Inside Track: Budget Repair Bill significantly changes Wisconsin's corporate income, franchise, and sales and use tax systems:

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    Budget Repair Bill significantly changes Wisconsin's corporate income, franchise, and sales and use tax systems

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    By Tim Schally of Michael Best & Friedrich LLP

    April 1, 2009 – The following is an excerpt from Atty. Schally's discussion in a forthcoming supplement to State Bar CLE Books'  Wisconsin Business Advisor: Business Organizations Volume 7.These issues are discussed in more depth in that supplement, which is scheduled to be released in April 2009.  

    On Feb. 19, 2009, Gov. Jim Doyle signed into law 2009 Wisconsin Act 2, also known as the Wisconsin “Economic Stimulus” or “Budget Repair” Bill. The legislation increases a variety of taxes and makes extensive changes to Wisconsin’s corporate income, franchise, and sales and use tax systems.

    One of the major income and franchise tax changes is the adoption of mandatory “combined reporting,” with Wisconsin joining approximately 20 other states (including neighbors Illinois, Minnesota, and Michigan) that have adopted some type of a mandatory combined reporting tax system. This is a monumental and complex shift in Wisconsin’s income and franchise tax system, which previously had required each corporation to compute its income, and file tax returns, on a separate company basis. The income tax changes are retroactive to tax years beginning on or after Jan. 1, 2009. According to the Legislative Fiscal Bureau, the changes are projected to result in an overall tax increase of $187.3 million for the 2009 -11 period, and $27.7 million for the fiscal period ending June 30, 2009. Wis. Leg. Fiscal Bureau, Summary of Budget Adjustment Provisions (2009 Wisconsin Act 2) 3 (Feb. 23, 2009), available at [hereinafter Summary of Budget Adjustment Provisions].

    The following are other income and franchise tax changes included in the Budget Repair Bill:

    • Repeal of the special “personal holding company” allocation rule

    • Expansion of the definition of “doing business in this state”

    • Expansion of “add-back” statutes enacted in 2008

    • Adoption of rules for sourcing to Wisconsin of certain intangible income

    • Enactment of a new statutory “economic substance” test

    The most significant sales and use tax change in Act 2 is adoption of the so-called Streamlined Sales and Use Tax provisions. The Streamlined package generally takes effect on Oct. 1, 2009, although one important part – which effectively reverses the result in Department of Revenue v. Menasha Corp., 2008 WI 88, 311 Wis. 2d 579, 754 N.W.2d 95 (a computer software case) – is effective on March 6, 2009. The Wisconsin Department of Revenue (DOR) has estimated that the overall sales and use tax changes in Act 2 will increase tax revenues by $9.4 million for the year ending June 30, 2009, and by $72.2 million for the 2009 - 11 period. See Summary of Budget Adjustment Provisions, supra, at 35, 39, 41.

    The Governor’s 2009 - 11 budget bill, Wisconsin Assembly Bill 75 (2009 - 10 Session), contains numerous significant, proposed tax changes and increases, which are still pending. Some of the more significant changes, and their projected effects, are described in detail in the 2009 supplement to 7 Wisconsin Business Advisor: Business Organizations. These changes affect income and franchise taxes, sales and use tax, and procedure and administration, and they would also create a new oil company profits tax.

    Wisconsin Business Advisor: Business Organizations is available to members for $129, plus tax, shipping, and handling. Purchasers who subscribe to the Bar’s automatic supplementation service will receive this and future updates at 10 percent the regular update price.