Wisconsin adopts portions of federal tax reform provisions


Steven Koritzinsky
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Jay Baehman
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Jamie C. Yesnowitz
Washington, DC
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Chuck Jones
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Lori Stolly
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On April 3, 2018, Wisconsin Gov. Scott Walker signed legislation addressing recently enacted federal tax reform,1 with substantial decoupling from federal tax reform provisions contained in H.R. 1, commonly referred to as the Tax Cuts and Jobs Act (TCJA).2 In addition, Wisconsin has adopted changes to its state-specific economic substance rules, along with changes to rules governing reliance on prior audit determinations.

IRC conformity legislation As a static conformity state, Wisconsin updates its conformity date to the Internal Revenue Code (IRC) from time to time. When the TCJA was enacted late last year, Wisconsin conformed to the IRC as of Dec. 31, 2016.3 Under the Wisconsin legislation, Wisconsin retains the Dec. 31, 2016, conformity date for the 2017 tax year, but has updated its general IRC conformity date to Dec. 31, 2017, for the 2018 tax year and thereafter.4 In doing so, Wisconsin automatically or specifically adopted several changes in the TCJA. Despite the new general conformity date, however, Wisconsin specifically decoupled from most of the notable TCJA provisions.

        Automatic adoption By advancing the IRC conformity date, Wisconsin automatically adopted the following provisions without taking further legislative action: IRC Sec. 179 (allowing for enhanced expensing thresholds); IRC Sec. 55(d) (allowing for an increased alternative minimum tax exemption amount for individuals); the Wisconsin supplement to federal historic rehabilitation tax credits; and IRC Sec. 708(b) (repealing the technical termination of partnership provisions).

        Specific conformity provisions In its revised IRC definition, Wisconsin specifically has conformed to three provisions contained in the TCJA: IRC Sec. 529A (increased contributions to ABLE accounts); IRC Sec. 529 (to the extent of rollovers from IRC Sec. 529 plans to allow for distributions for pre-college educational expenses); and IRC Secs. 481 and 1371 (relating to the modification of the treatment of S corporation conversions to C corporations).5

        Specific decoupling provisions (domestic) Wisconsin specifically has decoupled from many of the material domestic provisions that have been recently adopted under the TCJA, including: IRC Sec. 199A (the deduction for qualified business income of pass-through entities); IRC Sec. 168(k) (allowing for 100% bonus depreciation); IRC Sec. 163(j) (interest deduction limitation); and IRC Sec. 162 (to the extent of the limitation on deduction of FDIC premiums and excessive employee compensation).6

        Specific decoupling provisions (international) Wisconsin generally has decoupled from the international tax provisions contained in the IRC, including provisions relating to subpart F income, the foreign dividend gross-up and foreign tax credits. The enacted legislation continues this theme by decoupling from practically all of the provisions with international effect, including: IRC Sec. 245A (the dividend received deduction (DRD) available to dividends from a 10% owned foreign subsidiary, noting that Wisconsin has always decoupled from the federal DRD and has its own state-specific DRD); IRC Sec. 965 (the one-time repatriation tax), IRC Sec. 951A (the tax on global intangible low-taxed income (GILTI)); IRC Sec. 250 (the GILTI deduction, and the deduction for foreign derived intangible income (FDII)); and IRC Sec. 59A (the base erosion anti-abuse tax (BEAT)).7

Economic substance legislation Wisconsin is one of only a few states with a state-specific economic substance standard in effect. When the standard was originally adopted, Wisconsin presumed that transactions between controlled group members (as defined in IRC Sec. 267) had a lack of economic substance.8 To defeat this presumption, the taxpayer bore the burden of establishing by clear and convincing evidence that the transactions in question had economic substance.9 The new legislation reduces the taxpayer’s burden of proof to overcome the presumption for the 2018 tax year and thereafter, from “clear and convincing” to “satisfactory.”10

Reliance on prior audit determinations Wisconsin allows for taxpayers to rely on results in prior Department audits, which may prevent the Department from asserting tax liability in certain situations.11 Historically, there had been a limitation on this reliance rule in instances where the taxpayer did not give the Department adequate and accurate information with respect to the tax issue in the prior audit, or if the tax issue was settled by written agreement between the Department and the taxpayer.12 The legislation removes this limitation to the reliance rule, and in its place creates a relatively narrower limitation for situations in which: (i) the Department establishes by “clear and satisfactory” evidence that the taxpayer provided incomplete or false information during the prior audit cycle; (ii) the tax issue was settled in the prior audit via written agreement entered into by the Department and the taxpayer before April 5, 2018; or (iii) such agreement was completed on or after April 5, 2018, and the agreement acknowledged that the Department did not adopt the taxpayer’s position on the issue.13

Restriction on contingent fee audits In an effort to reduce the ability of the state to perform contingent fee unclaimed property audits of in-state companies, Wisconsin enacted legislation providing a limitation (applicable to newly executed contracts) on the use of third-party auditors for unclaimed property audits.14 Pursuant to this limitation, the state administrator is not allowed to use contingent fee auditors for audits of companies that are domiciled or whose records are stored in Wisconsin.15 To the extent a contingent fee audit is undertaken by the Wisconsin administrator on other companies, the fee is limited to 12% of the total amount of property that is reportable and deliverable that is disclosed by the audit.16 Further, statistical sampling is not allowed as a method to arrive at an audit determination unless consent is given by the company under audit.17

