State & Local Tax Alert

Transcription

1 State & Local Tax Alert Breaking state and local tax developments from Grant Thornton LLP Wisconsin Enacts Budget Bill With Numerous Tax Provisions On September 21, 2017, Governor Scott Walker signed into law Assembly Bill 64 as 2017 Wisconsin Act 59, 1 which amends various corporate income tax, sales and use tax and personal income tax statutes, and modifies the state s property tax laws. Included in the budget are provisions updating the state s conformity to the Internal Revenue Code (IRC) and revising net operating loss (NOL) and broadcaster apportionment provisions. Income/Franchise Tax Provisions Limitations on NOLs Established The legislation limits the number of years that a filer can retroactively recompute NOLs. 2 Specifically, the legislation provides that Wisconsin income may not be offset by a NOL for purposes of the individual income tax and the corporate income/franchise tax (imposed on general businesses and insurance companies) unless the incurred loss was computed on a return filed within 4 years of the unextended due date for filing the original return for the taxable year in which the loss was incurred. 3 Furthermore, for purposes of the individual income tax, no NOL carryback will be allowed unless it is claimed within 4 years of the unextended due date for filing the original return for the taxable year to which the NOL is carried back. 4 The legislation also revises existing language governing NOLs for the corporate income/franchise tax to clarify that the 20-year period for loss carryforwards means the immediately preceding 20 years, and to require that the corporation must have been subject to corporate income/franchise tax in the taxable year in which the loss was incurred (as Release date November 14, 2017 States Wisconsin Issue/Topic Multiple Taxes Contact details Steve Koritzinsky Wisconsin T E steve.koritzinsky@us.gt.com Jay Baehman Wisconsin T E jay.baehman@us.gt.com Jamie C. Yesnowitz Washington, DC T E Jamie.yesnowitz@us.gt.com Chuck Jones Chicago T E chuck.jones@us.gt.com Lori Stolly Cincinnati T E lori.stolly@us.gt.com Priya D. Nair Washington, DC T E priya.nair@us.gt.com 1 Act 59 (A.B. 64), Laws Wisconsin Legislative Bureau, Comparative Summary of Budget Recommendations, Wisconsin State Budget (Sept. 2017) at WIS. STAT (8)(b)1; 71.26(4)(a); 71.45(4)(a); 71.80(25)(a). 4 WIS. STAT (8)(b)1; 71.80(25)(b)..

2 Grant Thornton LLP - 2 opposed to sustained as is required under current law)(emphasis added). 5 These provisions first apply to a loss claimed on the effective date of the legislation regardless of the year in which the loss was incurred. 6 IRC Conformity The legislation generally updates the state s conformity to the IRC for purposes of the individual income tax, and the corporate income/franchise tax (imposed on general businesses and insurance companies) 7 by providing that, for taxable years beginning after December 31, 2016, Internal Revenue Code means the federal IRC as amended to December 31, 2016, 8 with some exceptions. 9 In addition, for taxable years beginning after December 31, 2017, the legislation adopts IRC Sec. 408(d)(8), relating to a tax-free qualified charitable distribution from an individual retirement account directly to a charitable organization. 10 Under federal law, IRC Sec. 408(d)(8) allows individuals over 70½ years of age to exclude from taxable income up to $100,000 distributed from an individual retirement account to a charitable organization. 11 Apportionment for Broadcasters The legislation substantially revises the apportionment of income of broadcasters. 12 The legislation provides that, for taxable years beginning after December 31, 2018, a broadcaster's gross receipts from advertising are in Wisconsin only if the advertiser s commercial domicile is in the state. 13 Additionally, for taxable years beginning after December 31, 2018, a broadcaster s gross royalties and other gross receipts received for the use or license of intangible property are sales in Wisconsin only if the commercial domicile of the purchaser or licensee is in the state and the purchaser or licensee has a direct connection or relationship with the broadcaster under a contract under which the 5 WIS. STAT (4)(a); Comparative Summary, supra at 237. Similar amendments are made to provisions governing NOLs incurred by insurance companies. WIS. STAT (4)(a). A similar change was made under the individual income tax laws requiring that the taxpayer be subject to individual income tax in the taxable year in which the NOL was incurred. (emphasis added) WIS. STAT (8)(b)1; Comparative Summary, supra at Act 59, 9338(10). 7 WIS. STAT (2)(k). 8 WIS. STAT (6)(k)1; 71.22(4)(k)1. See also Comparative Summary, supra at WIS. STAT (6)(k)2, 3 and 4; 71.22(4)(k)2, 3 and WIS. STAT (8). 11 Comparative Summary, supra at Comparative Summary, supra at 240. Under current law, sales of services are sourced to the state where the benefit of the service is received, and sourcing of receipts from licensing intangible property is to the state where the use of the intangible property occurred. Under current law and through the Department s interpretation of this market-based sourcing provision, multi-state broadcasters must apportion income based on the portion of a broadcaster's viewing audience located in Wisconsin compared to its viewing audience everywhere because the benefit of the service is received, and the use of the intangible property occurs, at the viewer's location. Id. 13 WIS. STAT (7)(dh)4; 71.25(9)(dh)4.

