Copies of Rule and Contact Person
Copies of this proposed rule are available without cost upon request to:
Pamela Haack
Office of Administrative Rules
Dept. of Regulation and Licensing
1400 East Washington Ave., Room 171
P.O. Box 8935
Madison, WI 53708
Telephone (608) 266-0495
Notice of Hearing
Revenue
Notice is hereby given, pursuant to s. 71.80(1)(c), Stats., and s. 71.25(14)(b), Stats., as created by 1997 Wis. Act 299, that Department of Revenue will hold a public hearing at the time and place indicated below, to consider the revision of ch. Tax 2, relating to the use of an alternative apportionment method.
Hearing Information
December 28, 1998 Room #207, GEF 3
Monday 125 South Webster Street
10:00 a.m. Madison, Wisconsin
Handicap access is available at the Butler Street entrance of the building.
Comments on the Rule
Interested persons are invited to appear at the hearing and may make an oral presentation. It is requested that written comments reflecting the oral presentation be given to the department at the hearing. Written comments may also be submitted to the contact person shown below no later than January 11, 1999, and will be given the same consideration as testimony presented at the hearing.
Contact Person
Mark Wipperfurth
Department of Revenue
125 South Webster Street
P.O. Box 8933
Madison, WI 53708-8933
(608) 266-8253
Analysis by the Department of Revenue
Statutory authority: ss. 71.80(1)(c), and 71.25(14)(b), as created by 1997 Wis. Act 299
Statute interpreted: s. 71.25(14)
SECTION 1. Tax 2.39(3)(a)(intro.) is amended, to exclude corporations that qualify for the use of an alternative apportionment method from the rule relating to the general apportionment method.
A second note at the end of Tax 2.39(3) is created, to include a reference to Tax 2.395.
SECTION 2. Tax 2.395 is created, to address the use of an alternative apportionment method. This alternative was created by s. 2r, 1997 Wis. Act 299, effective for taxable years beginning on January 1, 1998.
Text of Rule
SECTION 1. Tax 2.39(3)(a)(intro.) is amended to read:
Tax 2.39(3)(a)(intro.) For the reporting of income for the purposes of franchise or income taxation, all businesses except financial organizations and public utilities as defined in ss. 71.04(8) and 71.25(10), Stats., and corporations that are authorized to use an alternative method of apportionment under s. 71.25(14), Stats., shall use an apportionment fraction composed of a sales factor representing 50% of the fraction, a property factor representing 25% of the fraction and a payroll factor representing 25% of the fraction. Property, payroll or sales related to the production of nonapportionable income described in s. 71.04(1) and (4) or 71.25(5)(b), Stats., may not be included in either the numerator or the denominator of any of the apportionment factors. If one of these factors is omitted pursuant to s. 71.04(10) or 71.25(11), Stats., the percentages of the fraction represented by the remaining factors shall be adjusted as follows:
Note to Revisor: Insert the following note after the first note at the end of Tax 2.39(3):
Note: See s. Tax 2.395 for an alternative method of apportioning the income of certain corporations.
SECTION 2. Tax 2.395 is created to read:
Tax 2.395 Alternative method of apportionment. (1) DEFINITIONS. In this section:
(a) “Corporate restructuring" means the transfer by a corporation of part or all of its property and employes to one or more subsidiaries in exchange for 100% of the subsidiary's stock.
(b) “Corporation" means a corporation for profit that is incorporated under ch. 180, Stats., or under the law of another state, the District of Columbia or a foreign country and is subject to tax under s. 71.23(1) or (2), Stats.
(c) “Subsidiary" means a corporation that files an application under this section with a corporation that directly or indirectly owns 100 % of the total value or share of all classes of its stock outstanding.
(d) “Unfair representation of the degree of business activity in this state" means that the sum of the Wisconsin tax liability of the corporation and its subsidiaries calculated under s. 71.25(6), Stats., exceeds 200% of the Wisconsin tax liability that the corporation would have owed if corporate restructuring had not occurred and results in at least $2 million of additional Wisconsin tax liability.
Note: This definition applies only for purposes of s. 71.25(14), Stats.
(e) “Wisconsin tax liability" means the gross tax computed under s. 71.23(1) or (2), Stats.
(2) WHO MAY FILE AN APPLICATION. A corporation together with its subsidiary may file an application on or before January 1, 2000 to use an alternative method of apportionment under this section if all of the following conditions are met:
(a) The corporation is not a financial organization as defined in s. 71.25(10)(a), Stats., a public utility as defined in s. 71.25(10)(b), Stats., or a tax-option corporation as defined in s. 71.34(2), Stats.
(b) The corporation is a party to a corporate restructuring that occurs after June 30, 1998 and before January 1, 2000.
(c) The corporation retains direct or indirect ownership of 100% of the subsidiary's stock and the subsidiary has not been engaged in business in or outside this state since the date of its incorporation.
(d) As a result of the corporate restructuring, the use of the allocation and separate accounting method or the apportionment method prescribed under s. 71.25(6), Stats., would result in an unfair representation of the degree of business activity in this state, given the same level of sales, payroll and property for the corporation and its subsidiaries.
(3) CONTENT OF THE APPLICATION. The application shall set forth a complete statement of the facts and reasons relating to the request to use an alternative method of apportioning income to Wisconsin, including the following:
(a) The full name, address and federal employer identification number of the corporation applying for the change in apportionment method.
