As under current law, on January 1, 2000, the Department would be allowed, but not required, to adjust the tables to reflect the current law tax rate reduction that took effect with the 1998 tax year.
On July 1, 2000, the Department would be required to adjust the tables to reflect the proposed tax rates for tax year 2001. The administration indicates that the tables would be adjusted to reflect the proposed 2001 rate cut prior to its statutory effective date so that the cost of the reduction would not be pushed out of the 1999-01 biennium and so that the tax cuts would be available to taxpayers earlier. The Department is also directed to adjust the tables to reflect bracket indexing. However, as noted in the section on indexing, the tax brackets would not be indexed in 2000 and 2001 because the amounts would be set statutorily.
The Department indicates that it would likely not adjust the tables on January 1, 2000, since the tables would be adjusted again six months later under the Governor's proposal.
G. Itemized Deduction Credit. Eliminate miscellaneous itemized deductions as eligible expenses under the state’s itemized deduction credit. This modification would first apply to tax years beginning on January 1, 2000. Miscellaneous itemized deductions allowed under federal law include unreimbursed employe expenses, tax preparation fees, safe deposit box rent, gambling losses (to the extent of gambling winnings), casualty and theft losses from income-producing property and other amounts paid to produce or collect taxable income and manage or protect property held for earning income. Under the IRC, certain miscellaneous itemized deductions can only be deducted to the extent that they exceed 2% of the taxpayer's AGI.
Under current law, the itemized deduction credit is equal to 5% of the excess of allowable itemized deductions over the sliding scale standard deduction. State itemized deductions generally conform to the expenses permitted as federal itemized deductions and currently include charitable contributions; medical expenses exceeding 7.5% of AGI; interest expenses for a principal residence or a second home in Wisconsin; interest expenses for property sold on a land contract; other interest expenses, except personal interest; and miscellaneous itemized deductions.
H. Married Couple Credit. Increase the maximum credit to $440 in 2000 and to $480 in 2001 and thereafter. Under current law, two-earner married couples are eligible for a credit equal to 2.75% of the secondary earner’s earned income in 2000 (up to a maximum of $385) and 3.0% in 2001 and thereafter (up to a maximum of $420). These percentages would not be modified.
I. Eliminate Certain Tax Credits. Eliminate the property tax/rent credit (PTRC), dependent credit, senior citizen credit and working families credit for tax years 2000 and thereafter. Under current law, the PTRC is equal to 10% of property taxes, or rent constituting property taxes, to a maximum credit of $200 (the credit was increased to 14% of property taxes to a maximum credit of $350 on a one-time basis in 1998). Current law also provides for a $50 dependent credit and a $25 senior citizen credit for persons age 65 and over who fall under certain income limitations. The working families credit is equal to the net tax liability for taxpayers with Wisconsin AGI below $9,000 ($18,000 if married-joint); the credit phases out
over the next $1,000 of income until eliminated when AGI exceeds $10,000 ($19,000 if married-joint).
[Bill Sections: 1674, 1685, 1689 thru 1707, 1711, 1713 thru 1717, 1721, 1722, 1784 thru 1787 and 9343(20)]
2. HOMESTEAD TAX CREDIT: EXPANSION
GPR $11,700,000
Governor: Increase funding by $5,600,000 in 1999-00 and $6,100,000 in 2000-01 to fund the Governor's proposed expansion of the homestead tax credit. Under the bill, the maximum income amount under the credit would increase from $19,154 to $20,290, beginning with claims filed in 2000 and thereafter based on property taxes or rent constituting property taxes accrued during the previous year (tax year 1999). In addition, the bill would reduce the percentage used in phasing out the credit for higher-income claimants from 13% to 11.8%. The homestead credit formulas under current law and under the Governor’s proposal are shown below. Under current law and the Governor's proposal, property taxes claimed for the credit may not exceed $1,450 and the maximum credit is $1,160.
