This article is adapted from the July 2009 State Bar Business Law News, published by the Business Law Section.
By Kristina Somers, Reinhart Boerner Van Deuren S.C., Milwaukee
Just recently, Wisconsin passed its biennial budget bill, 2009 Wisconsin Act 28. This followed another significant piece of legislation, the budget repair and economic stimulus bill (2009 Wisconsin Act 2), passed just a few months ago.
While changes to Wisconsin tax law may not be surprising, what is particularly striking is the wide breadth of these recent legislative changes, affecting the areas of:
As a result, it is anticipated that these recent tax law changes will have widespread effect. These significant tax changes include the following:
Sales/use tax changes
Streamlined Sales Tax Project. Wisconsin has attempted, on several prior occasions, to pass legislative changes to its Statutes that would enable Wisconsin to become part of what is known as the Streamlined Sales Tax Project. Some of the changes are, in part, changes in terminology (for example, the term “gross receipts” has been replaced with the term “sales price”). Other changes represent major substantive changes that were intended to reverse Wisconsin case law and to bring in substantial revenue. Examples of these changes are provided below:
• “Specified digital goods” and “additional digital goods.” The sale, lease, license, or rental of specified digital goods or additional digital goods (both new terms) will be subject to Wisconsin sales/use tax.
• “Specified digital goods” means digital audio works, digital audiovisual works, and digital books.
• “Additional digital goods” means the following, if transferred electronically: Greeting cards, finished artwork, periodicals, and video or electronic games.
• Exemption: Will be provided for the sale of the electronic product (“specified digital good” or “additional digital good”) if the same sale of such product in tangible form would be exempt from tax.
• Effect of change: Currently, sales/use tax is imposed on sales of tangible personal property (such as books). As a result, if a book is sold in electronic format (such as downloaded), it is considered to be intangible personal property and is not currently subject to Wisconsin sales/use tax. This statutory change will result in the imposition of Wisconsin sales/use tax on the book transferred in electronic format.
• Imposition of tax begins on Oct. 1, 2009.
• “Prewritten computer software.” Sales tax is imposed on sales of “prewritten computer software.”
• Effect of change: Previously, the definition of “tangible personal property” excluded custom computer programs. As a result, the Wisconsin Supreme Court concluded last year that the sale of customized SAP R/3 system software was not taxable because it was intangible custom software.
The legislation modified the definition of “tangible personal property” to include “prewritten computer software,” rather than exclude custom computer programs. This statutory change now generally treats the sale of such software as subject to Wisconsin sales/use tax.
• Separately-stated charges for program modifications may not be subject to tax.
•Imposition of tax on custom software began on March 6, 2009 (the day after publication of 2009 Wisconsin Act 2).
• Other significant changes:
• Food: Some food sales that are now exempt will become taxable (e.g., ready-to-drink tea and marshmallows) and other items that are currently taxable would be exempt (e.g., fruit drink with 51% to 99% juice or any candy containing flour).
• Medical Equipment: The legislation expands the exemption for medical equipment exempt from tax. For example, the exemption will apply to durable medical equipment such as hospital beds, patients lifts, and I.V. stands.
• Bundled Transactions: The legislation generally imposes tax on the entire sales price of exempt items that are bundled with taxable items (with certain exceptions). This may result in the imposition of tax on previously exempt items.
• Drop Shipments: Currently, Wisconsin manufacturers are required to collect sales tax from purchasers located in Wisconsin (where the retailer is located out-of-state and is not registered to collect Wisconsin sales or use tax). The legislation will no longer require the Wisconsin manufacturer to collect the sales tax on such drop shipments. Rather, the purchaser will be liable for the tax.
Disregarded entities. Historically, Wisconsin has treated entities disregarded for income tax purposes, such as single member limited liabilities companies, as separate taxpayers for Wisconsin sales/use tax purposes. As a result, disregarded entities have been formed to take advantage of existing tax benefits, such as the contract carrier exemption and resale treatment.
The recent budget bill changed this. Now, Wisconsin will treat disregarded entities as disregarded not just for income tax purposes, but also for sales/use tax purposes. Taxpayers should re-evaluate the sales/use tax effect of transactions with disregarded entities. Particular care should be given in addressing entities set up to qualify for beneficial tax treatment such as the contract carrier exemption.
This change was effective June 30, 2009.
Nexus. If a retailer has “nexus” with Wisconsin, it is required to collect and remit sales/use tax on taxable transactions that take place in the State of Wisconsin. To determine when a retailer has nexus with Wisconsin, the Statutes consider when a retailer is engaged in business in this state.
The recent budget bill expanded the definition of “retailer engaged in business in this state” to potentially include any person who has an affiliate in Wisconsin. However, nexus results only if:
• The person is related to the affiliate; and
• The affiliate uses facilities or employees in Wisconsin to advertise, promote, or facilitate the establishment of or market for sales of items by the related person to purchasers in Wisconsin or for providing services to the related person’s purchasers in Wisconsin (including accepting returns of purchases or resolving customer complaints).
Specific tests are provided to determine when two persons are “related.” This change was effective June 30, 2009.
Manufacturing. Wisconsin provides an exemption for manufacturing consumables. The budget bill modified this exemption to require that the property must be used exclusively and directly in the manufacturing process. This change is effective Aug. 1, 2009.
The budget bill enacted an exemption for biotechnology and manufacturing research. This exemption, not effective until Jan. 1, 2012, includes:
• Machinery and equipment sold to persons engaged primarily in manufacturing or biotechnology in Wisconsin. The machinery and equipment must be used exclusively and directly in qualified research.
• Tangible personal property sold to persons engaged primarily in manufacturing or biotechnology in Wisconsin. The property must be consumed, destroyed, or lose its identity while being used exclusively and directly in qualified research.
Income/ franchise tax changes
Combined reporting. Wisconsin has previously attempted, on numerous occasions, to pass legislation that would transform it from a separate-company state to a combined-reporting state. This legislation finally passed as part of 2009 Wisconsin Act 2. What the legislation effectively does is to potentially impose Wisconsin tax liability on certain out-of-state corporations that may not have had “nexus,” or required contacts with the State of Wisconsin (and, as a result, may not have previously been subject to Wisconsin income/franchise tax).
Certain key aspects of this combined reporting legislation are identified below:
• Effective retroactive to Jan. 1, 2009.
• Includes all members of combined group, which is generally defined as 50 percent common ownership.
• Ability to use pre-Jan. 1, 2009, separate-company losses are greatly diminished.
• Post-Jan. 1, 2009, if a company is acquired, losses attributable to that company’s activities before acquisition will have to be maintained on a separate-company basis and cannot be used to offset the combined group’s net income.
• Pre-combined reporting, credits will have to be maintained on a separate-company basis.
• Special provisions regarding foreign corporations.
• Expansive definition of “doing business” in Wisconsin (“doing business” includes, for example, issuing credit, debit, or travel or entertainment cards to customers in Wisconsin).
• For financial organizations, business income includes interest, dividends, and receipts from investments of any kind.
• Special provisions regarding gain or loss from the sale or exchange of capital assets.
• Each combined group is required to have one designated agent.
• Special provisions regarding the tax year of the combined group.
• Addresses part-year members of a combined group.
• Determines when gross royalties and other gross receipts received for the use or license of intangible property will be treated as in Wisconsin.
• Specifies when sales of intangible property (excluding securities) will be treated as sales in Wisconsin.
• Allows the Wisconsin Department of Revenue to modify taxable income or tax for transactions without economic substance.
• Addresses the relationship between: (i) current law that allows reallocation of gross income, deductions and credits between two or more businesses; and (ii) statutory related entity provisions.
• Expands related entity add-backs.
The impact created by the dramatic shift from separate-company reporting to combined reporting could be significant. Every group of related organizations will have to consider how this legislation (effective retroactively) impacts its Wisconsin tax liability. While it is always possible that Wisconsin tax liability could decrease, Wisconsin has estimated that these provisions will increase state income and franchise tax revenues by approximately $27,700,000 in 2008-09; $72,600,000 in 2009-10; and $108,700,000 in 2010-11.
Capital gains exclusion. Wisconsin used to allow a 60 percent exclusion for capital gains. While this capital gains exclusion was in jeopardy of being eliminated entirely, ultimately the exclusion was reduced to 30 percent.
This change is effective retroactive to Jan. 1, 2009.
Withholding for pass-through entities. Pass-through entities with nonresident members were required to make annual estimated payments for withholding tax. Pass-through entities will now be required to make quarterly estimated payments of the withholding tax for their nonresident members.
This change first applies to taxable years beginning on Jan. 1, 2009.
Property tax changes
Low-income housing. Over the past several years, there has been a considerable lack of agreement regarding when low-income housing qualifies for property tax exemption. The budget bill attempts to provide clarification by creating a property tax exemption specifically for low-income housing. To qualify for the exemption:
• The property must be owned by a nonprofit entity that is a benevolent association.
• The property must be used as low-income housing (specifically defined).
Notably, the exemption provides that leasing a part of the property does not render it taxable, regardless of how the leasehold income is used. This is a significant change from the general provisions, which require that leasehold income be used solely for construction debt retirement and/or maintenance of the property.
The exemption also allows up to 30 acres of land to qualify for exemption. This exemption applies retroactively to property tax assessments as of Jan. 1, 2009.
Retirement homes for the aged. Benevolent associations, including retirement homes for the aged, have been exempt from property taxes for many years. Nevertheless, similar to (and perhaps even more so than) the low-income housing, assessors and taxpayers have increasingly been unable to agree when retirement homes for the aged qualify for property tax exemption. The budget bill modified this exemption in an effort to provide some clarity. To qualify as an exempt retirement home for the aged:
• The property must be owned by a nonprofit entity that is a benevolent association.
• The property must be used as a retirement home for the aged.
• The fair market value of the individual dwelling unit must be less than 130 percent of the average equalized value of residential property located in the county.
Like low-income housing, this modified exemption provides that leasing a part of the property does not render it taxable, regardless of how the leasehold income is used.
Also similar to low-income housing, the modified exemption expands the potential acreage that could qualify for exemption from 10 acres to 30 acres of land. These changes first apply to property tax assessments as of Jan. 1, 2010. Mark your calendar! The 60th Annual Tax School seminar, Dec. 1 in Madison and offered simultaneously via webcast, will address many of these issues.
Kristina E. Somers is a shareholder with Reinhart Boerner Van Deuren S.C. in Milwaukee. She practices in the firms in tax, litigation, and tax-exempt organizations practices.
This article is adapted from the July 2009 State Bar Business Law News, published by the Business Law Section. The State Bar offers its members the opportunity to network with other lawyers who share a common interest through its 26 sections. Section membership includes access to newsletters, email lists to facilitate information sharing, and other resources.