(b) The full name, address and federal employer identification number of the subsidiaries that are a party to the corporate restructuring. If this information is not available when the application is filed, it shall be provided to the department as an amendment to the application at least 60 days before a return using an alternative apportionment method is filed.
(c) The corporation's and the subsidiaries' taxable year. The subsidiaries shall have the same taxable year as the corporation.
(d) The taxable year for which the corporation wishes the change to become effective.
(e) A detailed description of the corporate structure and business operations before the corporate restructuring.
(f) A detailed description of the corporate structure and business operations after the corporate restructuring.
(g) The present allocation or apportionment method used in Wisconsin.
(h) A description of the alternative apportionment method requested.
(i) A complete and precise statement of the reasons for the modification requested, including why the present method does not fairly represent the activities of the corporation and its subsidiaries in Wisconsin.
(j) Calculations using data from the most recently filed tax return prior to July 1, 1998, showing that the Wisconsin tax liability of the corporation and its subsidiaries using the present method of allocation or apportionment would result in an unfair representation of the degree of business activity in this state.
(k) Calculations using data from the most recently filed tax return prior to July 1, 1998, showing that the Wisconsin tax liability of the corporation and its subsidiaries using the proposed alternative method of apportionment does not result in less Wisconsin franchise or income tax than the corporation would be liable for without restructuring.
(L) Any other information relevant to the application the department requires or the corporation believes may have a bearing on the department's decision about whether to grant the apportionment method requested.
(m) Whether the corporation is being audited by the department at the time of the application.
Note: The application shall be mailed to the following address: Administrator of the Division of Income, Sales and Excise Taxes, Wisconsin Department of Revenue, P.O. Box 8933, Madison, WI 53708-8933.
(4) ALTERNATIVE METHODS OF APPORTIONMENT. The department may authorize any one or a combination of the following alternative methods of apportionment:
(a) Excluding any one or more of the property, payroll and sales factors.
(b) Weighting the factors other than 50% sales, 25% property and 25% payroll.
(c) Allocating sales, other than sales of tangible personal property, to the state in which the corporation's customers are located for purposes of computing the numerator of the sales factor. For purposes of this paragraph:
1. A sale is allocated to the location where the customer receives the benefit of the service.
2. If the customer receives the benefit of the service in more than one state, the gross receipts are includable in the numerator of the apportionment factor in proportion to the extent the recipient receives the benefit of the service in each state.
(d) Including one or more additional factors which will fairly represent the corporation's or the subsidiaries' business activity in this state.
(e) Allowing one method for apportioning the business income of the corporation and another method for apportioning the business income of a subsidiary.
(f) Allowing the corporation and one or more subsidiaries to compute their Wisconsin tax liability by adding together their apportionable income and apportionment factors, eliminating any intercompany transactions, computing the Wisconsin tax liability as though the group were one taxpayer and dividing the combined Wisconsin tax liability among the corporations based on their share of the group's Wisconsin business income.
(g) Allowing any other apportionment method that will fairly represent the corporation's and the subsidiaries' business activity in this state.
(5) REVIEW OF THE APPLICATION. The department shall review the information submitted and follow the procedure specified in s. 71.25(14)(c), Stats., before issuing a written decision regarding the use of an alternative method of apportionment. The corporation shall receive written approval before using the alternative method.
(6) YEARS FOR WHICH USE OF ALTERNATIVE METHOD OF APPORTIONMENT APPLIES. (a) Except as provided in par. (b), once an alternative method of apportionment has been approved for a taxable year, the corporation shall use it for that taxable year and all subsequent taxable years, unless the department finds the use of the alternative apportionment method is no longer appropriate as determined under sub. (7)(b).
(b) Notwithstanding par. (a), the aggregate of the corporation's and the subsidiaries' Wisconsin tax liability shall be the greater of the Wisconsin tax liability calculated using the approved alternative apportionment or the Wisconsin tax liability calculated as if the corporate restructuring had not taken place.
(7) REVOCATION OF USE OF ALTERNATIVE METHOD OF APPORTIONMENT.
(a) 1. If the department upon audit or review finds that the use of the apportionment method prescribed in s. 71.25(6), Stats., does not result in an unfair representation of the degree of business activity in this state for the first taxable year for which an alternative method of apportionment was approved, the corporation and its subsidiaries shall recalculate their Wisconsin tax liabilities under s. 71.25(6), Stats.
2. If the department upon audit or review finds that the use of the alternative apportionment method in subsequent taxable years is no longer appropriate as determined under par. (b), the corporation and its subsidiaries shall recalculate their Wisconsin tax liabilities under s. 71.25(6), Stats., for each of the subsequent taxable years.
(b) In determining whether a corporation may continue to use the alternative method of apportionment, the department shall look for a continued substantial amount of difference between the tax liability calculated pursuant to s. 71.25(6), Stats., and the tax liability had the restructuring not taken place. The department shall also consider any additional information the corporation has submitted pursuant to sub. (8).
(c) If the department finds for a period of at least three consecutive taxable years that a substantial difference in tax liability as determined in par. (b) no longer exists, the corporation may no longer use the approved alternative apportionment method.
(d) If the department terminates the approved alternative apportionment method, in a subsequent taxable year the corporation may request a new alternative method of apportionment. The department shall submit the new proposed alternative method of apportionment to the co-chairpersons of the joint committee for review of administrative rules pursuant to s. 71.25(14)(c), Stats.