3 Grant Thornton LLP - 3 royalties or receipts are derived. 14 These gross receipts are then subject to adjustment under a multi-step formula. 15 Sourcing of Business Income Related to Services The legislation also clarifies existing provisions governing the sourcing of gross receipts from services. 16 Current law provides that gross receipts from services are sourced to Wisconsin if the purchaser of the service received the benefit of the service in the state. 17 The benefit of a service is received in Wisconsin if the service relates to tangible personal property that is located in the state at the time that the service is received or tangible personal property that is delivered directly or indirectly to customers in the state (emphasis added). 18 The legislation revises this provision so that the benefit of a service is now received in Wisconsin if the service relates to tangible personal property that is delivered directly or indirectly to customers in Wisconsin. 19 Similarly, existing law provides that the benefit of a service is received in Wisconsin if the service is provided to an individual who is physically present in the state at the time that the service is received. 20 This provision has been revised to now provide that the benefit of a service is received in Wisconsin if the service is purchased by an individual who is physically present in Wisconsin at the time that the service is received (emphasis added). 21 The treatment of these provisions first applies to taxable years beginning on January 1, Elimination of Wisconsin Alternative Minimum Tax The legislation also eliminates the Wisconsin alternative minimum tax for individuals, effective for tax years beginning after December 31, Amendments to Sales and Use Tax Provisions Adoption of Targeted Exemptions The legislation creates a sales and use tax exemption for tangible personal property sold to a construction contractor who, in fulfillment of a real property construction activity, transfers the tangible personal property to a technical college district, the Board of Regents of the University of Wisconsin System, an institution, a college campus, or the University of Wisconsin Extension, if the tangible personal property becomes a component of a 14 WIS. STAT (7)(dj)2; 71.25(9)(dj)2m. 15 WIS. STAT (7)(g); 71.25(9)(g). 16 Comparative Summary, supra at WIS. STAT (9)(dh)1. 18 WIS. STAT (9)(dh)2.b. 19 Id. A similar amendment is made in the individual income tax provision at WIS. STAT (7)(dh)2.b. 20 WIS. STAT (9)(dh)2.c. 21 Id. A similar amendment is made in the individual income tax provision at WIS. STAT (7)(dh)2.c. 22 Act 59, 9338(7). 23 WIS. STAT (4)(f); Act 59, 9338(13p). Comparative Summary, supra at 240.

