News & Publications
February 25, 2009
by Debra Sadow Koenig and James N. Phillips
On February 19th, the Governor signed a bill to address in part Wisconsin's budget shortfall, four days after the legislature first circulated a draft of the bill, and without any public input. The bill substantially changes the taxation of affiliated entities. Due to its complexity, the law will require further clarification from the Department of Revenue to understand how it will be administered.
Among other things, the bill adopts combined reporting for corporations, which is a significant shift in the way corporations doing business in Wisconsin are taxed. Previously, Wisconsin had separate reporting, which meant that a corporation reported on a single company basis in Wisconsin only if it had nexus with Wisconsin. In general, combined reporting means that each member of an affiliated or "combined" group of corporations engaged in a unitary business reports on a combined report the unitary business income allocable to Wisconsin. Each member of such combined group of corporations is treated as doing business in Wisconsin if any member of the combined group is doing business in Wisconsin.
The combined reporting regime is retroactive to tax years beginning on or after January 1, 2009. This means that calendar year taxpayers will be subject to combined reporting retroactive to January 1, 2009. Taxpayers will have to compute their income on a combined reporting basis for purposes of paying second quarter estimated tax payments, and will have to "catch up" their first quarter estimates at that time to reflect any increased taxes because of combined reporting.
In an area that may be of interest given the current economic downtown, net operating losses from years ending prior to 2009 can only be carried forward to offset income subsequent to 2008 from the entity that generated the losses. However, losses generated in 2009 and thereafter could be carried forward to offset income of the group.
The legislation includes a number of other tax changes, some of which include:
- Economic Nexus. The definition of doing business in Wisconsin for nexus purposes is expanded to a broader "economic nexus" concept, to include a variety of activities, such as regularly selling products or services to customers in Wisconsin, regularly soliciting business from potential customers in Wisconsin, regularly performing services outside Wisconsin for which the benefits are received in Wisconsin, regularly engaging in transactions with customers in Wisconsin, and holding loans secured by real or tangible personal property located in Wisconsin. This means that more entities located outside of Wisconsin will have to file Wisconsin tax returns.
- Add-back of Related Party Royalties and Management Fees. Last year Wisconsin adopted an add-back of interest and rents owed to related parties under certain circumstances, generally where the net effect was to reduce the Wisconsin tax base without generating a commensurate increase in tax in another jurisdiction. This provision is expanded to include payments to related persons for intangibles and management fees.
- Streamlined Sales Tax. The bill adopts the substantive provisions of the streamlined sales tax project. The project is an effort to implement a national uniform, simplified system of sales and use tax administration, and to encourage out-of-state retailers to voluntarily collect Wisconsin sales and use taxes. Wisconsin is the 23rd state to adopt the project. Ultimately the goal of the group is to have federal legislation require out-of-state retailers to collect sales and use taxes.
- Sales Tax on Digital Works. The sales tax base is expanded to include a number of digital works, such as audio works, digital books, audiovisual works, finished art work, and video or electronic games, if transferred electronically.
- Sales Tax on Software. The "Menasha" case, dealing with substantially modified software modules, is reversed to provide that the pre-written modules will be subject to sales tax, effective February 20, 2009.
- Economic Substance Doctrine. The Act introduces a statutory economic substance doctrine pursuant to which if a person engages in a transaction without economic substance to create a loss or tax benefit, the Department of Revenue has the authority to disregard the transaction.
- Early Stage Business Investment Program. Beginning in 2009, the angel investment tax credit for investment in early stage businesses, which is equal to 25% of the investment, is changed to permit the entire credit to be taken in the year of the investment, instead of over two years, and to eliminate the $2 million per claimant investment limit that may be used as the basis for the credit. In addition, for both the early stage seed investment credit, which is also a 25% credit for investments in early stage businesses, and the angel investment tax credit, the bill expands the scope of the program by increasing the amount of credits available to Wisconsin taxpayers.
Except or noted above, these changes generally take effect on October 1, 2009.
If you would like any additional information do not hesitate to contact a member of the Tax Team.