Current Law Credit = 80% (Property Taxes – 13.0% (Household Income - $8,000))
Proposed Credit = 80% (Property Taxes – 11.8% (Household Income - $8,000))
[Bill Sections: 1762 and 1763]
3. HOMESTEAD TAX CREDIT: CURRENT LAW REESTIMATE
GPR - $8,000,000
Governor: Decrease funding by $3,000,000 in 1999-00 and $5,000,000 in 2000-01 to reflect estimated expenditures for the homestead tax credit under current law. With this modification and the proposed expansion of the credit, the bill would provide total funding of $84,600,000 in 1999-00 and $83,100,000 in 2000-01.
4. EARNED INCOME TAX CREDIT: CURRENT LAW REESTIMATE
GPR $1,000,000
Governor: Decrease funding by $2,500,000 in 1999-00 and increase funding by $3,500,000 in 2000-01 for estimated costs of the earned income tax credit (EITC). Total funding would be $74,000,000 in 1999-00 and $80,000,000 in 2000-01. This funding level includes $2,000,000 each year to reflect a November, 1998, Internal Revenue Service ruling that gains realized on the sale of property used in a trade or business are not counted as investment income for purposes of the EITC. This ruling restores eligibility to individuals (particularly farmers) who were not previously able to claim the credit due to the limitation on disqualified income.
5. LIMIT EDUCATIONAL EXPENSES ALLOWED UNDER THE ITEMIZED DEDUCTION CREDIT
Governor: Specify that any amount claimed under the deduction for higher education tuition expenses would not be allowed for purposes of the itemized deduction credit. Specify that this provision would first apply to taxable years beginning on January 1 of the year in which the bill takes effect, except that if the bill takes effect after July 31, the provision would first apply to taxable years beginning on January 1 of the following year.
Under current law, a deduction from income is allowed for higher education tuition expenses for each taxpayer or dependent of a taxpayer, up to $3,000 per student each tax year. The student must be attending an institution of higher education located in Wisconsin or that is subject to the Minnesota-Wisconsin tuition reciprocity agreement. The maximum deduction is available to taxpayers with income below $50,000 if single, $80,000 if married-joint and $40,000 if married-separate. The amount of the deduction phases-out as income increases above these amounts until eliminated when income exceeds $60,000 if single, $100,000 if married-joint and $50,000 if married-separate. In addition, education expenses may be deducted as an itemized deduction for federal tax purposes, and also under the state's itemized deduction credit, if the education is undertaken to maintain or improve a skill required for employment, trade or business. Currently, an individual can deduct the same expenses under both provisions and receive a double benefit.
[Bill Sections: 1712 and 9343(4)]
6. CLARIFY THE LIMITS AND PRORATION OF THE HIGHER EDUCATION TUITION EXPENSE DEDUCTION
Governor: Specify that the proration of the higher education tuition expense deduction for nonresident and part-year resident taxpayers would apply to the full deduction, as it currently applies to the phase-out of the deduction for higher-income taxpayers.
Under current law, a deduction from income is allowed for higher education tuition expenses for each taxpayer or dependent of a taxpayer, up to $3,000 per student per tax year. The student must be attending an institution of higher education located in Wisconsin or that is subject to the Minnesota-Wisconsin tuition reciprocity agreement. The deduction is subject to the income limitations noted in the previous entry.
The deduction is currently prorated for nonresident and part-year resident taxpayers based on the ratio of income that is taxable in Wisconsin to total income. However, as drafted under current law, the proration provision only applies to the phase-out of the deduction for higher income taxpayers and not to taxpayers with income below the minimum income amounts.
In addition, extend the current law provision that limits the amount of the deduction for nonresident and part-year resident taxpayers to the aggregate wages, salary, tips, unearned income and net earnings from a trade or business that are taxable to this state to apply to full-year resident taxpayers. Specify that the limitation would first apply to taxable years beginning on January 1 of the year in which the bill takes effect, except that if the bill takes effect after July 31, the provision would first apply to taxable years beginning on January 1 of the following year.
For nonresident and part-year resident taxpayers, the deduction is limited to the amount of income subject to tax in Wisconsin. The bill provision would extend this limitation to all taxpayers so that the amount of the deduction would not exceed the taxpayer's taxable income.
