United States

Wisconsin enacts various tax changes in 2017-2019 biennial budget

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On Sept. 21, 2017, Wisconsin Gov. Scott Walker signed the 2017-2019 fiscal year budget through Wisconsin Act 59, providing both tax increases and reduction measures along with greater conformity to the federal tax code.

Notable tax provisions of the budget are summarized below.

Income tax

Federal conformity

For tax years beginning after Dec. 31, 2016, Wisconsin now generally conforms to the Internal Revenue Code as of Dec. 31, 2016, with exceptions.

Also, for tax years beginning after Dec. 31, 2013 and before Jan. 1, 2017, additional conformity to the Internal Revenue Code is adopted by Wisconsin.

And note that Wisconsin specifically excludes the changes to the Internal Revenue Code partnership audit rules and instead will continue to follow the TEFRA partnership audit rules.

Repeal of the alternative minimum tax

Wisconsin’s alternative minimum tax is repealed for tax years beginning after Dec. 31, 2018.

Manufacturing and agriculture credit

The budget ends the overlap that allowed individuals to calculate both the manufacturing and agriculture tax credit as well as the credit for taxes paid to other states on the same income. The change reduces the amount of income on which the credit is calculated by the amount of that same income that is claimed under the manufacturing and agriculture credit for taxes paid to another state.

Research tax credit

The research tax credit is now partially refundable.

Other credits and incentives

  • The budget act strengthens the claw-back process for revoked tax credits, and eliminates interest paid on refundable credits administered by the Wisconsin Economic Development Corporation.
  • New limitations to historic rehabilitation credits are imposed effective July 1, 2018.
  • Non-elderly, non-disabled individuals with no earned income from employment are no longer eligible for Homestead Credit.
  • Effective in tax year 2017, the budget modifies the credit for taxes paid to other states by limiting the amount of the credit that may be claimed to the amount of taxes that would be paid if the same income was taxed under the Wisconsin individual income tax. This limitation does not apply to tax paid to a border state of Wisconsin.
  • Nonresident and part-year resident (NPR) filers must use the standard deduction prior to the application of the NPR apportionment ratio when calculating the state itemized deduction credit. The credit equals 5% of the difference between certain federal itemized deductions and the claimant's state sliding scale standard deduction. Nonresidents and part-year residents file state tax form NPR and calculate their state standard deduction, gross tax, itemized deduction credit and property tax/rent credit based on their federal adjusted gross income. Then, NPR filers multiply their net state tax by a fraction equal to their Wisconsin income divided by their federal income to determine their actual state tax liability.

Charitable donations

For taxable years beginning after Dec. 31, 2017, Wisconsin conforms with federal law allowing persons over 70½ years of age to exclude from taxable income up to $100,000 distributed from an individual retirement account to a charitable organization.

Service income sourcing

The state Legislative Reference Bureau explains that sourcing of service income is modified so that tax is imposed on the gross receipts from services relating to tangible personal property delivered to customers in this state and purchased by individuals who are physically present in this state at the time the services are received.

Additionally, the law creates specific income sourcing provisions for broadcasters for gross receipts from advertising, royalties, and the use or licensing of intangible property.

Loss carry-forward and carry-back claims

The Legislative Reference Bureau explains that a taxpayer may not carry forward a net operating or a net business loss to offset future income unless the taxpayer filed a tax return to claim the loss within four years after the due date for filing the tax return for the taxable year in which the loss was incurred. Additionally, the bill provides that a taxpayer that is allowed to carry back the loss to offset income in prior years may only do so if the taxpayer files a tax return to claim the carry-back within four years after the due date for filing the tax return for the taxable year to which the loss is carried back.

Timing of refunds paid to individuals

The department is now prohibited from issuing a refund to an employed individual before March 1, unless both the individual and the individual's employer have filed all required returns and forms with the Wisconsin Department of Revenue for the taxable year for which the individual claims a refund.

Reporting Requirements

A captive insurance company that is part of a group of corporations engaged in a unitary business will be required to report its income with the group's combined report even if all of its income is exempt from the income/franchise tax.

Property tax

Forestry mill tax

Effective with the Jan. 1, 2017 property tax assessments, the state sunsets the forestry mill tax. The tax rate is 0.1697 mills for each dollar of the assessed value of the property of the state as determined by department.

Machinery, tools, and patterns

Effective with the Jan. 1, 2018 property tax assessments, the state exempts from property tax machinery, tools, and patterns not used in manufacturing. “Machinery" is defined for purposes of the exemption as a structure or assemblage of parts that transmits force, motion, or energy from one part to another in a predetermined way by electrical, mechanical, or chemical means, but does not include a building.

Sales and use tax

Construction contracts

The Legislative Reference Bureau explains that the new law expands the sales and use tax exemption for products sold in connection with real property construction activities as part of a lump-sum contract to all construction contracts. Under current law, there is a sales and use tax exemption for products sold by a contractor as part of a lump-sum contract for real property construction activities if the total sales price attributable to the taxable products is less than 10 percent of the total contract price. Under the new law, the exemption is expanded to apply to all construction contracts involving real property construction activities if the total sales price of taxable products is less than 10 percent of the total contract price. If the exemption applies, the contractor is the consumer of, and pays the sales tax on, the products.

Additionally, if the prime contract qualifies for the exemption, the exemption applies to all subcontracts entered into with respect to the real property construction activities. If the exemption applies to a subcontract, the subcontractor is the consumer of, and pays the sales tax on, the products. Under current law, if a construction contract is between a contractor and a tax-exempt entity, the contractor may purchase, without tax for resale to the tax-exempt entity, any products that will be sold by the contractor to the tax-exempt entity as part of a construction contract. The bill extends that sales and use tax exemption to products purchased by a subcontractor for eventual resale to the tax-exempt entity.

Prepared food

An exemption is created for prepared food sold by a retailer that meets certain criteria. As a result, frozen food sold by a retailer would be treated the same as other frozen foods regardless of whether the food was prepared by that retailer offsite (currently taxable as prepared food) or prepared by another person (currently exempt as food). Additionally, food consisting of more than 50 percent yogurt that is prepared by a retailer away from its retail establishment in a building assessed as manufacturing property at which no sales of prepared food are made and subsequently at its retail location would be exempt from the sales tax.

Other exemptions

Additional changes to sales and use tax exemptions include:

  •  a new exemption for video and electronic games sold in a tangible form to businesses providing taxable services through an amusement device
  • a new exemption for tournament or league entrance fees advertised and set aside as prize money
  • a new exemption for purchases related to beekeeping
  • a new exemption for sales of farm-raised fish to a registered fish farm
  • an expansion of the exemption for tangible personal property sold to construction contractors for use in construction activities for education-related entities

Effective July 1, 2020, the bill repeals the sales tax on internet access services, conforming to federal law prohibiting states from imposing the sales tax on such services.

Other Taxes

The budget expands the applicability of the local room tax so that a municipality may impose the tax on lodging marketplaces (e.g., AirBNB and VRBO) and owners of short-term rentals. Vacation and short-term rental companies would be required to register with the department. Anyone operating a short-term rental for more than 10 nights per year would be required to register with the state Wisconsin Department of Agriculture, the Wisconsin Trade and Consumer Protection and potentially with a municipal licensing body. Additionally, a local government would be barred from enacting an ordinance prohibiting the rental of a residential dwelling for more than a week, but may enact other more specific limits.  

Takeaways

The $76 billion budget is generally effective from July 1, 2017 through June 30, 2019. Noteworthy, the governor also made almost 100 partial vetoes to various provisions of the bill, which was one of the last state budgets passed this year. Connecticut and Pennsylvania are still without their respective budget bills. Wisconsin Act 59 provides for a number of taxpayer-friendly changes, with varying effective dates and application. Wisconsin taxpayers should speak to their tax advisors with questions.

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