Back to school sales tax holidays and rebate Wisconsin has created a sales tax holiday for “back to school” items from August 1 through 5, 2018.18 Eligible items include: (i) clothing, to the extent the sales price of a single item is $75 or less; (ii) computers purchased for personal use, with a sales price of $750 or less; (iii) school computer supplies purchased for personal use, to the extent the sale price of a single item is $250 or less; and (iv) school supplies, to the extent the sales price of a single item is $75 or less.19

In addition, a qualified child sales and use tax rebate has been adopted, under which a sales tax rebate of $100 is available to claimants who are raising dependent children who are Wisconsin residents under 18 years old as of the end of 2017. The $100 amount is considered “an approximation of the nonbusiness Wisconsin sales or use tax paid in 2017 for raising children.”20

Commentary With the enactment of the TCJA on Dec. 22, 2017, Wisconsin had to consider the impact of this legislation on the administration of Wisconsin income and franchise taxes. By decoupling from most of the major TCJA provisions, Wisconsin is passing up the opportunity to pick up substantial amounts of revenue through broadening the corporation income tax base. The procedural provisions ultimately adopted by the state all appear to have taxpayer-favorable impact, particularly the rules surrounding the reliance on prior audit determinations.

Items considered, but not enacted, during this year’s legislative session were the adoption of the federal built-in-gains recognition period, and suspending participation in the Multistate Tax Commission’s audit program. One can expect these items to resurface in the state’s next legislative session.

1 Act 231 (A.B. 259), Laws 2018, effective Apr. 5, 2018.
2 P.L. 115-97. For a discussion of this Act, see GT Alert: Tax Reform Law Transforming Business and Tax Planning.
3 WIS. STAT. §§ 71.01(6)(k).1; 71.22(4)(k).1; 71.22(4m)(k).1; 71.26(2)(b).11.a; 71.34(1g)(k).1; 71.42(2)(k).1.
4 WIS. STAT. §§ 71.01(6)(L).1; 71.22(4)(L).1; 71.22(4m)(L).1; 71.26(2)(b).12.a; 71.34(1g)(L).1; 71.42(2)(L).1.
5 WIS. STAT. §§ 71.01(6)(k).3; 71.22(4)(k).3; 71.22(4m)(k).3; 71.26(2)(b).11.d; 71.34(1g)(k).3; 71.42(2)(k).3.
6 WIS. STAT. §§ 71.01(6)(L).2; 71.22(4)(L).2; 71.22(4m)(L).2; 71.26(2)(b).12.c; 71.34(1g)(L).2; 71.42(2)(L).2. In addition, Wisconsin has decoupled from: IRC Sec. 461 (the limitation on excess business losses for non-corporate taxpayers); IRC Sec. 174 (amortization of research and development expenses for tax years after December 31, 2021); IRC Sec. 451 (special rules relating to the year of inclusion with respect to a change in accounting methods); IRC Sec. 274 (limitation of deduction by employer of expenses for fringe benefits; on premise meals; elimination of deduction meals provided for convenience of employer); and IRC Sec. 263A(f) (the production period for beer, wine and distilled spirits).
7 WIS. STAT. §§ 71.01(6)(L).2; 71.22(4)(L).2; 71.22(4m)(L).2; 71.26(2)(b).12.c; 71.34(1g)(L).2; 71.42(L).2. In addition to the above provisions, Wisconsin has decoupled from the following international provisions: IRC Secs. 902 and 960 (relating to foreign tax credits); IRC Secs. 1248, 961 and other provisions related to sales or transfers involving specified 10 percent owned foreign corporations; IRC Sec. 954 (elimination of inclusion of foreign base company oil related income); numerous additional IRC provisions relating to the repeal of an inclusion based on withdrawal of previously excluded subpart F income from qualified investment; IRC Sec. 958(b) (the modification of stock attribution rules related to controlled foreign subsidiaries); IRC Sec. 951 (the modification of the definition of a U.S. shareholder, and the elimination of the 30-day holding provision before subpart F inclusions apply); IRC Sec. 936 (limitations on income shifting through intangible property transfers); IRC Sec. 267A (related party amounts paid or accrued in hybrid transactions or with hybrid entities); and IRC Sec. 904 (foreign tax credits limitation for foreign branch income, and (g) election related to domestic taxable income offset). Id.
8 WIS. STAT. §§ 71.10(1m)(c); 71.30(1m)(c); 71.80(1m)(c).
9 Id.
10 Id.; Act 231 (A.B. 259), § 39(1).
11 WIS. STAT. § 73.16(3).
12 WIS. STAT. § 73.16(3)(b).
13 WIS. STAT. § 73.16(3)(b), (c); Act 231 (A.B. 259), § 39(2).
14 Act 235 (A.B. 773), Laws 2018, adding WIS. STAT. § 177.30(6), (7).
15 WIS. STAT. § 177.30(6)(a).
16 WIS. STAT. § 177.30(6)(b).
17 WIS. STAT. § 177.30(7).
18 Act 367 (S.B. 798), Laws 2018, adding WIS. STAT. §§ 77.54(67); 77.68. As enacted, the sales tax holiday period was scheduled for Aug. 4 and 5, 2018. However, Gov. Walker partially vetoed the legislation and extended the sales tax holiday period from Aug. 1-5, 2018. Veto Message, Wisconsin Governor Scott Walker, Apr. 17, 2018. For further information, see Sales Tax Holiday – August 1-5, 2018, Wisconsin Department of Revenue, Apr. 26, 2018.
19 WIS. STAT. § 77.54(67)(b).
20 WIS. STAT. § 77.68. The rebate claim must be filed between May 15 and July 2, 2018. Child Sales Tax Rebate, Wisconsin Department of Revenue, May 2018.

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