[Bill Sections: 1687, 1688 and 9343(3)]
7. INDIVIDUAL INCOME TAX DEDUCTIONS FOR ALIMONY AND SUPPLEMENTAL UNEMPLOYMENT COMPENSATION FOR NONRESIDENT TAXPAYERS
Governor: Delete a current law provision that requires all alimony and repayments of supplemental unemployment benefits deducted for federal income tax purposes and made while the individual was a nonresident of Wisconsin to be added to income for purposes of calculating Wisconsin adjusted gross income. The denial of these deductions to nonresidents could violate the privileges and immunities clause of the U.S. Constitution. Specify that this provision, as it relates to the repayment of supplemental unemployment compensation, would first apply to taxable years beginning on January 1 of the year in which the bill takes effect. However, if the bill takes effect after July 31, the provision, as it relates to the repayment of supplemental unemployment compensation, would first apply to taxable years beginning on January 1 of the following year.
[Bill Sections: 1684 and 9343(5)]
8. DISTRIBUTING INCOME TAX REFUNDS BETWEEN FORMERLY MARRIED PERSONS
Governor: Specify that if a judgment of divorce apportions any income tax refund due to formerly married persons to one of the former spouses or between the spouses, and if they include a copy of that portion of the judgment with their return, the Department would be directed to issue the refund under the terms of the judgment or to issue one check to each of the former spouses according to the apportionment terms of the judgment. This provision would first apply to a judgment of divorce that is entered on the effective date of the bill. Under current law, a refund payable on the basis of separate returns must be issued to the person who
filed the return and a refund payable on the basis of a joint return is issued jointly to the persons who filed the return.
[Bill Sections: 1788 and 9343(9)]
9. CORPORATE INCOME AND FRANCHISE TAX -- SINGLE SALES FACTOR APPORTIONMENT FORMULA
GPR-REV - $74,600,000
Governor: Require the income of corporations and nonresident individuals and estates and trusts engaged in business within and outside of Wisconsin to be apportioned to the state using a single sales factor apportionment formula. Similarly, insurance companies that are subject to the state corporate franchise tax and that collect premiums on property and risks inside and outside of the state would apportion income based on a single premiums factor. Use of property and payroll factors to apportion income would be eliminated.
The definition of sales used in determining the sales factor of the single sales factor apportionment formula would be modified. Sales, rents, royalties, and other income from real property, and the receipts from the lease or rental of tangible personal property, would be attributed to the state in which the property was located.
Receipts from the lease or rental of moving property including but not limited to motor vehicles, rolling stock, aircraft, vessels or mobile equipment would be included in the numerator of the sales factor to the extent the property was used in Wisconsin. The use of moving property in the state would be determined as follows:
a. A motor vehicle would be used in Wisconsin if it was registered in the state and used wholly in the state.
b. The use of rolling stock in Wisconsin would be determined by multiplying the receipts from the lease or rental of the rolling stock by the following fraction: miles traveled in Wisconsin by the leased or rented rolling stock divided by total miles traveled by the rolling stock.
c. The use of an aircraft in Wisconsin would be determined by multiplying the receipts from the lease or rental of the aircraft by the following fraction: the number of landings of the aircraft in Wisconsin divided by the total number of landings of the aircraft anywhere.
d. The use of a vessel, mobile equipment or other mobile property in Wisconsin would be determined by multiplying the receipts from the lease or rental of the property by the following fraction: the number of days in the tax year that the vessel, mobile equipment or other mobile property was in Wisconsin divided by the number of days in the tax year that the vessel, mobile equipment or other mobile property was rented or leased.
Royalties and other income received for the use of intangible property would be attributed to the state where the purchaser used the intangible property. Similarly, sales of intangible property would also be attributed to the state where the purchaser used the intangible property. If the intangible property was used in more than one state, the royalties and other income received for the use of the intangible property or the sales of the intangible property would be apportioned to the state according to the portion of the intangible property's use in Wisconsin. If this could not be determined, the royalties and other income would be excluded from the numerator and the denominator of the sales factor. Intangible property would be treated as used in Wisconsin if a purchaser used the intangible property or the rights to the intangible property in the regular course of the purchaser's business in Wisconsin, regardless of where the purchaser's customers were located.
