e., supplying and spreading of the black dirt and the fine grading, seeding, and mulching of the drain field) in the lump-sum contract, and this amount is 10 percent or less of the total lump-sum contract amount of $8,000, Septic Installer C's sale of the taxable products is exempt. Septic Installer C owes sales tax or use tax on the $400 that Septic Installer C paid for the black dirt, seed, and mulch. Septic Installer C is also required to pay Wisconsin sales or use tax on its purchases of the piping, pump, sand, and rock Septic Installer C uses in installing the mound septic system (a real property improvement).

Example 4 – Same as Example 3 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.

Contract entered into prior to October 1, 2013

Since Septic Installer C would normally charge $700 relating to the supplying and spreading of the black dirt and the fine grading, seeding, and mulching of the drain field, and this amount 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 Septic Installer C paid Landscaper X). Septic Installer C is required to pay Wisconsin sales or use tax on its purchases of the piping, pump, sand, and rock Septic Installer C uses in installing the mound septic system (a real property improvement).

Contract entered into on or after October 1, 2013

The contract is a "lump-sum contract." Since Installer C would normally charge $700 for the taxable products (i.e., supplying and spreading of the black dirt and the fine grading, seeding, and mulching of the drain field) in the lump-sum contract, and this amount is less than 10% of the total lump-sum contract amount of $8,000, Septic Installer C's sales of the taxable products are exempt. Septic Installer C owes sales or use tax on the $600 that Septic Installer C pays to Landscaper X for supplying and spreading the black dirt and fine grading, seeding, and mulching the drain field. Septic Installer C is also required to pay the applicable Wisconsin sales or use tax on its purchases of the piping, pump, sand, and rock Septic Installer C uses in installing the mound septic system (a real property improvement).

Example 5 – Same facts as Example 3, 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 $700 if Customer D wants to cover the mound with his own black dirt, fine grade, seed, and mulch the mound.

Contract entered into prior to October 1, 2013

Customer D is given the option of paying $8,000 for the entire job or paying $7,300 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, $700 of this is considered a separately stated charge for the landscaping services and is subject to Wisconsin sales tax. Septic Installer C may purchase the black dirt, seed, and mulch without tax for resale. Septic Installer C is required to pay 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 (a real property improvement).

Contract entered into on or after October 1, 2013

The contract is a "lump-sum contract." Customer D is given the option of paying $8,000 for the entire job or paying $7,300 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, $700 of this is considered a charge for the taxable products provided under the lump-sum contract. Since the amount charged for the taxable products is less than 10% of the total lump-sum contract amount of $8,000, Septic Installer C's sales of the taxable products are exempt. Septic Installer C owes sales tax or use tax on the $400 that Septic Installer C paid for the black dirt, seed, and mulch. Septic Installer C is also required to pay Wisconsin sales or use tax on its purchases of the piping, pump, sand, and rock Septic Installer C uses in installing the mound septic system (a real property improvement).

Example 6 – Same facts as Example 3, 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. The specific charges for taxable products indicated in one or more progress payments equals $700.

Contract entered into prior to October 1, 2013

Customer D is being provided a document that identifies specific charges for taxable property and/or services being provided. This is considered to be separately stating taxable charges. Septic Installer C is required to charge Wisconsin sales tax on the separately stated taxable charges. Septic Installer C may purchase the black dirt, seed, and mulch without tax for resale. Septic Installer C is required to pay 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 (a real property improvement).

Contract entered into on or after October 1, 2013

The contract is a "lump-sum contract." Since Septic Installer C would normally charge $700 for the taxable products (i.e., supplying and spreading of the black dirt and the fine grading, seeding, and mulching of the drain field) in the lump-sum contract, and this amount is 10 percent or less of the total lump-sum contract amount of $8,000, Septic Installer C's sale of the taxable products is exempt. Septic Installer C owes sales tax or use tax on the $400 that Septic Installer C paid for the black dirt, seed, and mulch. Septic Installer C is also required to pay Wisconsin sales or use tax on its purchases of the piping, pump, sand, and rock Septic Installer C uses in installing the mound septic system (a real property improvement).

Additional information relating to contractors providing both tangible personal property and/or taxable services along with nontaxable real property improvements, see Part II.D. of Publication 207: Sales and Use Tax Information for Contractors, available on the Department's website at: revenue.wi.gov/pubs/pb207.pdf.

Page last updated October 1, 2013