4 Grant Thornton LLP - 4 facility in Wisconsin that is owned by the entity. 24 These provisions take effect July 1, The legislation creates a sales and use tax exemption for certain prepared food that: (1) is sold by a retailer; (2) is not candy, soft drinks, or dietary supplements; and (3) meets certain manufacturing requirements. 26 Additionally, to qualify for the exemption, (1) the retailer must freeze the prepared food prior to its sale and sell the prepared food at retail in a frozen state, and the prepared food must not be sold with eating utensils that are provided by the retailer; or (2) the prepared food consists of more than 50 percent yogurt. 27 These provisions take effect September 23, The legislation also expands the lump sum contracts exemption to apply to all construction contracts and prime contractors and subcontractors. 29 Sales and Use Tax Audits; Statistical Sampling The legislation directs the Wisconsin Department of Revenue to promulgate rules establishing criteria for field audits where the auditor employs the use of statistical sampling. 30 The Department must establish criteria that allows any person with less than $10 million in annual sales during any year at issue in a field audit to choose to have the audit conducted using statistical sampling. In addition, the Department must establish the criteria that specifies the number of transactions necessary to qualify for statistical sampling and the maximum sample size. These provisions take effect on March 1, Occasional Sales Tax Exemption The legislation codifies and increases the occasional sales exemption threshold, 32 by creating a presumption that a seller is not pursuing a vocation, occupation, or business or a partial vocation or occupation or part-time business as a vendor of tangible personal property, or items, property, or goods or taxable services if the seller s total taxable sales price from sales of tangible personal property, items, property, and goods and taxable services is less than $2,000 during a calendar year. 33 The Department historically has exempted, by regulation, persons with less than $1,000 in annual sales from the requirement to hold a seller's permit WIS. STAT (9m). See Comparative Summary, supra at Act 59, 9438(3d). 26 WIS. STAT (20n)(d). 27 Id. See Comparative Summary, supra at Act 59, Comparative Summary, supra at 245. WIS. STAT (2m)(b); 77.54(60)(b), (bm), (a), (c), (c)2, (d)2, (d)3; Act 59, 9338(18) and 9438(3). 30 WIS. STAT (2g). 31 Act 59, 9438(3f). The provisions take effect the first day of the 6th month beginning after the date of publication of Act 59 on September 22, 2017, which would be March 1, Comparative Summary, supra at WIS. STAT (9)(a)2. 34 Comparative Summary, supra at 249.

5 Grant Thornton LLP - 5 Internet Access Charges The legislation also repeals the sales tax on the sale of Internet access services effective July 1, The effective date of the provision coincides with the date that states will be prohibited by the federal government from imposing such taxes. 36 Credits and Incentives The legislation also amends various individual and corporate income/franchise tax credits and incentive provisions, including increasing the amount of business development tax credits that may be allocated each year. 37 Additionally, the legislation amends provisions governing the interplay between the manufacturing and agriculture tax credit under the individual income tax and the credit for taxes paid to other states to prevent a double tax benefit under which taxpayers could use the same income to calculate both credits. 38 Specifically, the legislation provides that the amount of the eligible qualified production activities income (QPAI) that may be claimed in computing the credit must be reduced by the QPAI taxed by another state on which the other state tax credit is claimed. 39 This limit on the manufacturing and agriculture credit essentially allows the taxpayer to elect, on a non-binding basis, to forgo the credit for taxes paid to other states instead of reducing the manufacturing and agriculture tax credit for a filing period. These provisions take effect for taxable years beginning on January 1, The legislation also limits the credit for taxes paid to other states under the individual income tax so that the credit may not exceed the amount of Wisconsin income tax attributable to the same income taxed by another state. 41 This will mean that the credit is limited for taxes paid to states with a higher tax rate than Wisconsin. This limitation does not apply to the four states that border Wisconsin (Illinois, Iowa, Minnesota, and Michigan). 42 These provisions first apply to taxable years beginning on January 1, The legislation also changes the previously non-refundable research expense credit under the individual and corporate income/franchise tax to provide that 10 percent of the credit may be refunded if the taxpayer cannot use to offset the tax due. 44 Additionally, the amount of the claim not used to offset the tax due and not certified for payment can be carried forward and credited against Wisconsin income or franchise taxes otherwise due for the next 15 taxable years to the extent not offset by these taxes otherwise due in all intervening years between the year: (i) when the expense was incurred; and (ii) when the 35 WIS. STAT (2)(a)5.a, (4) (h) and Act 59, 9438(4w). 36 Comparative Summary, supra at WIS. STAT (4)(b); Comparative Summary, supra at Legislative Fiscal Bureau, Joint Committee on Finance, White Paper #291, Manufacturing and Agriculture Tax Credit and Taxes Paid to Other States Tax Credit Interaction (General Fund Taxes -- Income and Franchise Taxes) (2017). 39 WIS. STAT (5n)(d)3. 40 Act 59, 9338 (8). 41 Comparative Summary, supra at 239; WIS. STAT (7). 42 WIS. STAT (7)(d). 43 Act 59, 9338(3t). 44 WIS. STAT (4)(k)1; 71.47(4)(k)1; Comparative Summary, supra at 241.