Receipts from the performance of services would be attributed to the state where the purchaser received the benefit of the services. If the purchaser received the benefit of a service in more than one state, the receipts from the performance of the service would be included in the numerator of the sales factor according to the portion of the benefit of the service received in Wisconsin. If the state where the purchaser received the benefit could not be determined, the benefit of a service would be treated as being received in the state where the purchaser, in the regular course of the purchaser's business, ordered the service. In cases where the state in which a purchaser ordered the service could not be determined, the benefit of the service would be received in the state where the purchaser, in the regular course of business, received a bill for the service.
The modified definition of sales would be used in computing the state research credit under corporate income and franchise tax.
These provisions would be effective for tax years beginning on January 1, 2000. Use of a single sales factor apportionment formula would reduce corporate income and franchise tax revenues by an estimated $24,600,000 in 1999-00 and $50,000,000 in 2000-01.
Under Wisconsin law, formula apportionment is used if a corporation's Wisconsin activities are an integral part of a unitary business which operates both within and outside of the state. In these cases, the corporation adds its total gross income from its in-state and out-of-state unitary activities, subtracts its deductions, and multiplies the amount of net income by its apportionment ratio as determined by the Wisconsin apportionment formula. The apportionment ratio is used to approximate how much of a corporation's total net income is generated by activities in Wisconsin.
The apportionment ratio is the end result of the application of the Wisconsin apportionment formula to a particular corporation. For most corporations, the apportionment ratio or fraction is determined by dividing the corporation's property value, payroll and sales in Wisconsin by the corporation's total property value, payroll and sales, respectively. The apportionment ratio is determined by adding three fractions (referred to as the three factors of the formula)--the corporation's property in Wisconsin divided by its total property, the corporation's payroll in Wisconsin divided by its total payroll and the corporation's sales in Wisconsin divided by its total sales--double weighting the sales factor, and dividing the aggregate sum by four. The following figure provides an illustration of the Wisconsin apportionment formula.
The property factor of the apportionment formula is the ratio of the average value of real and tangible personal property owned or rented and used by the taxpayer in Wisconsin to that for the company as a whole. Tangible property includes land, buildings, machinery and equipment, inventories, furniture and fixtures and other tangible personal property actually owned and used in producing apportionable income.
The payroll factor is the ratio of the total amount of compensation paid by the company in the state to the total compensation paid by the company. Compensation includes wages, salaries, commissions and any other form of remuneration (including certain fringe benefits) paid to employes for personal services.
The sales factor is the ratio of the total sales of the taxpayer in the state to total sales everywhere. Sales are generally all gross receipts from the course of the taxpayer's regular trade or business operations which produce apportionable business income. For the sales factor, sales of tangible personal property are generally considered to be in Wisconsin if the property is delivered or shipped to a purchaser within Wisconsin or if the property is shipped from Wisconsin and the taxpayer is not subject to the taxing jurisdiction of the state of destination. The latter type of sales are "throwbacks" and single-weighted in the apportionment formula. In addition, sales of tangible personal property from an office in the state, but shipped from an out-of-state supplier to an out-of-state customer are considered throwback sales if neither the supplier nor the customer are subject to the taxing jurisdiction of the states in which they are located. Sales to the federal government are only considered to be in Wisconsin if they are shipped from a location within the state and are delivered to the federal government at a location within the state or if they are throwback sales. Federal throwback sales are single-weighted in the apportionment formula. Sales other than the sales of tangible personal property are usually considered to be in Wisconsin if the income-producing activity is performed wholly in Wisconsin. Generally, sales of intangible assets are excluded from the sales factor. Sales which produce nonapportionable income are also excluded from the sales factor.
Interstate air carriers, motor carriers, pipeline companies, taxable insurance companies and financial organizations are required to use different apportionment formulas to determine Wisconsin net taxable income. These corporations must use special apportionment factors in order to attribute income to their Wisconsin business activities.
[It should be noted that the administration indicates that, as drafted, the provisions of the bill do not capture the administration's intent in certain areas. Specifically, the administration indicates that it intended for the single-sales apportionment provisions to apply to financial institutions, utilities and other businesses that currently use specialized apportionment formulas. The administration also indicates that the provisions regarding the treatment of intangible assets, services and diversified businesses should be modified.]
[Bill Sections: 1675 thru 1682, 1729 thru 1738, 1745, 1746, 1750 thru 1753, 1758, 1759 and 9443(7)]
10. CORPORATE INCOME AND FRANCHISE TAX -- COMBINED REPORTING
GPR-REV $70,100,000
Governor: Require corporations that are subject to the state corporate income and franchise tax and that are members of an affiliated group engaged in a unitary business to compute state corporate income and franchise tax liability using the combined reporting method of determining income. Use of combined reporting would increase corporate income and franchise tax revenues by an estimated $23,100,000 in 1999-00 and $47,000,000 in 2000-01. The specific provisions related to combined reporting are described in the following sections.
Corporations Required to Use Combined Reporting
A corporation that is subject to the state corporate income and franchise tax, that is a member of an affiliated group and that is engaged in a unitary business with one or more members of the affiliated group would be required to compute its income using the combined reporting method. In addition, the Department of Revenue would be authorized to require the use of combined reporting for any corporation, regardless of the country in which it is organized or incorporated or conducts business and for any tax-option corporation, if the corporation is a member of an affiliated group that is engaged in a unitary business and the Department determines that combined reporting is necessary to accurately report the income of the corporation.
Business entities that would be subject to combined reporting would include corporations, insurance corporations, insurance joint stock companies, insurance associations, insurance common law trusts, publicly traded partnerships treated as corporations under the Internal Revenue Code (IRC) limited liability corporations (LLCs) treated as corporations under the IRC, joint stock companies, associations, common law trusts and all other entities treated as corporations under the IRC, unless the context requires otherwise.
An "affiliated group" would include the following:
a. A parent corporation and any corporation or chain of corporations that are connected to the parent corporation by ownership of the parent corporation if: (1) the parent corporation owns stock representing at least 50% of the voting stock of at least one of the connected corporations; or (2) the parent corporation or any of the connected corporations owns stock that cumulatively represents at least 50% of each of the connected corporations.
b. Any two or more corporations if a common owner owns stock representing at least 50% of the voting stock of the corporations or the connected corporations.
c. A partnership, LLC or tax-option corporation (S corporation) if a parent corporation or any corporation connected to the parent corporation by common ownership owns shares representing at least 50% of the shares of the partnership, LLC or tax-option corporation.
d. Any two or more corporations if stock representing at least 50% of the voting stock in each corporation are interests that cannot be separately transferred.
e. Any two or more corporations if stock representing at least 50% of the voting stock is directly owned by, or for the benefit of, family members. A family member is an individual or a spouse related by blood, marriage or adoption within the second degree of kinship as computed under state law.
A "unitary business" would be two or more businesses that have a common ownership or are integrated with or dependent upon each other. Two or more businesses would be presumed to be a unitary business if the businesses have: (a) centralized management or a centralized executive force; (b) centralized purchasing, advertising or accounting: (c) intercorporate sales or leases; (d) intercorporate services; (e) intercorporate debts; (f) intercorporate use of proprietary materials; (g) interlocking directorates or interlocking corporate officers; or (h) if a business conducted in the state is owned by a person that conducts a business entirely outside the state that is different from the business conducted in the state.
A "combined report" would be a form prescribed by DOR to show the calculations required to divide the income of a unitary affiliated group among the jurisdictions where the affiliated group conducts its business.
Presumptions and Burden of Proof
An affiliated group would be presumed to be engaged in a unitary business and all of the income of the unitary business would be presumed to be apportionable business income. The corporation, partnership, LLC or tax-option corporation would have the burden of proving that it was not a member of an affiliated group that would be subject to combined reporting.
Computation of Income
Income under combined reporting would be determined in the following manner:
