Individual and corporate income and franchise taxes; sales and use taxes; administration of tax laws; providing an exemption from emergency rule procedures; and requiring the exercise of rule-making authority. (FE)

This bill provides that those penalties may not be imposed until after DOR has issued a summons seeking the records and documents, and the taxpayer has failed to comply with the summons.

Under current law, if a taxpayer engages in a transaction without economic substance to create a loss, to reduce taxable income, or to increase credits allowed in determining Wisconsin tax, DOR may disregard the transaction for purposes of calculating the taxpayer's tax liability. This bill eliminates the factors under current law that determine whether a transaction has economic substance and replaces those factors with the factors set forth in federal law.

Under current law, a person may claim an income or franchise tax credit based on the person's qualified production activities income derived from manufacturing or agriculture in this state. Qualified production activities income includes certain direct costs and indirect costs, which are defined to include ordinary and necessary expenses paid or incurred in carrying on a trade or business that are deductible under the Internal Revenue Code. This bill changes the definitions of direct costs and indirect costs to also include a reasonable allowance for the exhaustion and wear and tear (including a reasonable allowance for obsolescence) of property that is deductible as depreciation under the Internal Revenue Code.

For income tax purposes, current law provides that any income of a nonresident individual, estate, or trust may be taxed by the state in which the business, property, or service from which the income is derived is located. This bill requires DOR to promulgate rules establishing the criteria to be used in determining whether a business, property, or service is located in this state for income and franchise tax purposes. The bill also prohibits DOR from relying on any factors not set forth in the rules when making the determination.

Under current law, DOR may tax the income of a taxpayer if the taxpayer is subject to the jurisdiction of this state, and DOR only taxes so much of the taxpayer's income that is allocated or apportioned to this state under a set of rules set forth in current law. Current law also provides that, if certain income of a taxpayer is not taxable by another state because the taxpayer is not subject to the jurisdiction of that state, DOR may tax that income under the state's throwback law. This bill requires DOR to promulgate rules establishing the criteria to be used in determining whether a taxpayer is subject to the jurisdiction of this state or any other state for income and franchise tax purposes. The bill also prohibits DOR from relying on any factors not set forth in the rules when making the determination.

Under current law, there is a sales and use tax exemption for property, items, and services 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 materials is less than 10 percent of the total contract price. Under the bill, the exemption for lump sum contracts is expanded to apply to all construction contracts involving real property construction activities if the total sales price of the taxable materials 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 materials.

The bill also provides that, 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 materials.

This bill also eliminates DOR's obligation and authority to participate in the Multistate Tax Commission Audit Program.

Because this bill relates to an exemption from state or local taxes, it may be referred to the Joint Survey Committee on Tax Exemptions for a report to be printed as an appendix to the bill.