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New Wisconsin Tax Laws Impact Multistate and In-State Companies

Tax Law Update John T. Barry

Wisconsin's Budget Repair/Stimulus Bill, 2009 Wisconsin Act 2, was signed into law on February 19, 2009. The bill includes several significant changes to Wisconsin's tax laws, particularly in the areas of corporate income/franchise tax and sales and use tax. Provided below are highlights of some of the major changes in the 2009 legislation.

Combined Reporting

The "combined reporting" method of taxing corporations has been adopted and is effective for tax years beginning January 1, 2009. Corporations must file a combined report if they are subject to Wisconsin income and franchise tax and if they are engaged in a "unitary business" with one or more other corporations. Wisconsin taxpayers who are required to file combined reports should examine their current tax positions to determine if additional tax planning is warranted.

Combined reporting does not apply to S corporations or to certain other corporations that are generally exempt from Wisconsin tax, including many insurance companies. Special rules apply to foreign corporations and to domestic corporations with substantial foreign income. Specific rules are provided for use of tax credits and net operating losses ("NOLs") by members of the combined group. The NOL rules may constitute planning opportunities for combined groups that have unused NOL carry-forwards and expect to incur NOLs in 2009 or later.

Combined groups must have a single designated agent who is responsible for filing the combined report on behalf of the combined group. In addition, the designated agent is responsible for sending and receiving all correspondence with the Wisconsin Department of Revenue ("DOR") and for remitting all taxes, including estimated payments, on behalf of the combined group. The designated agent is generally the parent corporation of the combined group.

Combined reporting legislation imposes joint and several liability on the members of the combined group for the costs, penalties, interest, and taxes associated with a combined report. The new legislation provides a transition period for combined groups to comply with the combined reporting requirements. Generally, the DOR will deem estimated tax payments that were due in the first quarter of 2009 as timely paid if included in the taxpayer's combined reporting estimated payments in the second quarter of 2009.

Other Income and Franchise Tax Law Changes

"Doing business in the state" has been modified to include additional types of activities that were not included under prior law, including the performance of certain activities without a physical presence in the State of Wisconsin. Individuals or entities that did not have nexus with the State of Wisconsin under the previous regime may find themselves subject to Wisconsin income and franchise tax.

The economic substance test has been adopted by statute. Taxpayers who engage in a transaction or series of transactions without economic substance for the purpose of reducing Wisconsin taxable income will be subject to adjustment by the DOR. Generally, a transaction will have economic substance only if the taxpayer's economic position is changed in a meaningful way, apart from tax effects, and if the taxpayer has a substantial non-tax purpose for engaging in the transaction. Transactions between members of a controlled group are presumed to lack economic substance, and the taxpayer bears the burden of establishing that the transaction has economic substance.

Beginning in 2008, the payor of interest and rent to a related party was required to add-back those amounts to taxable income unless certain conditions (and disclosure requirements) were met. The Act expands the statute to include a broad array of management fees and intangible expenses.

Streamlined Sales and Use Tax

The new legislation adopts the Streamlined Sales and Use Tax Agreement ("SSUTA"), which is effective as of October 1, 2009. SSUTA makes sales and use taxes more uniform across states and local taxing jurisdictions. The state hopes that by simplifying the system, more out-of-state retailers will agree to collect and remit Wisconsin sales tax. Under SSUTA, certain items that were previously taxable in Wisconsin are now exempt, and certain sales that were previously exempt are now taxable.

The new law provides amnesty for sellers who have failed to collect or remit sales and use taxes on sales to Wisconsin purchasers. In order to qualify for amnesty, a seller must register with the DOR to collect Wisconsin sales and use taxes within one year after the effective date of Wisconsin's adoption of SSUTA (i.e., by October 1, 2010). The seller must also collect and remit sales and use taxes on sales to purchasers in Wisconsin for at least three consecutive years after the date on which the seller registers. The new provisions specify that registration with the DOR will not be used as a factor in determining whether the seller has nexus with Wisconsin for any tax at any time.

A new procedure has been established to settle disputes between purchasers and sellers, regarding erroneous collections of sales or use tax. Under prior law, such disputes were handled through the court system. The new law eliminates specific requirements relating to the content of sales and use tax returns and, instead, provides that the return must show the amount of taxes due for the period covered by the return and such other information as the DOR deems necessary. This modification is intended to provide the DOR with flexibility to simplify sales and use tax returns on a go-forward basis. The SSUTA provisions also provide new rules with respect to exemption certificates. Wisconsin taxpayers should examine the new rules and related guidance to ensure that their sales and use tax returns and exemption certificates are properly and timely filed.

Other Sales and Use Tax Changes

The new law imposes sales and use tax on certain digital products that would be subject to tax if furnished in tangible form. The new tax will apply to goods such as audio works, digital books, greeting cards, finished artwork, and video or electronic games. The legislation also modifies the definition of taxable computer software. The DOR believes that the definitional changes will extend sales tax collection to the type of software that was determined to be exempt by the Wisconsin Supreme Court in the Menasha decision.

Adoption of Tax Incentives and Credits

The early stage business investment program has been modified, with changes to the angel investment tax credit and early stage seed investment tax credit. The $2 million cap on the amount of an investment that may be used as the basis for the angel investment tax credit has been eliminated. The previous credit, equal to 12.5% over two years, has been changed to 25% for the year in which the qualifying new business venture is certified. The legislation also provides an early stage seed investment tax credit under the state insurance premiums tax for tax years beginning after December 31, 2008. The credit equals 25% of the insurer's investment paid to a fund manager who invests in a certified business, and unused credits may be carried forward up to 15 years. The legislation also updates the criteria used to determine a "qualified new business venture."

The legislation creates refundable credits for dairy manufacturing facility investment and meat processing facility investment that can be claimed for individual income and corporate income and franchise tax purposes.

Business Development Tax Incentives Program

The Business Development in Wisconsin Tax Incentives Program is created to provide tax credits to eligible persons for conducting specified types of economic development projects in Wisconsin. Under the program, any person may apply to the Department of Commerce ("DOC") for certification to claim tax benefits. The DOC may certify a person who submitted an application if, after conducting an investigation, the DOC determines that the person is conducting an eligible activity. A person may be eligible to be certified to claim tax benefits if the person engages in a project that creates jobs, involves a significant investment in capital, involves significant investments in the training or reeducation of employees, or relates to the location or retention of the person's corporate headquarters in Wisconsin.

Cessation of Economic Activity Zone Programs

New activities in the current development zones, enterprise development zones, agricultural development zones, airport development zones, and technology zones programs are discontinued. The airport development zone loan program, administered by the Wisconsin Housing and Economic Development Authority ("WHEDA"), is repealed. WHEDA has not made any loans under the program.

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For more details or if you have any questions, please contact John Barry 414-277-5825 / [email protected] or your Quarles & Brady attorney.