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.
b. Full-Time Jobs Component. A credit of up to $6,500 against corporate income taxes can be claimed for each full-time job created or retained in a development or enterprise development zone and filled by a member of a targeted group (generally, public assistance recipients and other economically disadvantaged individuals). In addition, a credit of up to $4,000 can be claimed for each full-time job created or retained in a development or enterprise development zone that is filled by an individual who is not a member of a targeted group.
[Bill Sections: 1708, 1709, 1742, 1743, 1755, 1756, 1798, 2999, 3001 thru 3012, 3014, 9310(1)&(2) and 9343(2)]
12. DEVELOPMENT ZONES JOBS TAX CREDIT
GPR - $600,000
Governor: Decrease the sum sufficient appropriation for the development zones jobs tax credit by $300,000 annually. Total funding for the credit would be $150,000 each year. This reflects a change enacted in 1995 Wisconsin Act 209 that provided that the credit was no longer refundable for tax years beginning on January 1, 1997.
13. DEVELOPMENT ZONES SALES TAX CREDIT
GPR - $100,000
Governor: Decrease the sum sufficient appropriation for the development zones sales tax credit by $50,000 annually. Total funding for the credit would be $150,000 each year. This reflects a change enacted in 1995 Wisconsin Act 209 that provided that the credit was no longer refundable for tax years beginning on January 1, 1997.
14. DEVELOPMENT ZONES LOCATION CREDIT
GPR $1,000
Governor: Increase funding by $500 annually for the development zones location credit for Native American businesses or tribal enterprises. Total funding would be $2,500 annually.
15. CORPORATE INCOME AND FRANCHISE TAX -- ACTIVITY NOT CREATING NEXUS
Governor: Provide that an out-of-state corporation is not considered to have nexus with Wisconsin and is not subject to the corporate income and franchise tax if the corporation stores tangible personal property in or on property in the state that is not owned by the corporation and the tangible personal property is transferred to another person in the state for fabricating, processing, manufacturing or printing in the state. The provision would first apply to tax years beginning on January 1 of the year in which the bill takes effect, if the bill takes effect prior to July 31. If the bill takes effect after July 31, the provision would first apply beginning on January 1 of the following year. The bill does not include a fiscal effect for this provision.
Under current law, essentially two circumstances give Wisconsin taxing jurisdiction over corporations. First, corporations which are created and authorized to act in a corporate capacity (incorporated) under Wisconsin law or foreign corporations which are licensed to transact business in the state are subject to the Wisconsin corporate income and franchise tax. Such firms are subject to the corporate income and franchise tax whether or not they conduct business or own property in the state.
Second, corporations which are organized under the laws of other states or foreign nations are generally subject to the Wisconsin corporate income and franchise tax if they exercise a franchise, conduct business or own property within the state. A non-Wisconsin (foreign) corporation is considered to have "nexus" with Wisconsin and be subject to taxation if it has one or more of the following "activities" in the state:
a. Maintenance of any business location in Wisconsin, including any kind of office.
b. Ownership of real estate in Wisconsin.
c. Ownership of a stock of goods in a public warehouse or on consignment in Wisconsin.
d. Ownership of a stock of goods in the hands of a distributor or other nonemploye representative in Wisconsin, if used to fill orders for the owner's account.
e. Usual or frequent activity in Wisconsin by employes or representatives soliciting orders with authority to accept them.
f. Usual or frequent activity in Wisconsin by employes or representatives engaged in purchasing activity or in the performance of services, including construction, installation, assembly or repair of equipment.
g. Operation of mobile stores in Wisconsin, such as trucks with driver-salespersons, regardless of frequency.
h. Miscellaneous other activities by employes or representatives in Wisconsin such as credit investigations, collection of delinquent accounts, conducting training classes or seminars for customer personnel in the operation, repair and maintenance of the taxpayer's products.
i. Leasing of tangible property and licensing of intangible rights for use in Wisconsin.
j. The sale of other than tangible personal property such as real estate, services and intangibles in Wisconsin.
k. The performance of construction contracts and personal services contracts in Wisconsin.
An out-of-state corporation is not considered to have nexus with Wisconsin and is not subject to the corporate income tax if: (a) the corporation stores tangible personal property, such as inventory or a stock of goods, in or on property in the state that is not owned by the corporation and the tangible personal property is delivered to another person in the state for manufacturing, fabricating, processing or printing in the state; (b) the corporation stores, in or on property not owned by the corporation, finished goods that have been fabricated, processed, manufactured or printed in the state and the entire amount of such goods is shipped or delivered out-of-state by another person in the state; or (c) the corporation is an out-of-state publisher which has finished publications printed and stored in this state in or on property not owned by the publisher whether or not the finished publications are subsequently sold or delivered in this state or shipped outside of it.
[Bill Sections: 1723 and 9343(18)]
Other General Fund Taxes
16. CIGARETTE TAX REFUNDS AND TAX ON TOBACCO PRODUCTS
GPR - $5,958,500
Governor: Modify the statutes related to taxes on cigarettes and tobacco products as described below.
Cigarette Tax Refunds to Native Americans
Reduce, from 70% to 50%, the percentage of cigarette tax collections from sales of cigarettes on reservations or trust lands that would be refunded to Indian tribes. In addition, clarify that "Indian tribe" means an American Indian tribe or band.
Under current law, the Department of Revenue refunds 70% of cigarette tax collections in respect to sales on reservations or trust lands of an Indian tribe under specified conditions. State law further authorizes DOR to enter into agreements with Indian tribes to provide for the refunding of cigarette taxes paid on cigarettes sold on reservations to enrolled members of the tribe residing on the tribal reservation.
Federal law prohibits states from imposing a cigarette tax on sales by Native Americans to Native Americans on reservations. Ten of the 11 Indian tribes in the state have signed agreements with the state in which the tribes agree to sell only stamped (taxed) cigarettes and the state agrees to provide refunds to the tribes of 100% of taxes paid on cigarette sales to tribal members living on the reservation. For these tribes, DOR refunds 100% of tax collections on cigarettes sold to tribal members, and 70% of taxes on cigarettes that are sold to non-tribal members.
The remaining tribe, which does not have an agreement with the state, sells unstamped (untaxed) cigarettes to tribal members and stamped cigarettes to non-tribal members. For this tribe, the 70% refund applies only to tax collections from the sale of stamped cigarettes to non-tribal members.
The provision to reduce the refund rate would first apply to taxes imposed on the first day of the second month beginning after publication of the bill.
Tax on Tobacco Products
Current Law. Under current law, the Wisconsin tax on tobacco products is an occupational tax imposed on distributors of tobacco products. For domestic tobacco products sold by distributors, the distributors are required to pay a tax at the rate of 20% of the manufacturer's established list price (for imported products, federal tax is added to the list price before applying the 20% tax rate). However, the statutes provide exceptions to the tobacco products tax for the following:
