2015 - 2016 LEGISLATURE
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 1An Act to repeal 20.566 (1) (hn), 71.10 (1m) (b) 1. and 2., 71.30 (2m) (b) 1. and
22., 71.80 (1m) (b) 1. and 2. and 73.03 (28d); to renumber and amend 71.10
3(1m) (b) (intro.), 71.30 (2m) (b) (intro.), 71.80 (1m) (b) (intro.) and 77.54 (60) (a);
4to amend 71.07 (5n) (a) 3., 71.07 (5n) (a) 4., 71.10 (1m) (c), 71.28 (5n) (a) 3.,
571.28 (5n) (a) 4., 71.30 (2m) (c), 71.80 (1m) (c), 71.80 (9m) (intro.), 73.16 (3) (b),
677.51 (2), 77.51 (11d), 77.54 (60) (b), 77.54 (60) (c) and 77.61 (19) (intro.); and
7to create 73.03 (72), 73.03 (73), 77.51 (12t), 77.54 (60) (bm) and 77.54 (60) (d)
82., 3. and 4. of the statutes; relating to: individual and corporate income and
9franchise taxes; sales and use taxes; administration of tax laws; providing an
10exemption from emergency rule procedures; and requiring the exercise of
11rule-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 1Section 1. 20.566 (1) (hn) of the statutes is repealed.
SB503,2 2Section 2. 71.07 (5n) (a) 3. of the statutes, as affected by 2015 Wisconsin Act
355
, is amended to read:
SB503,3,114 71.07 (5n) (a) 3. "Direct costs" includes all of the claimant's ordinary and
5necessary expenses paid or incurred during the taxable year in carrying on the trade
6or business that are deductible as business expenses, and a reasonable allowance for
7the exhaustion and wear and tear, including a reasonable allowance for obsolescence,
8of property that is deductible as depreciation,
under the Internal Revenue Code, as
9defined in s. 71.01 (6), other than the sum of the cost of goods sold that are allocable
10to the claimant's production gross receipts under subd. 8.,
and identified as direct
11costs in the claimant's managerial or cost accounting records.
SB503,3 12Section 3. 71.07 (5n) (a) 4. of the statutes, as affected by 2015 Wisconsin Act
1355
, is amended to read:
SB503,4,514 71.07 (5n) (a) 4. "Indirect costs" includes all of the claimant's ordinary and
15necessary expenses paid or incurred during the taxable year in carrying on the trade

1or business that are deductible as business expenses, and a reasonable allowance for
2the exhaustion and wear and tear, including a reasonable allowance for obsolescence,
3of property that is deductible as depreciation,
under the Internal Revenue Code, as
4defined in s. 71.01 (6),
other than cost of goods sold and direct costs, and identified
5as indirect costs in the claimant's managerial or cost accounting records.
SB503,4 6Section 4. 71.10 (1m) (b) (intro.) of the statutes is renumbered 71.10 (1m) (b)
7and amended to read:
SB503,4,108 71.10 (1m) (b) A transaction has economic substance only if the taxpayer shows
9all of the following:
the transaction is treated as having economic substance under
10section 7701 (o) of the Internal Revenue Code.
SB503,5 11Section 5. 71.10 (1m) (b) 1. and 2. of the statutes are repealed.
SB503,6 12Section 6. 71.10 (1m) (c) of the statutes is amended to read:
SB503,4,1913 71.10 (1m) (c) With respect to transactions a transaction between members of
14a controlled group, as defined in section 267 (f) (1) of the Internal Revenue Code, such
15transactions the transaction shall be presumed to lack economic substance, and the
16taxpayer shall bear the burden of establishing by clear and convincing a
17preponderance of the
evidence that a the transaction or a the series of transactions
18between the taxpayer and one or more members of the controlled group has economic
19substance.
SB503,7 20Section 7. 71.28 (5n) (a) 3. of the statutes, as affected by 2015 Wisconsin Act
2155
, is amended to read:
SB503,5,422 71.28 (5n) (a) 3. "Direct costs" includes all of the claimant's ordinary and
23necessary expenses paid or incurred during the taxable year in carrying on the trade
24or business that are deductible as business expenses, and a reasonable allowance for
25the exhaustion and wear and tear, including a reasonable allowance for obsolescence,

1of property that is deductible as depreciation,
under the Internal Revenue Code, as
2defined in s. 71.01 (6), other than the sum of the cost of goods sold that are allocable
3to the claimant's production gross receipts under subd. 8.,
and identified as direct
4costs in the claimant's managerial or cost accounting records.
SB503,8 5Section 8. 71.28 (5n) (a) 4. of the statutes, as affected by 2015 Wisconsin Act
655
, is amended to read:
SB503,5,137 71.28 (5n) (a) 4. "Indirect costs" includes all of the claimant's ordinary and
8necessary expenses paid or incurred during the taxable year in carrying on the trade
9or business that are deductible as business expenses, and a reasonable allowance for
10the exhaustion and wear and tear, including a reasonable allowance for obsolescence,
11of property that is deductible as depreciation,
under the Internal Revenue Code, as
12defined in s. 71.01 (6),
other than cost of goods sold and direct costs, and identified
13as indirect costs in the claimant's managerial or cost accounting records.
SB503,9 14Section 9. 71.30 (2m) (b) (intro.) of the statutes is renumbered 71.30 (2m) (b)
15and amended to read:
SB503,5,1816 71.30 (2m) (b) A transaction has economic substance only if the taxpayer shows
17both of the following:
the transaction is treated as having economic substance under
18section 7701 (o) of the Internal Revenue Code.
SB503,10 19Section 10. 71.30 (2m) (b) 1. and 2. of the statutes are repealed.
SB503,11 20Section 11. 71.30 (2m) (c) of the statutes is amended to read:
SB503,6,221 71.30 (2m) (c) With respect to transactions a transaction between members of
22a controlled group, as defined in section 267 (f) (1) of the Internal Revenue Code, such
23transactions
the transaction shall be presumed to lack economic substance, and the
24taxpayer shall bear the burden of establishing by clear and convincing a
25preponderance of the
evidence that a the transaction or a the series of transactions

1between the taxpayer and one or more members of the controlled group has economic
2substance.
SB503,12 3Section 12. 71.80 (1m) (b) (intro.) of the statutes is renumbered 71.80 (1m) (b)
4and amended to read:
SB503,6,75 71.80 (1m) (b) A transaction has economic substance only if the taxpayer shows
6both of the following:
the transaction is treated as having economic substance under
7section 7701 (o) of the Internal Revenue Code.
SB503,13 8Section 13. 71.80 (1m) (b) 1. and 2. of the statutes are repealed.
SB503,14 9Section 14. 71.80 (1m) (c) of the statutes is amended to read:
SB503,6,1610 71.80 (1m) (c) With respect to transactions a transaction between members of
11a controlled group, as defined in section 267 (f) (1) of the Internal Revenue Code, such
12transactions
the transaction shall be presumed to lack economic substance, and the
13taxpayer shall bear the burden of establishing by clear and convincing a
14preponderance of the
evidence that a the transaction or a the series of transactions
15between the taxpayer and one or more members of the controlled group has economic
16substance.
SB503,15 17Section 15. 71.80 (9m) (intro.) of the statutes is amended to read:
SB503,7,218 71.80 (9m) Failure to produce records. (intro.) A person who fails to produce
19records or documents, as provided under ss. s. 71.74 (2) and 73.03 (9), that support
20amounts or other information required to be shown on any return required under
21this chapter and fails to comply in good faith with a summons issued pursuant to s.
2273.03 (9) seeking those records and documents
may be subject to any of the following
23penalties, as determined by the department, except that the department may not
24impose a penalty under this subsection if the person shows that under all facts and

1circumstances the person's response, or failure to respond, to the department's
2request was reasonable or justified by factors beyond the person's control:
SB503,16 3Section 16. 73.03 (28d) of the statutes is repealed.
SB503,17 4Section 17. 73.03 (72) of the statutes is created to read:
SB503,7,95 73.03 (72) To promulgate rules establishing the criteria to be used in
6determining whether a business, property, or service has its situs in this state,
7including for purposes of determining situs of income under s. 71.04, 71.25, 71.255
8(5), or 71.362. In determining whether a business, property, or service has its situs
9in this state, the department may not consider criteria not specified in the rules.
SB503,18 10Section 18. 73.03 (73) of the statutes is created to read:
SB503,7,1611 73.03 (73) To promulgate rules establishing the criteria to be used in
12determining to which states' jurisdiction a taxpayer is subject for income or franchise
13tax purposes for any part of a taxable year, including for purposes of determining
14apportionment of income under s. 71.04, 71.25, 71.255 (5), or 71.362. In determining
15whether a taxpayer is subject to the jurisdiction of this state or another state for a
16taxable year, the department may not consider criteria not specified in the rules.
SB503,19 17Section 19. 73.16 (3) (b) of the statutes is amended to read:
SB503,8,318 73.16 (3) (b) This subsection does not apply to any period associated with an
19audit determination, if the period begins after the promulgation of a rule,
20dissemination of written guidance to the public or to the person who is subject to the
21audit determination, the effective date of a statute, or the date on which a tax appeals
22commission or court decision becomes final and conclusive and if the rule, guidance,
23statute, or decision imposes the liability as a result of the tax issue described in par.
24(a) 1. This subsection does not apply to any period associated with an audit
25determination if the taxpayer did not give the department employee adequate and

1accurate information regarding the tax issue in the prior audit determination or if
2the tax issue was settled in the prior audit determination by a written agreement
3between the department and the taxpayer.
SB503,20 4Section 20. 77.51 (2) of the statutes is amended to read:
SB503,8,225 77.51 (2) "Contractors" and "subcontractors" are the consumers of tangible
6personal property or items or goods under s. 77.52 (1) (b) or (d) used by them in real
7property construction activities, and the sales and use tax applies to the sale of
8tangible personal property or items or goods under s. 77.52 (1) (b) or (d) to them. A
9contractor engaged primarily in real property construction activities may use resale
10certificates only with respect to purchases of tangible personal property or items or
11goods under s. 77.52 (1) (b) or (d) which the contractor has sound reason to believe
12the contractor will sell to customers for whom the contractor will not perform real
13property construction activities involving the use of such tangible personal property
14or items or goods under s. 77.52 (1) (b) or (d). In this subsection, "real property
15construction activities" means activities that occur at a site where tangible personal
16property or items or goods under s. 77.52 (1) (b) or (d) that are applied or adapted to
17the use or purpose to which real property is devoted are affixed to that real property,
18if the intent of the person who affixes that property is to make a permanent accession
19to the real property.
In this subsection, "real property construction activities" does
20not include affixing property subject to tax under s. 77.52 (1) (c) to real property or
21affixing to real property tangible personal property that remains tangible personal
22property after it is affixed.
SB503,21 23Section 21. 77.51 (11d) of the statutes is amended to read:
SB503,9,224 77.51 (11d) For purposes of subs. (1ag), (1f), (3pf), and (9p) and ss. 77.52 (20)
25and (21), 77.522, and 77.54 (51), and (52), and (60), "product" includes tangible

1personal property, and items, property, and goods under s. 77.52 (1) (b), (c), and (d),
2and services.
SB503,22 3Section 22. 77.51 (12t) of the statutes is created to read:
SB503,9,84 77.51 (12t) "Real property construction activities" means activities that occur
5at a site where tangible personal property or items, property, or goods under s. 77.52
6(1) (b), (c), or (d) that are applied or adapted to the use or purpose to which real
7property is devoted are affixed to that real property, if the intent of the person who
8affixes that property is to make a permanent accession to the real property.
SB503,23 9Section 23. 77.54 (60) (a) of the statutes is renumbered 77.54 (60) (d) and
10amended to read:
SB503,9,1111 77.54 (60) (d) In this subsection,"lump sum:
SB503,9,20 121. "Construction contract" means a contract to perform real property
13construction activities and to provide tangible personal property, items or property
14under s. 77.52 (1) (b) or (c), or taxable services and for which the contractor quotes
15the charge for labor, services of subcontractors, tangible personal property, items and
16property under s. 77.52 (1) (b) and (c), and taxable services as one price, including
17a contract for which the contractor itemizes the charges for labor, services of
18subcontractors, tangible personal property, items and property under s. 77.52 (1) (b)
19and (c), and taxable services as part of a schedule of values or similar document

20construction materials.
SB503,24 21Section 24. 77.54 (60) (b) of the statutes is amended to read:
SB503,9,2522 77.54 (60) (b) The sales price from the sale of and the storage, use, or other
23consumption of tangible personal property, items and property under s. 77.52 (1) (b)
24and (c), and taxable services
construction materials that are sold by a prime
25contractor as part of a lump sum construction contract, if the total sales price of all

1such taxable products construction materials is less than 10 percent of the total
2amount of the lump sum construction contract. Except as provided in par. (c), the
3prime contractor is the consumer of such taxable products the construction materials
4and shall pay the tax imposed under this subchapter on the taxable products
5construction materials.
SB503,25 6Section 25. 77.54 (60) (bm) of the statutes is created to read:
SB503,10,97 77.54 (60) (bm) 1. The sales price from the sale of and the storage, use, or other
8consumption of construction materials that are sold by a subcontractor as part of a
9construction contract, if any of the following applies:
SB503,10,1010 a. The sales price is exempted under par. (b).
SB503,10,1211 b. The sales price is less than 10 percent of the total amount of the construction
12contract.
SB503,10,1513 2. The subcontractor is the consumer of the construction materials exempted
14under this paragraph and shall pay the tax imposed under this subchapter on the
15construction materials.
SB503,26 16Section 26. 77.54 (60) (c) of the statutes is amended to read:
SB503,10,2517 77.54 (60) (c) If the lump sum construction contract under par. (b) is entered
18into with an entity that is exempt from taxation under sub. (9a), the prime contractor
19is the consumer of all taxable products construction materials used by the prime
20contractor in real property construction activities, but the prime contractor may
21purchase without tax, for resale, tangible personal property, items and property
22under s. 77.52 (1) (b) and (c), and taxable services
construction materials that are sold
23by the prime contractor as part of the lump sum construction contract with the entity
24and that are not consumed by the prime contractor in real property construction
25activities.
SB503,27
1Section 27. 77.54 (60) (d) 2., 3. and 4. of the statutes are created to read:
SB503,11,62 77.54 (60) (d) 2. "Construction materials" means tangible personal property
3the selling, licensing, leasing, or renting of which is taxable under s. 77.52 (1) (a);
4items the selling, licensing, leasing, or renting of which are taxable under s. 77.52
5(1) (b); property the leasing of which is taxable under s. 77.52 (1) (c); and services the
6selling, licensing, performing, or furnishing of which are taxable under s. 77.52 (2).
SB503,11,87 3. "Prime contractor" means a contractor who enters into a construction
8contract with an owner of real property.
SB503,11,109 4. "Subcontractor" means a contractor who enters into a construction contract
10with a prime contractor or another subcontractor.
SB503,28 11Section 28. 77.61 (19) (intro.) of the statutes is amended to read:
SB503,11,2012 77.61 (19) (intro.) A person who fails to produce records or documents, as
13provided under s. 73.03 (9) or 77.59 (2), that support amounts or other information
14required to be shown on a return required under s. 77.58 and fails to comply in good
15faith with a summons issued pursuant to s. 73.03 (9) seeking those records and
16documents
may be subject to any of the following penalties, as determined by the
17department, except that the department may not impose a penalty under this
18subsection if the person shows that under all facts and circumstances the person's
19response, or failure to respond, to the department's request was reasonable or
20justified by factors beyond the person's control:
SB503,29 21Section 29. Nonstatutory provisions.
SB503,11,2422 (1) The repeal of sections 20.566 (1) (hn) and 73.03 (28d) of the statutes does
23not affect the validity of any assessment based entirely or in part on information or
24documents obtained from the multistate tax commission prior to the repeal.
SB503,12,4
1(2) The department of revenue shall submit in proposed form the rules required
2under section 73.03 (72) and (73) of the statutes, as created by this act, to the
3legislative council staff under section 227.15 (1) of the statutes no later than the first
4day of the 6th month beginning after the effective date of this subsection.
SB503,12,155 (3) Using the procedure under section 227.24 of the statutes, the department
6of revenue shall promulgate rules required under section 73.03 (72) and (73) of the
7statutes, as created by this act, for the period before the effective date of the
8permanent rules promulgated under section 73.03 (72) and (73) of the statutes, as
9created by this act, but not to exceed the period authorized under section 227.24 (1)
10(c) of the statutes, subject to extension under section 227.24 (2) of the statutes.
11Notwithstanding section 227.24 (1) (a), (2) (b), and (3) of the statutes, the department
12is not required to provide evidence that promulgating a rule under this subsection
13as an emergency rule is necessary for the preservation of the public peace, health,
14safety, or welfare and is not required to provide a finding of emergency for a rule
15promulgated under this subsection.
SB503,12,2016 (4) Before the date on which the emergency rules under subsection (3 ) are
17promulgated, the department of revenue shall administer chapter 71 of the statutes
18according to policies and procedures established by the department, but not
19promulgated as rules, notwithstanding the absence of rules to administer that
20chapter.
SB503,30 21Section 30. Initial applicability.
SB503,13,322 (1) The treatment of sections 71.07 (5n) (a) 3. and 4., 71.10 (1m) (b) (intro.), 1.,
23and 2. and (c), 71.28 (5n) (a) 3. and 4., 71.30 (2m) (b) (intro.), 1., and 2. and (c), and
2471.80 (1m) (b) (intro.), 1., and 2. and (c) of the statutes first applies to taxable years
25beginning on January 1 of the year in which this subsection takes effect, except that

1if this subsection takes effect after July 31, this act first applies to taxable years
2beginning on January 1 of the year following the year in which this subsection takes
3effect.
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