[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
For the first two tax years that a combined report was filed, estimated corporate income and franchise taxes could be paid either on a group basis or a separate corporation basis. If estimated taxes were paid on a separate corporation basis, the amount of taxes paid during the first two years would be credited to the group's tax liability. The designated agent would be required to notify DOR of any estimated taxes paid on a separate basis during the first two years that a combined report is filed.
After a combined report was filed for two consecutive tax years, estimated taxes would have to be paid on a group basis for each subsequent tax year until the corporations that are members of the affiliated group file separate returns. DOR would consider the affiliated group that is filing a combined report to be one taxpayer for each tax year in which combined estimated tax payments are required.
If a corporation subject to combined estimated payment requirements files a separate return in a tax year following a year in which the corporation joined in filing a combined report, the amount of any estimated tax payments made on a group basis for the previous year would be allocated by the designated agent and credited against the tax liability of that corporation, if DOR approves. If an affiliated group paid estimated taxes on a group basis for any part of a tax year and the members filed separate returns for the tax year, the designated agent, with DOR approval, would allocate the estimated tax payments among the members of the affiliated group. If estimated taxes were filed on a group basis for a tax year but the group did not file a combined report for the tax year or the previous tax year, the estimated tax would be credited to the corporation that made the estimated tax payment on the group's behalf.
Interest for Underpayment of Estimated Tax
Interest would be due for an underpayment of estimated taxes by an affiliated group. The amount of interest due for the first year in which a combined report is filed would be determined by using the aggregate of the tax and income shown on the returns filed by the members of the group for the previous year. The amount of interest that would be due from a member of a group that filed separate returns would be determined using the group member's separate items from the combined report filed for the previous year and the group member's allocated share of the combined estimated payments for the current year. The designated agent would be required to report the group member's allocated share of the combined estimated payments to DOR, in a manner prescribed by the Department.
A corporation that became a member of an affiliated group during a common accounting period would have interest due for underpayment of estimated taxes allocated to it as follows: (a) if the corporation became a member of the affiliated group at the beginning of a common accounting period, the corporation would include with the corresponding items on the combined report for the previous common accounting period the separate items shown on the corporation's return for the previous tax year; or (b) if the corporation was not a member of an affiliated group for an entire common accounting period, the corporation would include with the corresponding items on the combined report for the current tax year, the corporation's separate items for that portion of the common accounting period that the corporation was a member of the affiliated group. In determining separate items for a corporation that was a member of an affiliated group during a portion of a common accounting period in which the corporation becomes a member of another affiliated group, the corporation's separate items would include separate items that were attributed to it by the designated agent of the first affiliated group.
A corporation that left an affiliated group during a common accounting period would have interest for underpayment of estimated taxes allocated to it as follows: (a) the separate items attributed to it by the designated agent for the common accounting period during which the corporation left the affiliated group would be excluded from the corresponding items of the affiliated group for the current common accounting period and all common accounting periods following the corporation's departure from the affiliated group; and (b) a corporation that left an affiliated group would consider the separate items attributed to it by the designated agent of the affiliated group to determine the amount of interest due for underpayment of estimated taxes.
Liability for Tax, Interest and Penalty
Members of an affiliated group that filed a combined report would be jointly and severally liable for any combined tax, interest or penalty. The liability of a member of an affiliated group for any combined tax, interest or penalty could not be reduced by an agreement with another member of the affiliated group or by an agreement with another person.
Assessment Notice
In cases where DOR sent notice to a designated agent of taxes owed by an affiliated group, the notice would have to name each corporation that was a member of the affiliated group during any part of the period covered by the notice. The Department's failure to name a member on such a notice would not invalidate the notice as to the unnamed member of the affiliated group. Any levy, lien or other proceeding to collect the amount of tax assessment would have to name the corporation from which DOR would collect the assessment. In cases where a corporation that joined in filing a combined report left the affiliated group, the Department would be required to send the corporation a copy of any notice sent to the affiliated group, if the corporation notified DOR that it was no longer a member of the group and requested in writing that the Department send it such information. DOR's failure to comply with a corporation's request to receive a notice would not affect the tax liability of the corporation.
