Jennifer Hacker Olsen, PR & Communications Manager
Wisconsin Budget Bill
On June 30, 2013, the Governor of Wisconsin signed into law the 2013-2015 budget bill, which included many changes to the state of Wisconsin’s tax system. The changes affect sales and use taxes, individual income taxes, corporate income taxes, and property taxes.
1. Sales Tax Law Changes
Exemption for Lump Sum Contracts | Effective for contracts entered into on or after October 1, 2013
A sales and use tax exemption is created for certain lump sum contracts, defined to mean a contract to perform real property construction activities and to provide taxable goods or services and for which the contractor quotes the charge for labor, services of subcontractors, and the taxable items as one price, including a contract for which the contractor itemizes such charges as part of the schedule of values or similar document.
Under this legislation, the contractor is the consumer of the taxable products provided in a lump sum contract if the total sales price of the taxable products (tangible personal property and services) is less than 10% of the total sales price of the contract, regardless of whether the contractor separately itemizes the charges for taxable products in a schedule of values or similar document that is provided to the customer. Note, special rules apply when a lump sum contract is entered into with an entity that is exempt from sales and use tax under Wisconsin statutes. Please contact a Wipfli specialist for additional information.
Exemption on Qualified Research of another Group Member | Effective July 2, 2013
Under previous law, the sale of tangible personal property, animals, and certain other items to a person who is primarily engaged in biotechnology or manufacturing in this state is exempt from the sales and use tax if the property, animals, or items are used for qualified research. This bill allows a member of a combined group of corporations to claim the exemption if another group member is conducting qualified research for the member who is engaged in biotechnology or manufacturing in this state.
Property Used to Raise Animals Sold Primarily to a Biotechnology Business, a Public or Private Institution of Higher Education, or a Governmental Unit for Use in Qualified Research | Effective
July 2, 2013
For purposes of this sales and use tax exemption, the definition of “qualified research” is modified to mean “qualified research as defined under section 41(d)(1) of the Internal Revenue Code, except that it includes qualified research that is funded by a member of a combined group for another member of a combined group.”
Clarification on Eligibility to Claim Sales/Use Tax Exemption Under Qualified Research | Effective July 2, 2013
The sales and use tax exemption for purchases of machinery, equipment, and consumables for research purposes has been amended to include the following:
1. A person engaged in manufacturing in this state at a building assessed as manufacturing under s.70.995.
2. A person engaged primarily in biotechnology in this state.
3. A combined group member who is conducting qualified research for another combined group member and that other combined group member is a person described under 1 or 2 above.
“Building” means any structure used for sheltering people, machinery, animals or plants; storing property; or working, office, parking, sales, or display space.
“Primarily” means more than 50%. A person is primarily engaged in biotechnology in Wisconsin when more than 50% of that person’s activities in Wisconsin are biotechnology.
Note, the primarily test of more than 50% still applies to a person primarily engaged in biotechnology in Wisconsin when more than 50% of that person’s activities in Wisconsin are biotechnology; however, a manufacturer must be engaged in this state at a building assessed as manufacturing under s. 70.995 of the Wisconsin Statutes.
Also, qualified research under this section of the statutes has been redefined to include qualified research that is funded by a member of a combined group for another member of a combined group.
Note: For the period January 1, 2012, through July 1, 2013, in order for a manufacturer to make exempt research-related purchases of machinery, equipment, and consumables from sales and use tax, that manufacturer must have been “primarily engaged” in manufacturing in Wisconsin.
Exemption for Select Property Used by Certain Printers | Effective October 1, 2013
A sales and use tax exemption is created for purchases by a person primarily engaged in: (a) commercial printing (except screen printing and book printing) without publishing (except grey goods printing), (b) printing or printing and binding books and pamphlets without publishing, or (c) performing prepress and post-press services in support of printing activities. The purchase of the following items would be exempt from sales and use tax:
– Computers and servers that are used to store copies of the product that are sent to a printing press.
– Tangible personal property purchased from out−of−state sellers that are temporarily stored, remain idle, and not used in this state for not more than 180 days and that are then delivered and used outside of this state.
Change in Exemption under Taxable Laundry and Dry Cleaning Services | Effective October 1, 2013
Under previous law, taxable laundry, dry cleaning, pressing, and dyeing services provided for an exemption from the tax when a listed service was performed: (1) on raw materials or good in process destined for sale or (2) performed on cloth diapers by a diaper service, or when (3) performed by the customer through the use of coin-operated machines. Under this bill the language “coin-operated” has been stricken and replaced with “self-service” machines.
Change in Sales/Use Tax Filing Frequency Threshold | Effective January 1, 2014
Under prior law, a retailer would remit the sales and use taxes collected or accrued during each calendar quarter to the Wisconsin Department of Revenue (“DOR”) no later than the last day of the month following the end of the previous calendar quarter. If, however, a retailer had a tax liability of more than $600 in any calendar quarter, DOR may have required the retailer to remit the taxes no later than the last day of the month following the month in which the taxes are collected. Under this bill, if a retailer has a tax liability of more than $1,200 in any calendar quarter, DOR may require the retailer to remit the taxes no later than the last day of the month following the month in which the taxes are collected.
Due Date for Filing Sales and Use Tax Refund Claims | Effective August 1, 2013
This Bill clarifies that sales and use tax refund claims, whether filed by a seller or buyer, must generally be filed within four years of the original due date (unextended date) of the claimant’s Wisconsin income or franchise tax return.
Custom Farming Services – Defined
Under current law, a veterinarian’s charges for the performance of custom farming services are not subject to tax. “Custom farming services” has been defined to specifically include services performed by a veterinarian to animals that are farm livestock or work stock and used exclusively in the business of farming.
Exemption for Property Provided with Services (clarification)
Following 2011 Wisconsin Act 32, sellers were no longer required to pay use tax on products provided free of charge with the purchase of other products.
This Bill clarifies that the sales and use tax exemption for products provided free of charge with the purchase of another product does not apply to products provided free of charge with the purchase of taxable services. Note: This tax treatment is the practice currently administered by the Wisconsin Department of Revenue.
Retailer Ability to Take Current Period Credit on Past Exempt Sales | Effective July 2, 2013
Under this Bill, a retailer has the option of taking a deduction (credit) on their sales and use tax return in the period in which an exemption certificate is received, subsequent to the time all of the following have occurred: 1) a sale was reported for which the purchaser was previously charged tax, 2) the tax was remitted to the Department of Revenue, and 3) such tax was returned (refunded) to the buyer.
Note: The above provision does not apply if the period in which the exemption certificate is received is in a taxable year subsequent to the taxable year in which the sale, covered by the exemption, occurred.
Exemption for Advertising and Promotional Direct Mail | Effective July 1, 2013
An exemption is created for the gross receipts from the sale of and the storage, use, or other consumption of advertising and promotion direct mail.
“Advertising and promotional direct mail” means direct mail that has the primary purpose of attracting public attention to a product, person, business, or organization or to attempt to sell, popularize, or secure financial support for a product, person, business, or organization.
“Direct mail” means printed material that is delivered or distributed by the U.S. mail or other delivery service to a mass audience or to addressees on a mailing list provided by or at the direction of the purchaser when the cost of the items is not billed directly to the recipients. “Direct mail” does not include multiple items of printed material delivered to a single address.
Under current law, “Advertising and promotional direct mail” is sourced to the location from where it was shipped unless the purchaser provides one of the following:
– Direct pay permit
– Exemption certificate claiming direct mail
– Taxing jurisdiction information for each recipient
Note: This legislation was previously passed as part of 2011 Wisconsin (Budget) Act 32.
2. Individual Income Tax Changes
Individual Income Tax Rate Reduction
Under this Bill, the number of individual income tax brackets is reduced from five to four and all brackets saw rate reductions as follows:
Previous Law/New Rates:
4.60% – 4.40%
6.15% – 5.84%
6.50% – 6.27%
6.75% – 6.27%
7.75% – 7.65%
The rates will be in effect for tax periods beginning after December 31, 2012.
Phase-In of Health Insurance Premium Deduction
The health insurance premiums deduction created as a result of the passage of the 2007 – 2009 state budget became first available in the 2008 tax year at ten percent (10%) of expenses. The escalation of the phase-in was delayed on the passage of the 2009-2011 budget bill and was held at the ten percent level for the 2009 and 2010 tax years. The deductible amount of premiums expenses for the 2013 tax year, and going forward, will reach the one hundred percent (100%) level.
The historical phase-in percentages are provided below:
2011 – 25%
2012 – 45%
2013 – 100%
Note: For the 2013–2015 tax years, the state budget has excluded from the amount deductible any premiums paid with premium assistance credits (made available as a result of the passage of the Affordable Care Act).
Farm Loss Limitation Ends
For taxable years beginning before January 1, 2014, farm losses are limited for farmers not actively engaged in farming. The addition to net income is eliminated for taxable years beginning on or after January 1, 2014. Federal limitations on “passive” farm losses may still apply.
Subtraction for Private School Tuition
For tax years beginning on or after January 1, 2014, Wisconsin allows a subtraction from income for tuition paid to attend eligible private schools.
The subtraction is limited to:
Elementary (K–8) pupil – $4,000
Secondary (9–12) pupil – $10,000
The subtraction applies to each pupil, but the subtraction can only be claimed for one grade for the pupil who is enrolled in both elementary and secondary institutions in the same taxable year. In order to claim the subtraction on the tax return, the pupil must be claimed as a dependent by the individual that paid the tuition.
Economic Development Surcharge
Effective for taxable years beginning on or after January 1, 2013, the economic development surcharge does not apply to individuals, estates, trusts, partnerships, and limited liability companies taxed as partnerships.
3. Corporate Income/Franchise Tax Changes
Extension of Research & Development Credit to Pass-Through Entities | Taxable years beginning on or after January 1, 2013
Under previous law, only C corporations were eligible to claim the federal Research & Development credit at the state level. Under this Bill, pass-through entities such as S corporations, LLCs, and partnerships are allowed to compute the credit and provide credit information to their owners who may claim the credit against their individual income tax. An individual set up as a sole proprietor would also be able to claim the credit. Many more businesses are structured as pass-through entities. Consequently, this provision is expected to benefit many Wisconsin taxpayers.
Initial Year of Manufacturing & Agriculture Credit Phase-In
The credit was previously enacted under the 2011–2013 state budget (WI Act 32) with an initial phase-in scheduled to begin in the 2013 tax period. The credit was designed to, over a four (4) year period, reduce and virtually eliminate the income tax burden placed specifically on the state manufacturing and agricultural sectors. The credit can be claimed by owners of pass-through entities in addition to C corporations, who own or rent property in Wisconsin, assessed as either manufacturing or agricultural and used to grow, produce, or extract tangible personal property.
The credit is phased-in as follows:
2013 – 1.875%
2014 – 3.75%
2015 – 5.526%
2016 – 7.5%
Starting with the 2016 tax year and going forward, the maximum corporate income tax rate for qualified companies will be at the rate of 0.4% (7.9% top rate¾7.5% credit).
Note: An adjustment was made under the current biennium budget to limit the credit to the amount of income or franchise tax paid on income on which the credit is based¾effectively making the credit non-refundable.
Elimination of Business Tax Credits
In an effort to streamline the state tax code and to further eliminate certain under-utilized tax credits, the following eighteen (18) credits will be eliminated in 2014 and 2015:
Dairy and Livestock Farm Investment Credit
Dairy Manufacturing Facility Investment
Film Production Services and Investment
Food Processing Plant and Food Warehouse Investment
Meat Processing Plant and Food Warehouse Investment
Woody Biomass Harvesting and Processing Investment***
Health Insurance Risk-Sharing Plan Assessment
Beginning Farmer and Farm Asset Owner
Biodiesel Fuel Production
Ethanol and Biodiesel Fuel Pump
Super Research and Development
Community Development Finance
Electronic Medical Records
*** Eliminated in 2015 (all other credits eliminated in 2014)
****Eliminated in 2013
Depreciation and Amortization | Taxable years beginning on or after January 1, 2014
For taxable years beginning on or after January 1, 2014, sections 179, 179A, 179B, 179C, 179D, and 179E of the Internal Revenue Code apply for Wisconsin tax purposes. For purposes of this change, the Internal Revenue Code is the Internal Revenue Code in effect in the year in which the property is placed in service.
For tax years beginning on or after January 1, 2014, depreciation and amortization are to be computed based on the Internal Revenue Code as of January 1, 2014.
Starting with the first taxable year beginning after December 31, 2013, and for each of the next four taxable years, a subtraction is provided for 20% of the amount determined by subtracting the combined federal adjusted basis of all depreciated or amortized assets as of the last day of the taxable year beginning in 2013 that are also being depreciated for Wisconsin from the combined Wisconsin adjusted basis of those assets on the same day.
Net Operating Losses
Effective for tax years beginning on or after January 1, 2014, net operating losses (“NOL”) may be carried back 2 years and forward 20 years. Previously, carrybacks of NOLs were not allowed and the carryforward period was limited to 15 years.
4. Property Tax Changes
Exemption for Biogas and Synthetic Gas Energy Systems | Effective July 1, 2013
The property tax exemption for solar systems was expanded to include biogas and synthetic gas systems. “Biogas or synthetic gas energy system” means:
– equipment which directly converts biomass, as defined under section 45K (c) (3) of the Internal Revenue Code, as interpreted by the Internal Revenue Service, into biogas or synthetic gas,
– equipment which generates electricity, heat, or compressed natural gas exclusively from biogas or synthetic gas,
– equipment which is used exclusively for the direct transfer or storage of biomass, biogas, or synthetic gas, and
– any structure used exclusively to shelter or operate such equipment,
– or the portion of any structure used in part to shelter or operate such equipment that is allocable to such use if all such equipment, and any such structure, is located at the same site and includes manure, substrate, and other feedstock collection and delivery systems, pumping and processing equipment, gasifiers and digester tanks, biogas and synthetic gas cleaning and compression equipment, fiber separation and drying equipment, and heat recovery equipment, but does not include equipment or components that are present as part of a conventional energy system.
Off-Premises Advertising Signs
Off-premises advertising signs are now included as personal property. In this subsection, “off-premises advertising sign” means a sign that does not advertise the business or activity that occurs at the site where the sign is located.
5. General Administrative Changes
Reduction of Overpayment (Refund) Interest from 9% to 3% | Effective July 2, 2013
Prior to July 2, 2013, the statutory interest rate paid on overpayments (refunds) of income/franchise and surtaxes – (sales/use taxes and motor fuel taxes) was nine percent (9%). Effective July 2, 2013, and thereafter, the statutory overpayment interest rate is reduced to three percent (3%) for all taxes administered by the Department. All refunds paid on or after this date will include three percent (3%) interest, regardless of the refund periods involved or the status of any proposed audit report.
Reliance on Past Audits | Effective January 1, 2014
Under this bill, generally, a person who is subject to an assessment or audit determination by the Wisconsin Department of Revenue (“DOR”) for taxable years beginning after December 31, 2008, is not liable for any amount that DOR asserts that the person owes if the liability asserted is the result of a tax issue that existed in a prior assessment or audit, a DOR employee involved in the prior assessment or audit knew of the tax issue, and DOR did not assert the liability for the tax issue at the time of the prior assessment or audit.
Note: This protection first applies to DOR audit determinations issued on and after January 1, 2014.
Appeal of Redeterminations–Additional Venues | Effective July 2, 2013
Previously, appeals of Tax Appeals Commission redeterminations could only be made to the circuit court for Dane County. This Bill provides additional options for the appeal to be heard before any of the following circuit court locations:
1. Taxpayer’s commercial domicile
2. Where the taxpayer owns property
3. Where the taxpayer transacts business in this state
Refund Offset Program Expanded to Nontax Obligations of Wisconsin and Other States | Effective
July 2, 2013
Under prior law, the Wisconsin Department of Revenue may enter into agreements with other states to provide for offsetting Wisconsin tax refunds against tax obligations of other states and offsetting tax refunds of other states against Wisconsin tax obligations. Under this bill, DOR may also enter into agreements with other states to provide for offsetting Wisconsin tax refunds against nontax obligations of other states and offsetting tax refunds of other states against Wisconsin nontax obligations.
We expect more clarification of these law changes in the coming months as the Wisconsin Department of Revenue issues further guidance.