On September 21, 2017, the Governor of Wisconsin signed into law the 2017-2019 budget bill (2017 Wisconsin Act 59), 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 Changes
Exemption Created for Beekeeping Effective December 1, 2017
A sales and use tax exemption for purchases of machinery, equipment, accessories, supplies, electricity, and fuel used or consumed in beekeeping was created. “Beekeeping” is defined as the business of moving, raising, producing, and other management of bees, or bee products, regardless of the number of hives of bees managed.
Exemption Created for Sales of Farm-Raised Fish Effective September 23, 2017
A sales and use tax exemption is created for the sale of and storage, use, or other consumption of farm-raised fish sold to a fish farm that is registered with the department of agriculture, trade, and consumer protection or a person who holds a valid permit for the stocking of fish.
Expansion of Exemption for Building Materials That Become Part of a Local Government or Qualifying Nonprofit Facility Effective July 1, 2018
In December 2015, Senate Bill 227 was signed into law, which created a sales and use tax exemption for contracts entered into on or after January 1, 2016, for building materials, sold to a construction contractor, that become a component of a facility owned by an exempt owner customer. 2017 Wisconsin Act 59 expands this exemption to include any technical colleges, any institutions designated by the Board of Regents of the University of Wisconsin System, any two-year college campus, and the University of Wisconsin – Extension. This applies to contracts entered into on or after July 1, 2018.
“Facility” means any building, shelter, parking lot, parking garage, athletic field, athletic park, storm sewer, water supply system, or sewerage and waste water treatment facility, but does not include a highway, street, or road.
Exemption for Lump Sum Construction Contracts Expanded to include all Construction Contracts Effective December 1, 2017
Under current law, purchases of property sold by a contractor as part of a lump sum contract for real property construction are exempt from sales and use tax if the total sales price related to the taxable property is less than 10% of the total contract price. This bill expands the exemption to apply to all construction contracts, entered into on or after December 1, 2017, involving real property construction if the total sales price of taxable property is less than 10% of the total contract price. The contractor is then the consumer of all materials and must pay tax on all materials incorporated into the construction contract.
Furthermore, if the prime contract meets the requirements above, the exemption applies to all subcontracts related to the real property construction. The subcontractor is then the consumer of all materials and pays tax on the materials incorporated into the construction contract. If the prime contract is entered into with a qualifying exempt organization that owns the facility in which the materials are being incorporated into as part of the construction contract, the exemption for building materials allowed for the prime contractor extends to the subcontractor.
“Prime contractor” means a contractor who enters into a construction contract with an owner or lessee of real property, except for leased property, to perform real property construction activities on the real property. “Subcontractor” means a contractor who enters into a construction contract with a prime contractor or another subcontractor.
Finally, the term “lump sum” is replaced by “construction contract” and is defined as a contract to perform real property construction activities and to provide products. The above rules apply to all types of construction contracts.
Real Property Construction Activities – Defined
Previously, the definition of “real property construction activities” was included within the definition of “contractors” and “subcontractors.” “Real property construction activities” is now defined on its own as activities that occur at a site where tangible personal property is affixed to that real property, if the intent of the person who affixes that property is to make a permanent accession to the real property. “Real property construction activities” does not include affixing taxable leased property to real property or affixing to real property tangible personal property that remains tangible personal property after it is affixed.
Exemption for Prepared Food Manufactured and Sold by Retailer Effective September 23, 2017
An exemption is created for prepared food that is manufactured and sold by a retailer if the following apply:
- The prepared food is not candy, soft drinks, or dietary supplements.
- The retailer manufacturers the food in a building that is or would be assessed as manufacturing property for property tax purposes.
- The retailers makes no retail sales of prepared food at the manufacturing facility.
- And either:
- The retailer freezes the food prior to its sale and sells the prepared food frozen and without eating utensils.
- The food consists of more than 50% yogurt.
Exemption Created for Internet Access Services Effective July 1, 2020
The sales tax on charges for internet access services is set to expire on July 1, 2020 to conform with the federal law that prohibits states from imposing sales tax on such services after June 30, 2020. The Internet Tax Freedom Act prohibits states from imposing sales tax on these services. However, Wisconsin is exempt from this federal law due to being a state that was grandfathered due to having imposed sales tax on these services prior to the law being enacted in 1998. Therefore, until July 1, 2020, charges for these services will remain taxable.
Exemption on Wireless Surcharge – Repealed Effective September 23, 2017
Under prior law, the wireless 911 fee charged by wireless providers was exempt from sales and use tax. This bill eliminates that exemption making the wireless surcharge subject to tax.
Exemptions Created for Providers of Certain Amusement Services Effective December 1, 2017
Videos and Games - Under current law, a provider of taxable services through amusement devices is considered the consumer of videos or electronic games that are played through video or gaming devices and must pay tax on their purchases of such videos or electronic games. This bill creates a sales and use tax exemption for the purchase of videos or electronic games used in a taxable amusement service that are separate from the devices through which they are played and sold in a tangible form.
Prizes Won in Amusement Device – This bill creates a sales and use tax exemption for tangible personal property sold to a person in the business of providing a taxable service through an amusement device if the tangible personal property is used exclusively as a prize awarded or transferred through the use of the amusement device.
Prize Money – This bill creates a sales and use tax exemption for tournament or league entrance fees advertised and set aside as prize money.
Occasional Sales Threshold Defined Effective January 1, 2018
Under prior rule, a seller who makes more than $1,000 in sales of taxable tangible personal property or taxable services is required to hold a seller’s permit and collect sales tax. Under the new law, the threshold for the occasional sale exemption was increased to $2,000 of sales of taxable tangible personal property or taxable services.
Retailer – Definition Expanded
The definition of a “retailer” was expanded to include any person making any retail sale of off-highway motorcycles.
Field Audit Sampling Criteria Effective June 1, 2018
This bill creates a requirement for the Department of Revenue to create rules to establish criteria applicable to field audits for which an auditor randomly selects a sample of transactions and uses probability theory to evaluate the sample results. The department shall establish criteria to allow any person with less than $10 million in annual sales during any year at issue in a field audit the choice to have the audit conducted using statistical sampling. The Department must also establish criteria that specifies the number of transactions necessary to qualify for statistical sampling and the maximum sample size.
2. Income Tax Changes – Individual and Corporate
Alternative Minimum Tax Repealed Effective for tax years beginning after December 31, 2018
The Wisconsin alternative minimum tax is repealed for tax years beginning after December 31, 2018.
Net Operating Loss Carry-forward and Carry-Back Effective September 23, 2017
This bill limits the time for computing and claiming a net operating loss (NOL) carry-back or carry-forward to four years. Taxpayers can carry back an NOL to offset income in prior years if a return is filed to claim that carry-back within four years after the unextended due date of the return for the taxable year in which the loss occurred. Additionally, taxpayers may not carry forward an NOL to offset future income unless a return was filed to claim the NOL within four years of the unextended due date of the return for the year in which the loss occurred.
Internal Revenue Code Conformity Effective for tax years beginning after December 31, 2016
Wisconsin updated its references to the Internal Revenue Code (IRC) to generally conform with the IRC as amended to December 31, 2016. One notable outcome is that Wisconsin now conforms to the federal law that allows individuals over 70½ years of age to exclude from taxable income up to $100,000 distributed from an IRA to a charitable organization. One notable exception is the exclusion of the changes to the IRC partnership audit rules. Wisconsin will still follow the previous partnership audit rules.
Delay in Issuance of Income Tax Refund
The department will not issue a refund to an employed individual before March 1 of the current tax year unless both the individual and the individual’s employer have filed all required returns and forms with the department for that tax year.
Changes to Electronic Filing Requirements Effective for statements or returns filed in 2018
Employers required to file 10 or more wage statements or 10 or more of any one type of information return with the department are now required to file those returns electronically. The prior threshold was 50 returns.
Manufacturing and Agriculture Credit Effective for tax years beginning after 2016
The manufacturing and agriculture tax credit is available to individuals and entities for taxable years that begin on or after January 1, 2013, for manufacturing and agricultural activities in Wisconsin. The tax credit is available for income derived from manufacturing or agricultural activities occurring in Wisconsin. The credit is a percentage of “eligible qualified production activities income”.
This piece of legislation impacts individuals that have flow through entities (i.e. LLC’s, partnerships, S-corporations, etc.), not C-Corporations. This bill reduces the amount of qualified production activities income used to calculate the tax credit by the amount of that income that is utilized to compute and claim the credit for state taxes paid to another state. We are waiting on additional guidance to be published by the Wisconsin Department of Revenue on this legislative change.
Partially Refundable Research Tax Credit Effective for tax years beginning after 2017
This bill allows 10% of the allowable research tax credit to be refunded. For tax years 2017 and prior, no research tax credit amount was refundable. As a result of this legislation it appears only tax credits claimed in the current year can be refunded and no amount of credits claimed in prior years that are carried forward to 2018 can be refunded. We are waiting on additional guidance to be published by the Wisconsin Department of Revenue on this legislative change.
Change in Income Sourcing Effective for tax years beginning after December 31, 2016
This bill provides that income derived from services is sourced to Wisconsin if the service relates to tangible personal property delivered directly or indirectly to Wisconsin customers or if the service is purchased by an individual who is physically present in Wisconsin at the time the service is provided. Under prior law gross receipts from services were sourced to Wisconsin if the purchaser of the service received the benefit of the service in Wisconsin. We are waiting on additional guidance to be published by the Wisconsin Department of Revenue on this legislative change.
The bill also implements changes to income sourcing for broadcasters that take effect for tax years beginning after 2018.
3. Personal Property Tax Changes
Exemption Created for Machinery, Tools, and Patterns Effective January 1, 2018
This bill creates a property tax exemption for machinery, tools, and patterns not used in manufacturing. “Machinery” is defined 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.
In the past it did not matter whether machinery, tools, and patterns and tools were reported for personal property tax purposes (often reported under furniture, fixtures, and office equipment and vice versa). Going forward it will be extremely important for Companies to review asset listings and verify all eligible property is exempted for personal property tax purposes. We are waiting on additional guidance to be published by the Wisconsin Department of Revenue regarding this exemption.
Elimination of Forestry Mill Tax Effective January 1, 2017
The forestry mill tax has been eliminated from property tax assessments effective January 1, 2017.
Please contact Wipfli relationship executive if you have any questions regarding the budget bill or if you would like to know how specific changes could apply to you.