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.
5. The service is performed at a location in this state.
6. If the taxpayer is not subject to income tax in the state in which the benefit of the service is received, the benefit of the service is received in this state to the extent that the taxpayer's employes or representatives performed the service from a location in this state.
If the purchaser of a service 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 services received in this state. If the state where a purchaser received the benefit of a service could not be determined, the benefit of a service would be received in the state where the purchaser in the regular course of the purchaser's business, ordered the service. If the state where a purchaser ordered a service could not be determined, the benefit of the service would be received in the state where the purchaser, in the regular course of the purchaser's business, received a bill for the service.
e. Delete references to prior law development zones credits.
f. Apply the phase-in of the single sales factor apportionment formula to insurance companies and specify the method for determining a single premiums apportionment fraction. Premiums and assumed premiums for reinsurance would be included in the sales factor. In addition, the method for determining the apportionment ratio under current law would be modified so that the apportionment percentage would be used to determine Wisconsin income rather than non-Wisconsin income.
g. Specify a single sales factor method for apportioning the income of interstate financial organizations including the definition of financial institutions and receipts for tax years beginning on or after January 1, 2000.
"Financial organization" would mean a bank; a savings bank; a bank holding company; a savings and loan association; a trust company; a credit union, except a credit union that is exempt from taxes under state law; a production credit association; or an agency or branch of a foreign depository; whether chartered under the laws of this state, another state or territory, the laws of the United States or the laws of a foreign country. A "financial organization" would include a corporation that derives at least 50% of its total gross income from finance leases, including direct finance leases and leveraged leases as defined by rule, and a corporation that derives at least 50% of its total gross income from an activity that a financial organization performs.
Net income would be apportioned to Wisconsin by use of an apportionment fraction, the numerator of which is the receipts of the taxpayer in this state during the taxable year and the denominator of which is the receipts of the taxpayer within and without this state during the taxable year. The method of calculating receipts for purposes of the denominator would be the same as the method used in determining receipts for purposes of the numerator.
Gross receipts would include gross receipts from the lease of real property, gross receipts from the lease of tangible personal property, gross interest from loans secured by real property, gross interest from loans, income from the sale of loans, gross interest fees and penalties from sale of credit card receivables, credit card reimbursement fees, receipts from merchant discounts, loan servicing fees, gross income from investment banking services, and gross receipts from other services.
h. Establish a single sales factor method for apportioning the income of interstate brokers-dealers and underwriters including the definition of broker-dealer, underwriter and receipts for tax years beginning on or after January 1, 2000.
"Broker-dealers" would mean a person who does business as a broker of securities or commodities. Broker would not include a sales agent; a bank, savings institution or trust company that enters a securities or commodities transaction as an agent; an executor, guardian or conservator who enters a securities or commodities transaction as an agent for another; or a person who purchases or sells the person's own securities or commodities.
"Underwriter" would mean a person who guarantees to provide a definite sum of money by a definite date to a corporate or government entity in exchange for securities; who markets a corporate or government security offering to the public or who buys a security offering for a specified price and sells the security offering to the public.
Net income would be apportioned to Wisconsin by use of an apportionment fraction, the numerator of which would be the receipts of the taxpayer in this state during the taxable year and the denominator the receipts of the taxpayer within and without this state during the taxable year.
Gross receipts would include gross brokerage commissions and total margin interest paid on behalf of brokerage accounts, gross commissions, gross management or underwriting fees or other gross income earned in performing underwriting activities on behalf of the issuer of the securities, gross commissions, gross management fees or other gross income earned in providing investment research, management services and advice and other financial services and other related receipts.
i. Specify the treatment of receipts from professional sports teams and broadcasting and publishing. For broadcasting, gross receipts, including advertising revenues from television and radio broadcasting within and without the state, would be attributed to the numerator of the receipts factor based on the ratio of the audience within this state to the audience everywhere. For publishing, gross receipts, including advertising revenues, from newspapers and magazines would be attributed to the numerator of the receipts factor based on the ratio of circulation within this state to circulation everywhere.
j. Maintain the current law formulas for apportioning the income of interstate public utilities, air carriers, motor carriers, railroad and sleeping car and carline companies and pipeline companies.
k. Delete DOR authority to waive the use of one of the apportionment factors if it results in an unreasonable or inequitable final apportionment ratio.
l. The method for determining the applicable apportionment ratio(s) for interstate diversified businesses would be specified.
m. A definition of commercial domicile would be created. Commercial domicile would mean either: (a) the headquarters of the trade or business, from which the trade or business is principally managed and directed; or (b) if a taxpayer is organized under the laws of a foreign country, the commonwealth of Puerto Rico or any territory or possession of the U.S., commercial domicile would be the state from which the taxpayer's trade or business in the U.S. is principally managed or directed. It would be presumed, subject to rebuttal, that the location from which the taxpayer's trade or business is principally managed and directed is the state to which the greatest number of employes are regularly connected or out of which they are working, irrespective of where the services of the employes are performed.
These provisions would decrease corporate income tax revenues by an estimated $12,500,000 in 2000-01 compared to current law. Compared to the estimates used in the bill, revenues would increase by $24,600,000 in 1999-00 and $37,500,000 in 2000-01. Once the new provisions are fully phased-in, the estimated cost would be a minimum of $80 million annually.
Assembly: Provide that electric and gas utilities be included in the phase-in of the single sales factor apportionment formula for tax years beginning on or after January 1, 2001. Include technical corrections to implement the phase-in of single sales factor apportionment. This provision would reduce state corporate income and franchise tax revenues by an estimated $100,000 in 2000-01. When single sales factor apportionment is fully phased-in, the inclusion of electric and gas utilities would reduce revenues by an estimated $800,000, annually.
In addition, provide that, in determining sales that would be included in the sales factor of the apportionment formula, if the receipts from services would be attributed to Wisconsin because the benefit of a service was received in the state and the taxpayer submits evidence to the Department of Revenue that another state that has jurisdiction to tax the service, attributes the receipts from the service to that state to determine income taxable by that state, then the taxpayer could elect, by a method prescribed by DOR, to attribute the receipts from the service to Wisconsin in proportion to the direct cost of performing such service. This provision, which would first apply to tax years beginning on or after January 1, 2000, would reduce state individual and corporate income and franchise taxes by an unknown amount.
Senate: Delete provisions that phase in the use of single sales factor apportionment, beginning with tax year 2001. Compared to the Joint Finance version of the bill, this would increase corporate income and franchise tax revenues by an estimated $12,500,000 in 2000-01.
16. CORPORATE INCOME AND FRANCHISE TAX -- COMBINED REPORTING [LFB Paper 112]
Conference Committee/Legislature: Include the Senate provision to delete the phase-in of single sales factor apportionment. However, retain statutory provisions for sourcing sales from services including the Assembly provision that would allow the taxpayer to elect to attribute receipts of a service to the state in proportion to the direct cost of performing the service. As a result, sales from services would be attributed based on where the benefit of the service is received rather than where the service is performed, which is the case under current law.
Veto by Governor [F-9]: Delete provision.
[Act 9 Vetoed Sections: 1682, 1736 and 9343(22fd)]
[Bill Sections: 1675 thru 1682, 1729 thru 1738, 1745, 1746, 1750 thru 1753, 1758, 1759 and 9443(7)]
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.
