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:
a. The net income of each corporation would be determined under current law provisions for computing income. A general or limited partner's share of income would be computed in this manner to the extent that the general or limited partner and the partnership in which the partner invests are engaged in a unitary business, regardless of the percentage of the partner's ownership in the partnership.
b. Each corporation's income would be adjusted as provided under current law general provisions related to accounting methods, order of computations and methods of determining income for specific entities such as Domestic International Sales Corporations (DISCs) or specific cases such as defense contract renegotiations.
c. Intercompany transactions would be subtracted from income such that intercompany accounts of assets, liabilities, equities, income, costs or expenses are excluded from the determination of income to accurately reflect the income, the apportionment factors and the tax credits in a combined report. Distributions of intercompany dividends that are paid from nonbusiness earnings or nonbusiness profits, or distributions of intercompany dividends that are paid from earnings or profits that are accumulated before the payer corporation becomes a member of an affiliated group that is engaged in a unitary business, could not be excluded from the income of the recipient corporation. An intercompany distribution that exceeds the payer corporation's earnings or profits or stock basis would not be considered income from an intercompany sale of an asset and would not be excluded as income from an intercompany transaction. Intercompany dividends that are paid from earnings or profits from a unitary business income would be considered as paid first from current earnings or profits and then from accumulations from prior years in reverse order of accumulation.
An intercompany transaction would be a transaction between corporations, partnerships, LLCs or tax-option corporations that become members of the same affiliated group that is engaged in a unitary business immediately after the transaction. An intercompany transaction would include the following:
1. Income from sales of inventory from one member of the affiliated group to another.
2. Gain or loss from sales of intangible assets from one member of the affiliated group to another member.
3. Gain or loss on sales of fixed assets or capitalized intercompany charges from one member of the affiliated group to another.
4. Loans, advances, receivables and similar items that one member of the affiliated group owes to another member of the affiliated group, including interest income and interest expense related to these items.
5. Stock or other equity of one member of the affiliated group that is owned or controlled by another member.
6. Intercompany dividends paid out of earnings and profits from a unitary business income [except for those affected by the provisions described in paragraph (c)].
7. Annual rent paid by one member of the affiliated group to another member of the affiliated group.
8. Management or service fees paid by one member of the affiliated group to another.
9. Income or expenses allocated or charged by one member of the affiliated group to another member.
d. After income from intercompany transactions is subtracted, the next step would be to subtract nonbusiness income, net of related expenses. Nonbusiness losses, net of related expenses, would be added to income. The resulting amount would be each corporation's apportionable net income or apportionable net loss.
e. Each corporation's apportionable net income or apportionable net loss would be multiplied by the corporation's apportionment fraction to arrive at the income that is attributed to Wisconsin. To calculate the state apportionment factors, the numerator and denominator of each corporation's apportionment factors would first be determined under current law provisions. (This would apply to a general or limited partner's share of the numerator and the denominator of the apportionment factors to the extent that the general or limited partner and the partnership are engaged in a unitary business, regardless of the percentage of the partner's ownership.) The next step would be to subtract intercompany transactions from the numerators and denominators of each company. The denominators of the apportionment factors of each company would be added to arrive at the combined denominator. Each corporation's apportionment factors would be computed by dividing the corporation's numerator for each factor by the combined denominator for each factor. The apportionment ratio would be computed using these factors.
f. The nonbusiness income of each corporation that was attributable to Wisconsin would be added to the corporation's apportioned income and nonbusiness losses would be subtracted.
g. The final step in computing income would be to subtract from income each corporation's net business loss carry-forward as determined under current law. For the first two tax years that a combined report was filed, the net operating loss for each member of an affiliated group that filed the report would be determined by adding each member's share of nonbusiness income to each member's share of business income and subtracting each member's share of nonbusiness loss from each member's share of business loss. Beginning with the third tax year that a combined report was filed, if a member of an affiliated group that files a combined report had a positive net income, the affiliated group would only deduct the amount of the net operating loss carry-forward attributable to that member. A corporation could not carry forward a business loss from tax years ending before January 1, 2000, if the corporation was not subject to the state corporate income and franchise tax for tax years ending before that date.
Accounting Period
The income, apportionment factors and tax credits of all corporations that were members of an affiliated group and that were engaged in a unitary business would have to be determined by using the same accounting period. If the affiliated group had a common parent corporation, the accounting period of the common parent corporation would be used by all the corporations that were members of that affiliated group. If the affiliated group had no common parent corporation, then the income, apportionment factors and tax credits of that group would be determined using the accounting period of the member that had the most significant operations on a recurring basis in the state.
Filing Returns
Corporations with the Same Accounting Period. Corporations that were required to file returns and that had the same accounting period could file a combined return that reported the aggregate state income or franchise tax liability of all the members of the affiliated group. Corporations that were required to file combined returns could file separate returns reporting the respective apportionment of the corporation's income or franchise tax liability determined by combined reporting, if each corporation that filed a separate return paid its own apportioned share of its state income or franchise tax liability.
Corporations with Different Accounting Periods. Corporations that were required to file combined reports and that had different accounting periods would be required to use the actual figures from the corporations' financial records to determine the proper income and income-related computations to convert to a common accounting period. Corporations that were required to file a combined report could use a proportional method that did not materially misrepresent the income apportioned to the state. The apportionment factors and tax credits would have to be computed according to the same method used to determine income for the common accounting period. If a corporation performed an interim closing of its financial records to determine the income attributable to the common accounting period, the actual figures from the interim closing would have to be used to convert the apportionment factors to the common accounting period.
Designated Agent. The parent corporation of the affiliated group would be the sole designated agent for each member of the group that filed a combined report using the same accounting period. The designated agent would be required to file the combined report for affiliated groups using the same accounting period and the taxes, including estimated taxes, would be paid in the designated agent's name. The designated agent would also be required to file for extensions, amended reports, claims for refund or credit, and would be required to send and receive all correspondence with DOR regarding a combined report. Any notice the Department sent to the designated agent would be considered a notice sent to all members of the affiliated group. Any refund would be required to be paid to and in the name of the designated agent and would discharge any liability of the state to any member of the affiliated group regarding the refund. The designated agent would be required to participate on behalf of the affiliated group in any investigation or hearing requested by the Department regarding a combined report and would be required to produce all information requested by the DOR regarding the combined report. The designated agent would be authorized to execute a power of attorney on behalf of members of the affiliated group. The designated agent would also be required to execute waivers, closing agreements and other documents for reports for groups using the same accounting period, and any waiver, agreement or document executed by the designated agent would be considered as executed by all members of the affiliated group. If the Department acted in good faith with an affiliated group member that represented itself as the designated agent for the group but was not the designated agent, any action taken by the Department with that member would have the same effect as if that affiliated group member was the actual agent of the group.
Part-Year Members. If a corporation became a member of an affiliated group engaged in a unitary business or ceased to be a member of such a group after the beginning of a common accounting period, the method for apportioning that corporation's income would differ, depending on whether the corporation was required to file two federal short period returns. If the corporation was required to file two short period federal returns for the common accounting period, the income for the short period that the corporation was a member of the unitary affiliated group would be determined by using the combined reporting method and the corporation would be required to join in filing a combined report for the short period. The income for the remaining short period would be determined by separate reporting. If the corporation became a member of another unitary affiliated group in the remaining short period, its income would be determined for that period by using the combined reporting method.
If the corporation was not required to file federal short period returns, the corporation would be required to file a separate return. Income would have to be determined by: (a) the combined reporting method for any period that the corporation was a member of a unitary affiliated group; and (b) separate reporting for any period that the corporation was not a member of a unitary affiliated group.
Amended Combined Report. An amended combined report could be filed for the same corporations that joined in filing the original combined report in the following cases:
a. If an election to file a combined report that is in effect for a tax year is revoked because DOR determines that the affiliated group that filed the combined report was not a unitary business, the designated agent for the affiliated group could file an amended separate return for each corporation that joined in filing the combined report. In computing the tax owed, each corporation filing an amended return would consider all of the payments, credits or other amounts, including refunds, that the designated agent allocated to the corporation.
b. If a change in tax liability results from a corporation being removed from an affiliated group as ineligible for membership due to a DOR determination, the designated agent would be required to file an amended combined report. The ineligible corporation would file a separate amended return.
c. If a corporation erroneously failed to join in filing a combined report, the designated agent would be required to file an amended combined report that included the corporation. If that corporation had filed a separate return, the corporation would be required to file an amended separate return that showed no net income, overpayment or underpayment and showed that the corporation had joined in filing a combined report.
Estimated Tax Payments
