New State Laws Target Businesses

Lynn Keller, CPA, Tax Senior Manager   email
April 2009

Not to be overshadowed by tax changes in Washington, on February 19, 2009, Governor Doyle signed Wisconsin’s economic recovery bill designed to shore-up the state’s current budget deficit. As part of this comprehensive plan, the legislation includes a variety of tax changes, some of which are covered below.

Combined Reporting

Commonly controlled corporations will be required to file combined returns for Wisconsin corporate income tax purposes. Unlike many other states, Wisconsin previously required separate tax returns for all corporations. Combined reporting will be required for unitary businesses. The legislation identifies factors to presume the existence of unitary business relationships. Related entities will calculate Wisconsin corporate tax liability based on the business activity of all related entities, with certain exclusions, including those for foreign-source income. There are many questions on this new law and the state will need to provide additional guidance. The law is applicable to tax years beginning on or after January 1, 2009.

Related Entity “Add-Backs”

Wisconsin law currently disallows the deduction for interest and rental expenses paid to related entities (even if deductible for federal purposes). However, these items, also known as “add-backs,” are deductible for Wisconsin if the amounts are paid primarily for business purposes and not tax avoidance. Under the new law add-back items are expanded to include intangible expenses and management fees paid to related entities. Detailed reporting of related party expenses will continue.

Nexus

Corporations performing certain activities in Wisconsin will be considered to be doing business in the state and will be subject to Wisconsin income or franchise taxes. These activities include:

• regularly selling any kind of products or services to buyers in Wisconsin if the buyers receive the products or services in the state;
   
• regularly soliciting business from potential customers in Wisconsin;
   
• regularly performing services outside Wisconsin but receiving the benefits within the state;
   
• regularly transacting with Wisconsin customers involving intangible property, if the transactions result in receipts flowing to a company within Wisconsin; and
   
• holding loans secured by real or personal property located in Wisconsin.

Additional Changes Affecting Business Owners

• Wisconsin’s apportionment rules for multi-state companies have been revised.
   
• Wisconsin agreed to join the Streamlined Sales Tax Project (SSTP).
   
• Effective March 6, 2009, pre-written computer software modules are subject to sales tax . This change essentially overturns the decision of the Menasha Case.