6 Grant Thornton LLP - 6 carryforward credit is claimed. 45 These provisions apply for taxable years beginning after December 31, and mark the first time that Wisconsin will allow a refundable research credit. Amendments to Property Tax Provisions The legislation sunsets the forestry mill tax ( forestation state tax ) providing that the tax will not be levied beginning with property tax assessments as of January 1, Additionally, beginning with the property tax assessments as of January 1, 2018, machinery, tools, and patterns, not including such items used in manufacturing, are exempt from property tax. 48 Commentary In a marked departure from the trend seen in other states, the Wisconsin budget does not contain any major tax increases or overhauls but its enactment was, however, steeped in controversy amid allegations of backroom deals between a select group of senators and the governor. 49 The budget was ultimately passed more than 10 weeks after the deadline, the longest such delay in a decade 50 and included 99 partial vetoes, including one that would have given a nearly $1 million tax break [to] broadcasters. 51 Notably, several of the provisions contained in the budget have an interesting backstory. For example, the revisions governing NOLs will mean that taxpayers reporting current income may be limited in their ability to claim NOLs incurred in years when a Wisconsin franchise/income tax return was not filed. According to a legislative analysis accompanying the bill, the amendments to the NOL provisions were due to a concern that the Tax Appeals Commission could interpret the current statutes to allow taxpayers to retroactively amend tax returns for the 20 previous years to recompute NOLs and use the loss to offset income in a tax year currently open under the statute of limitations. 52 Similarly, according to the same legislative analysis, the changes to the provisions governing sourcing of gross receipts from services were to codify [the DOR s] current administrative practice and were spurred by Department concerns that existing language, if challenged, might be construed by a court as an unconstitutional double taxation of the same income. 53 The information contained herein is general in nature and based on authorities that are subject to change. It is not intended and should not be construed as legal, accounting or tax advice or opinion provided by 45 WIS. STAT (4)(k)(2), 71.47(4)(k)(2). 46 WIS. STAT (4)(k), 71.47(4)(k). 47 WIS. STAT (1), (2); Act 59, 9138; Comparative Summary, supra at WIS. STAT (27); Comparative Summary, supra at Mark Sommerhauser and Milly Beck, Robin Voss: GOP Senators Who Struck Budget Deal With Scott Walker are Terrorists, WISCONSIN STATE JOURNAL, Oct. 23, Id. 51 Jason Stein, Patrick Marley, and Karen Herzog, Gov. Scott Walker Making 99 Partial Vetoes to Reshape Wisconsin budget, JOURNAL SENTINEL, Sept. 20, 2017; Wisconsin Legislative Bureau, Summary of Partial Vetoes of 2017 Wisconsin Act 59, Wisconsin State Budget (Oct. 2017) at Comparative Summary, supra at Id. at 238.

7 Grant Thornton LLP - 7 Grant Thornton LLP to the reader. This material may not be applicable to or suitable for specific circumstances or needs and may require consideration of nontax and other tax factors. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Grant Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, re-keying or using any information storage and retrieval system without written permission from Grant Thornton LLP. This document supports the marketing of professional services by Grant Thornton LLP. It is not written tax advice directed at the particular facts and circumstances of any person. Persons interested in the subject of this document should contact Grant Thornton or their tax advisor to discuss the potential application of this subject matter to their particular facts and circumstances. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed.