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.]
Joint Finance/Legislature: Delete provision.
[Bill Sections: 1724 thru 1728, 1739, 1741, 1747, 1749, 1754, 1760, 1789 and 9343(17)]
17. DEVELOPMENT AND ENTERPRISE DEVELOPMENT ZONE PROGRAM AND TAX CREDIT MODIFICATIONS [LFB Papers 114 and 115]
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.
Joint Finance: Delete provisions that would: (a) eliminate the current limit on the total amount of tax credits that can be claimed under the development zone program of $33,155,000 and establish a maximum limit on the total amount of tax credits that could be claimed under both the development and enterprise development zone programs of $300,000,000; and (b) authorize the Department of Commerce to designate up to 100 enterprise development zones.
Instead, the following modifications would be made:
a. Increase the maximum amount of tax credits that can be claimed under the development zones program by $5 million, from $33.155 million to $38.155 million.
b. Authorize Commerce to create an additional 15 enterprise development zones. The total number of zones authorized would be 79 (up to 100 could be designated with Joint Committee on Finance approval), including at least 10 of which would be for environmental remediation.
c. Specify that development zone credits could only be used to offset income from the claimant's business activities in the development or enterprise zone.
d. Delete the requirement that 25% of all development zone tax credits claimed must be based on creating or retaining full time jobs for development zone environmental remediation tax credits and provide that environmental remediation tax credits claimed in development and enterprise development zones would not have to be based on activities that created or caused to create jobs.
Conference Committee/Legislature: Include the Joint Finance provision. In addition, designate an area in the City of Kenosha as a development opportunity zone. The Kenosha development opportunity zone would exist for seven years. Any corporation that conducted economic activity in the zone and that, in conjunction with the local governing body of the City of Kenosha, submitted a project plan by July 1, 2000, would be eligible to claim the development zone credit and a development zone investment credit. The maximum amount of tax credits that could be claimed by businesses in the Kenosha development opportunity zone would be $7 million. (This provision is designed to provide assistance to Daimler Chrysler Company for expansion of its Kenosha engine plant.)
Businesses in the Kenosha development opportunity zone would be eligible to claim a development zone investment credit and the development zone credit provided under current law.
Investment Tax Credit. Eligible corporations could claim a credit against income taxes due of 2.5% of the purchase price of depreciable tangible personal property or 1.75% of the purchase price of depreciable tangible personal property that was expensed under section 179 of the Internal Revenue Code (IRC). The property must be purchased after the business is certified for tax benefits by Commerce. The credit would be available only for qualified new and used property that had at least 50% of its use devoted to the conduct of business operations at a location in the development zone or, if the property was mobile, the base of operations of the property for at least 50% of its use must be at a location in a development zone. If the credit was claimed for used property, the claimant may not have used the property for business purposes at a location outside the development zone.
Only taxes due on income generated by or directly related to business activities in the development zone could be offset by the credit. The credit would not be refundable but unused credit amounts could be carried forward fifteen years to offset future tax liabilities on income generated by activities in the development zone. However, if the corporation ceased business operations in the development zone, unused credit amounts could not be carried forward. If certification was revoked, no credit could be claimed beginning with the year in which the revocation occurs and unused credits could not be carried forward to offset tax liabilities in succeeding years. The claimant would be subject to recapture provisions when the investment credit property was disposed of or moved outside the development zone.
Development Zone Tax Credit. A consolidated development zone tax credit can be claimed by businesses in development and enterprise development zones, under both the individual and corporate income and franchise taxes. The credit is based on amounts spent on environmental remediation and the number of full-time jobs created or retained.
Veto by Governor [B-25]: Change the effective date of the provision related to certification of target group members from January 1, 2000, to January 1, 1999.
[Act 9 Sections: 1707g thru 1707m, 1708 thru 1709bb, 1741n thru 1741pp, 1742 thru 1743bb, 1754g thru 1754t, 1755 thru 1756e, 2998g thru 3013, 9310(1)&(2) and 9343(1g),(2)&(22d)]
[Act 9 Vetoed Section: 9343(2)]
[Bill Sections: 1708, 1709, 1742, 1743, 1755, 1756, 1798, 2999, 3001 thru 3012, 3014, 9310(1)&(2) and 9343(2)]
18. DEVELOPMENT ZONES JOBS TAX CREDIT
GPR - $600,000
Governor/Legislature: 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.
19. DEVELOPMENT ZONES SALES TAX CREDIT
GPR - $100,000
Governor/Legislature: 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.
20. DEVELOPMENT ZONES LOCATION CREDIT
GPR $1,000
Governor/Legislature: 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.
21. CORPORATE INCOME AND FRANCHISE TAX -- ACTIVITY NOT CREATING NEXUS [LFB Paper 113]
GPR-REV - $750,000
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.
Joint Finance: Delete provision.
Senate/Legislature: Provide that an out-of-state corporation would not have nexus with Wisconsin and would not be subject to the corporate income and franchise tax if each of the following conditions were met:
a. The out-of-state corporation stores tangible personal property in the state on property not owned by the corporation;
b. The tangible personal property is stored for 90 days or less;
c. The tangible personal property is stored on another person's property and is transferred to the person for manufacturing in the state;
d. The value of manufacturing real estate of the parcel on which the tangible personal property is stored and manufactured was between $10 million and $11 million on January 1, 1999.
This provision would take effect for tax years beginning on or after January 1, 2000, and would reduce corporate income and franchise tax revenues by an estimated $250,000 in 1999-2000 and $500,000 in 2000-01.
[Act 9 Sections: 1722yc and 9343(22dd)]
22. TAX TREATMENT OF CORPORATE PARTNERS AND LIMITED LIABILITY COMPANY MEMBERS
Joint Finance: Modify current corporate income and franchise tax provisions as follows:
a. Define "doing business in this state" to include owning a direct or indirect interest in a general or limited partnership or limited liability company that transacts in the state for pecuniary gain.
b. Provide that the corporate income and franchise tax would be imposed on corporations that derive income from sources within the state or from activities attributable to the state.
c. Provide that a general or limited partner's share of the numerator and the denominator of the partnership's apportionment factors would be included in the numerator and the denominator of the general or limited partner's apportionment factors and for a limited liability company treated as a partnership a member's share of the numerator and the denominator of the limited liability company's apportionment factors would be included in the numerator and the denominator of the member's apportionment factors.
d. Provide that these provisions would first apply to tax years beginning on or after January 1, 1999.
