United States

Wisconsin enacts SALT deduction workaround with pass-through tax

TAX ALERT  | 

On Dec. 14, 2018, Wisconsin Governor Scott Walker signed Senate Bill 883 as a response to the Tax Cuts and Jobs Act (Pub. L. No. 115-97, commonly known as the “TCJA” and enacted on Dec. 22, 2017), and to the U.S. Supreme Court’s decision in South Dakota v. Wayfair.

The highlights of the bill include the following:

  • An elective 7.9 percent entity level income tax on pass-through entities (PTE)
  • Economic nexus standards for out-of-state retailers selling to Wisconsin customers

Pass-through entity tax

The bill seeks to provide an option to mitigate the effect of the federal $10,000 state and local tax (SALT) deduction cap for individual taxpayers by providing an elective entity level tax. The tax would be imposed at a rate of 7.9 percent on the PTE’s Wisconsin sourced net income due in quarterly estimated payments. The election requires the consent of the majority of the entity’s ownership, and must be made by the due date or extended due date of the entity’s Wisconsin income tax return.

There are limitations associated with making the election, which include the inability to claim losses and credits (other than a credit for tax paid to another state). As a result, the election may not be beneficial for every taxpayer.

Economic nexus for out-of-state retailers

Senate Bill 883 codifies the economic sales tax nexus thresholds adopted through emergency regulation by the Wisconsin Department of Revenue. The department began enforcement of those thresholds on Oct. 1, 2018. Pursuant to the new bill, the statutory provision addressing whether a retailer is engaged in business in Wisconsin now includes remote retailers that exceed the following thresholds in the previous or current year:

  1. Annual gross sales into Wisconsin exceeding $100,000, or
  2. Annual number of separate sales transactions into Wisconsin equals 200 or more.

Takeaways

While potentially beneficial in generating a greater SALT deduction, the entity level tax is calculated using a higher tax rate than the highest marginal individual rate and does not include losses or most credits. Taxpayers are encouraged to contact their state and local adviser to determine if paying the entity level tax is a favorable option and to consider whether the provision will withstand IRS scrutiny under the new SALT deduction regulations.

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