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.
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.
