SB503: Bill Text

LRB-3740/1

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2015 - 2016 LEGISLATURE

2015 Senate BILL 503

January 6, 2016 - Introduced by Senators Marklein, Gudex, Olsen and Roth, cosponsored by Representatives Macco, Kooyenga, Katsma, Jarchow, Novak, Tauchen, Duchow, Knodl, E. Brooks, R. Brooks, Jacque and Murphy. Referred to Committee on Revenue, Financial Institutions, and Rural Issues.

SB503,1,11 An Act to repeal 20.566 (1) (hn), 71.10 (1m) (b) 1. and 2., 71.30 (2m) (b) 1. and 2., 71.80 (1m) (b) 1. and 2. and 73.03 (28d); to renumber and amend 71.10 (1m) (b) (intro.), 71.30 (2m) (b) (intro.), 71.80 (1m) (b) (intro.) and 77.54 (60) (a); to amend 71.07 (5n) (a) 3., 71.07 (5n) (a) 4., 71.10 (1m) (c), 71.28 (5n) (a) 3., 71.28 (5n) (a) 4., 71.30 (2m) (c), 71.80 (1m) (c), 71.80 (9m) (intro.), 73.16 (3) (b), 77.51 (2), 77.51 (11d), 77.54 (60) (b), 77.54 (60) (c) and 77.61 (19) (intro.); and to create 73.03 (72), 73.03 (73), 77.51 (12t), 77.54 (60) (bm) and 77.54 (60) (d) 2., 3. and 4. of the statutes; relating to: individual and corporate income and franchise taxes; sales and use taxes; administration of tax laws; providing an exemption from emergency rule procedures; and requiring the exercise of rule-making authority.

Analysis by the Legislative Reference Bureau

This bill makes various changes to Wisconsin tax law related to individual and corporate income and franchise taxes, sales and use taxes, and the administration of tax laws.

Under current law, the Department of Revenue (DOR) may impose certain penalties if a taxpayer fails to produce records and documents requested by DOR to substantiate amounts or other information required to be shown on a tax return. This bill provides that those penalties may not be imposed until after DOR has issued a summons seeking the records and documents, and the taxpayer has failed to comply with the summons.

Under current law, if a taxpayer engages in a transaction without economic substance to create a loss, to reduce taxable income, or to increase credits allowed in determining Wisconsin tax, DOR may disregard the transaction for purposes of calculating the taxpayer's tax liability. This bill eliminates the factors under current law that determine whether a transaction has economic substance and replaces those factors with the factors set forth in federal law.

Under current law, a person may claim an income or franchise tax credit based on the person's qualified production activities income derived from manufacturing or agriculture in this state. Qualified production activities income includes certain direct costs and indirect costs, which are defined to include ordinary and necessary expenses paid or incurred in carrying on a trade or business that are deductible under the Internal Revenue Code. This bill changes the definitions of direct costs and indirect costs to also include a reasonable allowance for the exhaustion and wear and tear (including a reasonable allowance for obsolescence) of property that is deductible as depreciation under the Internal Revenue Code.

For income tax purposes, current law provides that any income of a nonresident individual, estate, or trust may be taxed by the state in which the business, property, or service from which the income is derived is located. This bill requires DOR to promulgate rules establishing the criteria to be used in determining whether a business, property, or service is located in this state for income and franchise tax purposes. The bill also prohibits DOR from relying on any factors not set forth in the rules when making the determination.

Under current law, DOR may tax the income of a taxpayer if the taxpayer is subject to the jurisdiction of this state, and DOR only taxes so much of the taxpayer's income that is allocated or apportioned to this state under a set of rules set forth in current law. Current law also provides that, if certain income of a taxpayer is not taxable by another state because the taxpayer is not subject to the jurisdiction of that state, DOR may tax that income under the state's throwback law. This bill requires DOR to promulgate rules establishing the criteria to be used in determining whether a taxpayer is subject to the jurisdiction of this state or any other state for income and franchise tax purposes. The bill also prohibits DOR from relying on any factors not set forth in the rules when making the determination.

Under current law, there is a sales and use tax exemption for property, items, and services sold by a contractor as part of a lump sum contract for real property construction activities if the total sales price attributable to the taxable materials is less than 10 percent of the total contract price. Under the bill, the exemption for lump sum contracts is expanded to apply to all construction contracts involving real property construction activities if the total sales price of the taxable materials is less than 10 percent of the total contract price. If the exemption applies, the contractor is the consumer of, and pays the sales tax on, the materials.

The bill also provides that, if the prime contract qualifies for the exemption, the exemption applies to all subcontracts entered into with respect to the real property construction activities. If the exemption applies to a subcontract, the subcontractor is the consumer of, and pays the sales tax on, the materials.

This bill also eliminates DOR's obligation and authority to participate in the Multistate Tax Commission Audit Program.

Because this bill relates to an exemption from state or local taxes, it may be referred to the Joint Survey Committee on Tax Exemptions for a report to be printed as an appendix to the bill.

For further information see the state and local fiscal estimate, which will be printed as an appendix to this bill.

The people of the state of Wisconsin, represented in senate and assembly, do enact as follows:

SB503,1 Section 1. 20.566 (1) (hn) of the statutes is repealed.

SB503,2 Section 2. 71.07 (5n) (a) 3. of the statutes, as affected by 2015 Wisconsin Act 55, is amended to read:

SB503,3,11 71.07 (5n) (a) 3. "Direct costs" includes all of the claimant's ordinary and necessary expenses paid or incurred during the taxable year in carrying on the trade or business that are deductible as business expenses, and a reasonable allowance for the exhaustion and wear and tear, including a reasonable allowance for obsolescence, of property that is deductible as depreciation, under the Internal Revenue Code, as defined in s. 71.01 (6), other than the sum of the cost of goods sold that are allocable to the claimant's production gross receipts under subd. 8., and identified as direct costs in the claimant's managerial or cost accounting records.

SB503,3 Section 3. 71.07 (5n) (a) 4. of the statutes, as affected by 2015 Wisconsin Act 55, is amended to read:

SB503,4,5 71.07 (5n) (a) 4. "Indirect costs" includes all of the claimant's ordinary and necessary expenses paid or incurred during the taxable year in carrying on the trade or business that are deductible as business expenses, and a reasonable allowance for the exhaustion and wear and tear, including a reasonable allowance for obsolescence, of property that is deductible as depreciation, under the Internal Revenue Code, as defined in s. 71.01 (6), other than cost of goods sold and direct costs, and identified as indirect costs in the claimant's managerial or cost accounting records.

SB503,4 Section 4. 71.10 (1m) (b) (intro.) of the statutes is renumbered 71.10 (1m) (b) and amended to read:

SB503,4,10 71.10 (1m) (b) A transaction has economic substance only if the taxpayer shows all of the following: the transaction is treated as having economic substance under section 7701 (o) of the Internal Revenue Code.

SB503,5 Section 5. 71.10 (1m) (b) 1. and 2. of the statutes are repealed.

SB503,6 Section 6. 71.10 (1m) (c) of the statutes is amended to read:

SB503,4,19 71.10 (1m) (c) With respect to transactions a transaction between members of a controlled group, as defined in section 267 (f) (1) of the Internal Revenue Code, such transactions the transaction shall be presumed to lack economic substance, and the taxpayer shall bear the burden of establishing by clear and convincing a preponderance of the evidence that a the transaction or a the series of transactions between the taxpayer and one or more members of the controlled group has economic substance.

SB503,7 Section 7. 71.28 (5n) (a) 3. of the statutes, as affected by 2015 Wisconsin Act 55, is amended to read:

SB503,5,4 71.28 (5n) (a) 3. "Direct costs" includes all of the claimant's ordinary and necessary expenses paid or incurred during the taxable year in carrying on the trade or business that are deductible as business expenses, and a reasonable allowance for the exhaustion and wear and tear, including a reasonable allowance for obsolescence, of property that is deductible as depreciation, under the Internal Revenue Code, as defined in s. 71.01 (6), other than the sum of the cost of goods sold that are allocable to the claimant's production gross receipts under subd. 8., and identified as direct costs in the claimant's managerial or cost accounting records.

SB503,8 Section 8. 71.28 (5n) (a) 4. of the statutes, as affected by 2015 Wisconsin Act 55, is amended to read:

SB503,5,13 71.28 (5n) (a) 4. "Indirect costs" includes all of the claimant's ordinary and necessary expenses paid or incurred during the taxable year in carrying on the trade or business that are deductible as business expenses, and a reasonable allowance for the exhaustion and wear and tear, including a reasonable allowance for obsolescence, of property that is deductible as depreciation, under the Internal Revenue Code, as defined in s. 71.01 (6), other than cost of goods sold and direct costs, and identified as indirect costs in the claimant's managerial or cost accounting records.

SB503,9 Section 9. 71.30 (2m) (b) (intro.) of the statutes is renumbered 71.30 (2m) (b) and amended to read:

SB503,5,18 71.30 (2m) (b) A transaction has economic substance only if the taxpayer shows both of the following: the transaction is treated as having economic substance under section 7701 (o) of the Internal Revenue Code.

SB503,10 Section 10. 71.30 (2m) (b) 1. and 2. of the statutes are repealed.

SB503,11 Section 11. 71.30 (2m) (c) of the statutes is amended to read:

SB503,6,2 71.30 (2m) (c) With respect to transactions a transaction between members of a controlled group, as defined in section 267 (f) (1) of the Internal Revenue Code, such transactions the transaction shall be presumed to lack economic substance, and the taxpayer shall bear the burden of establishing by clear and convincing a preponderance of the evidence that a the transaction or a the series of transactions between the taxpayer and one or more members of the controlled group has economic substance.

SB503,12 Section 12. 71.80 (1m) (b) (intro.) of the statutes is renumbered 71.80 (1m) (b) and amended to read:

SB503,6,7 71.80 (1m) (b) A transaction has economic substance only if the taxpayer shows both of the following: the transaction is treated as having economic substance under section 7701 (o) of the Internal Revenue Code.

SB503,13 Section 13. 71.80 (1m) (b) 1. and 2. of the statutes are repealed.

SB503,14 Section 14. 71.80 (1m) (c) of the statutes is amended to read:

SB503,6,16 71.80 (1m) (c) With respect to transactions a transaction between members of a controlled group, as defined in section 267 (f) (1) of the Internal Revenue Code, such transactions the transaction shall be presumed to lack economic substance, and the taxpayer shall bear the burden of establishing by clear and convincing a preponderance of the evidence that a the transaction or a the series of transactions between the taxpayer and one or more members of the controlled group has economic substance.

SB503,15 Section 15. 71.80 (9m) (intro.) of the statutes is amended to read:

SB503,7,2 71.80 (9m) Failure to produce records. (intro.) A person who fails to produce records or documents, as provided under ss. s. 71.74 (2) and 73.03 (9), that support amounts or other information required to be shown on any return required under this chapter and fails to comply in good faith with a summons issued pursuant to s. 73.03 (9) seeking those records and documents may be subject to any of the following penalties, as determined by the department, except that the department may not impose a penalty under this subsection if the person shows that under all facts and circumstances the person's response, or failure to respond, to the department's request was reasonable or justified by factors beyond the person's control:

SB503,16 Section 16. 73.03 (28d) of the statutes is repealed.

SB503,17 Section 17. 73.03 (72) of the statutes is created to read:

SB503,7,9 73.03 (72) To promulgate rules establishing the criteria to be used in determining whether a business, property, or service has its situs in this state, including for purposes of determining situs of income under s. 71.04, 71.25, 71.255 (5), or 71.362. In determining whether a business, property, or service has its situs in this state, the department may not consider criteria not specified in the rules.

SB503,18 Section 18. 73.03 (73) of the statutes is created to read:

SB503,7,16 73.03 (73) To promulgate rules establishing the criteria to be used in determining to which states' jurisdiction a taxpayer is subject for income or franchise tax purposes for any part of a taxable year, including for purposes of determining apportionment of income under s. 71.04, 71.25, 71.255 (5), or 71.362. In determining whether a taxpayer is subject to the jurisdiction of this state or another state for a taxable year, the department may not consider criteria not specified in the rules.

SB503,19 Section 19. 73.16 (3) (b) of the statutes is amended to read:

SB503,8,3 73.16 (3) (b) This subsection does not apply to any period associated with an audit determination, if the period begins after the promulgation of a rule, dissemination of written guidance to the public or to the person who is subject to the audit determination, the effective date of a statute, or the date on which a tax appeals commission or court decision becomes final and conclusive and if the rule, guidance, statute, or decision imposes the liability as a result of the tax issue described in par. (a) 1. This subsection does not apply to any period associated with an audit determination if the taxpayer did not give the department employee adequate and accurate information regarding the tax issue in the prior audit determination or if the tax issue was settled in the prior audit determination by a written agreement between the department and the taxpayer.

SB503,20 Section 20. 77.51 (2) of the statutes is amended to read:

SB503,8,22 77.51 (2) "Contractors" and "subcontractors" are the consumers of tangible personal property or items or goods under s. 77.52 (1) (b) or (d) used by them in real property construction activities, and the sales and use tax applies to the sale of tangible personal property or items or goods under s. 77.52 (1) (b) or (d) to them. A contractor engaged primarily in real property construction activities may use resale certificates only with respect to purchases of tangible personal property or items or goods under s. 77.52 (1) (b) or (d) which the contractor has sound reason to believe the contractor will sell to customers for whom the contractor will not perform real property construction activities involving the use of such tangible personal property or items or goods under s. 77.52 (1) (b) or (d). In this subsection, "real property construction activities" means activities that occur at a site where tangible personal property or items or goods under s. 77.52 (1) (b) or (d) that are applied or adapted to the use or purpose to which real property is devoted are affixed to that real property, if the intent of the person who affixes that property is to make a permanent accession to the real property. In this subsection, "real property construction activities" does not include affixing property subject to tax under s. 77.52 (1) (c) to real property or affixing to real property tangible personal property that remains tangible personal property after it is affixed.

SB503,21 Section 21. 77.51 (11d) of the statutes is amended to read:

SB503,9,2 77.51 (11d) For purposes of subs. (1ag), (1f), (3pf), and (9p) and ss. 77.52 (20) and (21), 77.522, and 77.54 (51), and (52), and (60), "product" includes tangible personal property, and items, property, and goods under s. 77.52 (1) (b), (c), and (d), and services.

SB503,22 Section 22. 77.51 (12t) of the statutes is created to read:

SB503,9,8 77.51 (12t) "Real property construction activities" means activities that occur at a site where tangible personal property or items, property, or goods under s. 77.52 (1) (b), (c), or (d) that are applied or adapted to the use or purpose to which real property is devoted are affixed to that real property, if the intent of the person who affixes that property is to make a permanent accession to the real property.

SB503,23 Section 23. 77.54 (60) (a) of the statutes is renumbered 77.54 (60) (d) and amended to read:

SB503,9,11 77.54 (60) (d) In this subsection,"lump sum:

SB503,9,20 1. "Construction contract" means a contract to perform real property construction activities and to provide tangible personal property, items or property under s. 77.52 (1) (b) or (c), or taxable services and for which the contractor quotes the charge for labor, services of subcontractors, tangible personal property, items and property under s. 77.52 (1) (b) and (c), and taxable services as one price, including a contract for which the contractor itemizes the charges for labor, services of subcontractors, tangible personal property, items and property under s. 77.52 (1) (b) and (c), and taxable services as part of a schedule of values or similar document construction materials.

SB503,24 Section 24. 77.54 (60) (b) of the statutes is amended to read:

SB503,9,25 77.54 (60) (b) The sales price from the sale of and the storage, use, or other consumption of tangible personal property, items and property under s. 77.52 (1) (b) and (c), and taxable services construction materials that are sold by a prime contractor as part of a lump sum construction contract, if the total sales price of all such taxable products construction materials is less than 10 percent of the total amount of the lump sum construction contract. Except as provided in par. (c), the prime contractor is the consumer of such taxable products the construction materials and shall pay the tax imposed under this subchapter on the taxable products construction materials.

SB503,25 Section 25. 77.54 (60) (bm) of the statutes is created to read:

SB503,10,9 77.54 (60) (bm) 1. The sales price from the sale of and the storage, use, or other consumption of construction materials that are sold by a subcontractor as part of a construction contract, if any of the following applies:

SB503,10,10 a. The sales price is exempted under par. (b).

SB503,10,12 b. The sales price is less than 10 percent of the total amount of the construction contract.

SB503,10,15 2. The subcontractor is the consumer of the construction materials exempted under this paragraph and shall pay the tax imposed under this subchapter on the construction materials.

SB503,26 Section 26. 77.54 (60) (c) of the statutes is amended to read:

SB503,10,25 77.54 (60) (c) If the lump sum construction contract under par. (b) is entered into with an entity that is exempt from taxation under sub. (9a), the prime contractor is the consumer of all taxable products construction materials used by the prime contractor in real property construction activities, but the prime contractor may purchase without tax, for resale, tangible personal property, items and property under s. 77.52 (1) (b) and (c), and taxable services construction materials that are sold by the prime contractor as part of the lump sum construction contract with the entity and that are not consumed by the prime contractor in real property construction activities.

SB503,27 Section 27. 77.54 (60) (d) 2., 3. and 4. of the statutes are created to read:

SB503,11,6 77.54 (60) (d) 2. "Construction materials" means tangible personal property the selling, licensing, leasing, or renting of which is taxable under s. 77.52 (1) (a); items the selling, licensing, leasing, or renting of which are taxable under s. 77.52 (1) (b); property the leasing of which is taxable under s. 77.52 (1) (c); and services the selling, licensing, performing, or furnishing of which are taxable under s. 77.52 (2).

SB503,11,8 3. "Prime contractor" means a contractor who enters into a construction contract with an owner of real property.

SB503,11,10 4. "Subcontractor" means a contractor who enters into a construction contract with a prime contractor or another subcontractor.

SB503,28 Section 28. 77.61 (19) (intro.) of the statutes is amended to read:

SB503,11,20 77.61 (19) (intro.) A person who fails to produce records or documents, as provided under s. 73.03 (9) or 77.59 (2), that support amounts or other information required to be shown on a return required under s. 77.58 and fails to comply in good faith with a summons issued pursuant to s. 73.03 (9) seeking those records and documents may be subject to any of the following penalties, as determined by the department, except that the department may not impose a penalty under this subsection if the person shows that under all facts and circumstances the person's response, or failure to respond, to the department's request was reasonable or justified by factors beyond the person's control:

SB503,29 Section 29. Nonstatutory provisions.

SB503,11,24 (1) The repeal of sections 20.566 (1) (hn) and 73.03 (28d) of the statutes does not affect the validity of any assessment based entirely or in part on information or documents obtained from the multistate tax commission prior to the repeal.

SB503,12,4 (2) The department of revenue shall submit in proposed form the rules required under section 73.03 (72) and (73) of the statutes, as created by this act, to the legislative council staff under section 227.15 (1) of the statutes no later than the first day of the 6th month beginning after the effective date of this subsection.