Playing tax tug-of-war

Tax changes would favor in-state producers with out-of-state sales
Is the corporate-tax glass half full or half empty in Wisconsin? The answer depends on who you are and what you do and whether or not one of the biggest changes in the way corporations report income to Wisconsin passes in the state Legislature.
The change involves how a corporation’s income is allocated, or apportioned, to the state. Under the current system, a company’s physical assets – land, buildings, equipment and inventory, payroll and sales – are divided among the states in which the company does business. Under Wisconsin’s current formula, the sales factor is double weighted, counting for half of the percentage allocated to Wisconsin.
The proposal before the Assembly and Senate would eliminate the property and payroll portions of the formula, making sales the only factor used to calculate Wisconsin’s share of corporate taxable income.
The single sales factor has received attention in the recent months mainly because it was seen as an offset to the combined reporting proposal pushed by Gov. Tommy Thompson. Under combined reporting, any corporation doing business in Wisconsin and all of its affiliates would have been required to file the state’s equivalent of a consolidated tax return. Wisconsin has separate company returns under its current system which means only the businesses with operations within the state are required to file returns.
The governor had packaged both the single sales factor and combined reporting as an all-or-nothing deal, but the combined reporting provision was killed in the Joint Finance Committee and Thompson has softened on the idea of single sales factor.
“Any Wisconsin company that has a significant portion of its sales outside of the state and a large investment in property and payroll in the state will like it,” Jon Skavlem of Pricewaterhouse Coopers, says of the single-sales factor proposal. Skavlem is a director of state tax consulting and also serves as the chairman of the Wisconsin Institute of Certified Public Accountants’ Wisconsin Taxation Committee. “The businesses that will not likely be in favor of it will be out-of-state businesses that have very little property and payroll here but a large volume of sales, relatively speaking.”
‘Not an issue
for small firms’
“It’s probably not an issue for small businesses,” Dr. Michael Schadewald, associate professor and director of UW-Milwaukee’s Deloitte & Touche Center for Multistate Taxation, says because small businesses tend to sell in only one state.
While the announcement of the single sales factor was cheered by many in the corporate world, recent press coverage has given small business owners and other taxpayers a sense of doom and gloom over their taxpaying future.
“People who say this is a loss for taxpayers in general, I think they’re looking down the road and making some assumptions that may not necessarily happen,” Skavlem says. “Are you assuming there’s not going to be any economic growth? Or that there’s going to be an economic crash such that you’re going to need to raise revenue elsewhere?
“And another thing that gets overlooked by businesses and practitioners a lot is the idea that businesses and corporations are only tax collectors,” Skavlem says. “Ultimately, business isn’t like an individual. If I pay corporate income tax, what do I do with it? I feed it into my product costs. I feed it into lower wages that I pay my workers. I cut dividends to my stockholders.”
Schadewald says there are two ways corporations with multistate sales could view the move to a single sales factor.
“They could look at it as a tax incentive to locate their factories in Wisconsin if they apportion their income,” Schadewald says. “If Wisconsin doesn’t change to single sales factor, they could look at it as a disadvantage and locate their plants in other [single sales factor] states.”
Schadewald notes that states surrounding Wisconsin – Illinois, Iowa, Nebraska, Michigan and Minnesota -are either 100% sales or close to it.
Change would level playing field for state
Skavlem says it’s a competitive issue for Wisconsin and the change in apportionment factor was needed to level the playing field with its neighbors.
“Large businesses are very, very mobile,” Skavlem says. “Every day they’re looking at where to deploy their capital, where to keep their people and where to make their investments. And they do look at things like taxes.”
Skavlem, who used to work in the Wisconsin Department of Revenue as an economist, also points out that the models the department uses to project revenues do not factor in economic growth and other intangibles that may affect the business climate in Wisconsin. And small and medium-sized businesses should consider some of those factors, too, before coming out against the single sales factor proposal.
“I guess I’m not so sure I would think this is a bad thing because I’m thinking now my corporate neighbors down the road that I sell to and do business with are going to pay less tax,” Skavlem says. “Their effective tax rate is going to go down in this state so that means that they’re potentially healthier. They’re going to stay here. They’re not going to export jobs. They’re going to invest and they’re going to be there five years from now when I want to continue to sell them my products and services.”