[Bill Sections: 1712 and 9343(4)]
10. CLARIFY THE LIMITS AND PRORATION OF THE HIGHER EDUCATION TUITION EXPENSE DEDUCTION
Governor/Legislature: 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.
[Act 9 Sections: 1687, 1688 and 9343(3)]
[Bill Sections: 1687, 1688 and 9343(3)]
11. INDIVIDUAL INCOME TAX DEDUCTIONS FOR ALIMONY AND SUPPLEMENTAL UNEMPLOYMENT COMPENSATION FOR NONRESIDENT TAXPAYERS
Governor/Legislature: 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.
[Act 9 Sections: 1684 and 9343(5)]
[Bill Sections: 1684 and 9343(5)]
12. DISTRIBUTING INCOME TAX REFUNDS BETWEEN FORMERLY MARRIED PERSONS
Governor/Legislature: 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.
[Act 9 Sections: 1788 and 9343(9)]
13. TAXATION OF TRUSTS
Joint Finance: Modify current law as it relates to the taxation of inter vivos trusts (trusts created by a living person) as follows: (a) authorize Wisconsin to tax trusts created by persons who were Wisconsin residents at the time the trust becomes irrevocable, whether the trust is administered in Wisconsin or in another state; and (b) prohibit Wisconsin from taxing the trusts of nonresidents that are administered in Wisconsin. Specify that a trust is irrevocable if the power to revest title does not exist and that a trust is revocable if the person whose property constitutes the trust may revest title to the property. Specify that this provision would take effect with tax year 2000. This provision is estimated to result in a revenue loss of $300,000 in 2000-01.
Conference Committee/Legislature: Modify the Finance Committee provision to specify that this provision would first apply to taxable years beginning on January 1, 1999. In addition, specify that this provision would only apply to trusts or portions of trusts that become irrevocable after the date this provision takes effect. Due to these modifications, the fiscal effect compared to current law would be minimal; revenues would increase by $300,000 in 2000-01 compared to the Finance Committee provision.
[Act 9 Sections: 1674e, 1721es, 1721it and 9343(13g)&(23x)]
14. INTERNAL REVENUE CODE UPDATE [LFB Paper 116]
GPR-REV $22,070,000
Joint Finance: Provide that, beginning in tax year 1999, state individual income and corporate and business tax provisions referenced to the federal Internal Revenue Code (IRC) would refer to the code in effect on December, 31, 1998, rather than December 31, 1997, as under current law. Modify current lottery provisions to allow prize winners to make a designation of whether to receive the prize as a lump sum or as an annuity within 60 days after winning if the lottery prize is payable over at least 10 years. In addition, allow individuals who won prior to October 21, 1998, and currently receive the prize as an annuity, to designate a lump sum payment for the remaining portion of the prize, if the option is exercised by December 31, 2000. The following table provides a summary of the items that are estimated to have an impact on state revenues.
Summary of Federal Law Changes with Substantive Fiscal Effects
Individual Total $5,065,000 $1,925,000
Corporate and Business Taxes
Meals Provided for Convenience of Employer -$200,000 -$150,000
Deduction for Deferred Compensation 7,870,000 2,680,000
Mark-to-Market Treatment Denied to Customer Receivables 3,180,000 1,700,000
Corporate and Business Total $10,850,000 $4,230,000
IRC Update Total $15,915,000 $6,155,000
Conference Committee/Legislature: Include a nonstatutory provision relating to adopting the IRC update for prior years.
[Act 9 Sections: 1673d thru 1673n, 1722d thru 1722x, 1740d thru 1740m, 1741m, 1748c thru 1748L, 1748m thru 1748x, 1749m, 3025g, 3025j, 9143(3c) and 9343(23v)]
[Bill Sections: 1788 and 9343(9)]
15. CORPORATE INCOME AND FRANCHISE TAX -- SINGLE SALES FACTOR APPORTIONMENT FORMULA [LFB Paper 111]
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.]
Joint Finance: Delete implementation of the single sales factor apportionment formula for tax years beginning on January 1, 2000 and, instead, phase in the single sales factor apportionment formula over three years, beginning with tax year 2001. For tax years beginning on or after January 1, 2001 and before January 1, 2002, the sales factor would equal 63% of the apportionment fraction and the property and payroll factors would each equal 18.5% of the fraction. For tax years beginning on or after January 1, 2002 and before January 1, 2003, the sales factor would equal 85% of the apportionment fraction and the property and payroll factors would each be 7.5% of the fraction. For tax years beginning on or after January 1, 2003, the apportionment fraction would be the sales factor. In addition, make the following modifications to implement single sales factor apportionment.
a. For tax years beginning after December 31, 1999, 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.
b. Methods for attributing receipts from the lease or rental of moving property including motor vehicles, rolling stock, aircraft, vessels, mobile equipment or other mobile property would be specified.
c. The treatment of income from intangibles would be modified. Intangible property would include securities, patents, copywrites, trademarks, trade names, service names, service marks, logos, franchises, licenses, plans, specifications, blueprints, processes, techniques, formulas, designs, layouts, patterns, drawings, manuals, customer lists, contracts, technical know-how and trade secrets. Intangible property would not include securities. For tax years beginning after December 31, 1999, gross royalties and gross income received for the use of intangible property, excluding securities, would be attributable to this state if:
1. The purchaser of intangible property uses the intangible property in the production, fabrication or manufacturing of a product that is sold to a customer who is located in this state.
2. The purchaser of intangible property uses the intangible property in printing or publication of materials that are sold to a customer who is located in this state.
3. The purchaser of intangible property uses the intangible property in the operation of a trade or business at a location in this state.
4. The purchaser of intangible property is billed for the purchase of the intangible property at a location in this state.
5. The purchaser of intangible property does not use the intangible property in this state but the trade or business of the seller of the intangible property is managed at a location in this state.
6. The taxpayer is not subject to the income tax in the state in which the intangible property is used but the taxpayer's commercial domicile is in this state.
d. Establish a definition for determining where the purchaser received the benefit of services. For tax years beginning after December 31, 1999, receipts from a service would be attributable to the state where the purchaser of the service received the benefit of the service. The benefit of a service would be received in this state if any of the following applied:
1. The service relates to real property that is located in this state.
2. The service relates to tangible personal property that is located in this state at the time that the service is received.
3. The service is provided to a person who is located in this state.
4. The service is provided to a person doing business in this state.