Insurance Company Liability Limit
The current law provision that the amount that an insurance company pays under the state franchise tax cannot exceed the liability that would be calculated under a 2% gross premium tax would be repealed. As drafted, this provision would take effect on the day after publication of the bill.
Rule Making
The Department of Revenue would be required to promulgate rules to implement the combined reporting provisions.
Conform Current Law Provisions
Current law provisions related to the treatment of apportionable income, interest and dividends, sales of intangible assets, intangible income or loss of personal holding companies, nonapportionable income, expenses and interest from wholly exempt income would be modified to reflect the use of combined reporting.
Effective Date
Except as noted above, these provisions would apply to tax years beginning on January 1 of the year in which the bill takes effect, if it takes effect by July 31. If the bill takes effect after July 31, then the provisions would first apply to tax years beginning on January 1 of the following year. The fiscal estimate assumes that the new provisions would first apply to tax year 2000.
In general, the Wisconsin corporate income and franchise tax is computed using federal provisions to determine income and deductions and then apportioning the net income of a multistate corporation, applying the tax rate and allowing for any credits. For state tax purposes, specified rules and laws are used to allocate or assign income to a particular corporate taxpayer.
A corporation which conducts all of its business and owns property only in Wisconsin has all of its income subject to taxation in Wisconsin. Such firms are typically incorporated in Wisconsin. These types of firms are often referred to as "100% Wisconsin firms" and they compute their taxes like a Wisconsin resident under the individual income tax.
A corporation which conducts its business operations and owns property both within and outside of the state is subject to a different corporate income tax treatment than is a 100% Wisconsin firm. When the states tax the income of corporations generated by activities carried on across state lines, they are required to tax only the income that is fairly attributable to activities carried on within the state. In order to meet this obligation, Wisconsin generally employs one of three methods of assigning income to the state -- separate accounting, formula apportionment or specific allocation.
Under separate accounting, a geographic or functional area of a single multistate corporation is treated separately from the rest of the business activities of the corporation. Net income is computed as if the activities of the corporation were confined to that geographic or functional area. Wisconsin law permits a multijurisdictional corporation to use separate accounting when the corporation's business activities in the state are not an integral part of a unitary business. Currently, few multijurisdictional corporations in Wisconsin use separate accounting to determine net tax liability.
Formula apportionment is characterized by the use of a mathematical equation to assign income of a multistate corporation to each state in which the corporation's business is conducted. States have developed apportionment formulas as a means of attributing a reasonable share of the tax base of a multistate unitary business to the taxing state. A principal reason for using formula apportionment is that, frequently, income from the multistate business activities of corporations cannot be explicitly attributed to each taxing state.
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.
Specific allocation traces income to the state of its supposed source and includes the income in that state's tax base. Generally, this method of assigning income is applied to income from property with the source of the income generally following the location of the property. Wisconsin law distinguishes nonapportionable income from apportionable income. In determining a corporation's tax liability, total corporate nonapportionable income or loss is removed from the total income of a unitary multistate corporation and the remaining income or loss is apportioned to the state. Nonapportionable income allocated to Wisconsin is then added to apportioned business income to determine Wisconsin net income.
Wisconsin taxes all multijurisdictional corporations based on the unitary principle. Generally, all gross income and all the business expenses of the unitary operation of a single corporation are used in determining that company's apportionable income. The apportionment percentage is based on the ratio of the company's Wisconsin payroll, property and sales to the total payroll, property and sales for the unitary business.
However, Wisconsin taxes each corporation separately. Consequently, only the gross income, business expenses and apportionment formula factors which reflect the unitary operations of a single corporation are used to determine net taxable income. The income, business expenses and formula factors of affiliated corporations are not included, even if the business operations of the affiliated corporations would be considered part of a single unitary business. If the state has nexus with affiliated corporations engaged in a unitary business, they are taxed separately. If the state does not have nexus with such corporations, they are not taxed by the state.
[It should be noted that the administration indicates that, as drafted, the provisions of the bill do not capture the administration's intent regarding the applicability of the combined reporting requirement for firms located outside the United States, the computation of income and apportionment factors, estimated payments and a number of other areas.]
[Bill Sections: 1724 thru 1728, 1739, 1741, 1747, 1749, 1754, 1760, 1789 and 9343(17)]
11. DEVELOPMENT AND ENTERPRISE DEVELOPMENT ZONE PROGRAM AND TAX CREDIT MODIFICATIONS
Governor: Modify the development and enterprise development zones programs and tax credits as outlined below. Although these changes could affect the amount of credits claimed, the bill does not include a fiscal effect for these provisions.
a. Limit on Total Tax Credits. The current limit on the total amount of tax credits that can be claimed under the development zone program of $33,155,000 would be eliminated. Instead, a maximum limit on the total amount of tax credits that could be claimed under both the development and enterprise development zone programs would be established at $300,000,000.
b. Enterprise Development Zones. The Department of Commerce would be authorized to designate up to 100 enterprise development zones. The current requirement that the Department obtain approval from the Joint Committee on Finance to designate more than 50 zones would be eliminated.
In addition, Commerce would be authorized to designate enterprise development zones for environmental remediation projects. "Environmental remediation" would be defined as removal or containment of environmental pollution and restoration of soil or groundwater that is affected by environmental pollution in a brownfield if that removal, containment or restoration began after the area that contains the site was designated as an enterprise development zone. Commerce would be required to determine that the project would likely provide for significant environmental remediation and that other current law criteria were met. At least ten of the total number of enterprise development zones designated would have to be for environmental remediation projects.
c. Development Zones Tax Credit--Jobs Component. The full-time jobs component of the development zones tax credit would be modified to: (1) increase from $6,500 to $8,000 the maximum credit that could be claimed for each full-time job that was created and filled by a member of a targeted group; (2) eliminate the credit for retaining a job that is filled by a member of a targeted group; (3) provide a maximum tax credit of $8,000 for retaining a full-time job in an enterprise development zone if Commerce determines that a significant capital investment was made to retain the full time job; and (4) increase from $4,000 to $6,000 the maximum tax credit that could be claimed for each full-time job created or retained and filled by an individual who is not a member of a targeted group. In addition, at least one-third of jobs credits claimed would have to be based on jobs created and filled by members of a targeted group. Currently, the credits must be based on jobs created or retained for targeted group members. These modifications would first apply to tax years beginning on January 1, 2000.
d. Administrative Provisions. The requirement that targeted group members for whom tax credits are claimed must be certified within 90 days after the first day of employment would be eliminated. This provision would first apply to tax years beginning on January 1 of the year in which the bill takes effect, unless the bill takes effect after July 31. In that case, this provision would first apply to tax years beginning in the following year. The bill would also authorize Commerce to specify by rule the circumstances under which an exception could be established from the requirement that the development zones tax credit must be based on regular, full-time nonseasonal jobs that are created or retained. This provision would first apply to tax years beginning on January 1, 2000. The bill would also correct a cross-reference regarding eligibility for the credits.
Wisconsin has two programs which provide tax credits to businesses as incentives to expand and locate in designated economically distressed areas--development zones and enterprise development zones. The programs are designed to promote economic growth through job creation and investment in the distressed areas. Designation criteria target areas with high unemployment, low incomes and decreasing property values. Businesses which locate or expand in the different zones are eligible to receive the following tax credits:
a. Environmental Remediation Component. A credit against income taxes due can be claimed for 50% of the amount expended for environmental remediation in a brownfield located in a development zone or enterprise development zone.
