Chapter 71

71.25(10)(a)2. 2. As used in this section, “financial organization” includes any subsidiary of an entity described in subd. 1., if a significant purpose for the subsidiary is to hold investments or if the subsidiary primarily functions to hold investments.

71.25(10)(b) (b)

71.25(10)(b)1. 1. In this section, for taxable years beginning before January 1, 2006, “public utility” means any business entity described under subd. 2. and any business entity which owns or operates any plant, equipment, property, franchise, or license for the transmission of communications or the production, transmission, sale, delivery, or furnishing of electricity, water or steam the rates of charges for goods or services of which have been established or approved by a federal, state or local government or governmental agency.

71.25(10)(b)2. 2. In this section, for taxable years beginning after December 31, 2005, “public utility” means any business entity providing service to the public and engaged in the transportation of goods and persons for hire, as defined in s. 194.01 (4), regardless of whether or not the entity’s rates or charges for services have been established or approved by a federal, state or local government or governmental agency.

71.25(10)(c) (c) The net business income of railroads, car line companies, pipeline companies, financial organizations, telecommunications companies, air carriers, and public utilities requiring apportionment shall be apportioned pursuant to rules of the department of revenue, but the income taxed is limited to the income derived from business transacted and property located within the state.

71.25 Cross-reference Cross-reference: See also ss. Tax 2.46, 2.47, 2.475, 2.48, 2.49, 2.495, 2.50, and 2.502, Wis. adm. code.

71.25(11) (11) Department may waive factor. Where, in the case of any corporation engaged in business in and outside of this state and required to apportion its income as provided in sub. (6), it shall be shown to the satisfaction of the department of revenue that the use of any one of the 3 factors provided in sub. (6) gives an unreasonable or inequitable final average ratio because of the fact that such corporation does not employ, to any appreciable extent in its trade or business in producing the income taxed, the factors made use of in obtaining such ratio, this factor may, with the approval of the department of revenue, be omitted in obtaining the final average ratio which is to be applied to the remaining net income. This subsection does not apply to taxable years beginning after December 31, 2007.

71.25(12) (12) Department may apportion by rule. If the income of any such corporation properly assignable to the state of Wisconsin cannot be ascertained with reasonable certainty by the methods under this section, then the same shall be apportioned and allocated under such rules as the department of revenue may prescribe.

71.25 Cross-reference Cross-reference: See also s. Tax 2.45, Wis. adm. code.

71.25(13) (13) Unrelated business taxable income. The unrelated business taxable income of organizations that are subject to tax on that income under s. 71.26 (1) (a) shall be apportioned under the department of revenue’s rules.

71.25(14) (14) Alternative allocation.

71.25(14)(a) (a) Upon request by a corporation on or before January 1, 2000, the department of revenue may authorize a corporation or a subsidiary thereof to use or continue to use a different method of apportioning its income to this state for purposes of this subchapter, and may specify the method of apportionment that the corporation or subsidiary shall use. This paragraph is to be used exclusively in the event of a corporate restructuring that would result in an unfair representation of the degree of business activity in this state. In no instance may the alternative method proposed under the new corporate structure result in less franchise or income tax revenue to the state than the current corporate structure is liable for, given the same overall level of sales, payroll and property.

71.25(14)(b) (b) Before the department of revenue grants permission to any corporation to use an alternative method of allocation under par. (a), the department of revenue shall promulgate rules that specify in more detail the circumstances in which that authority may be granted and the kinds of alternative methods that the department may authorize.

71.25(14)(c) (c) At least 14 days before giving final approval to an alternative method of apportionment under par. (a), the department of revenue shall submit the proposed alternative method of apportionment to the cochairpersons of the joint committee for review of administrative rules, together with a description of the proposed alternative and the reasons for the proposed alternative. If, within 14 days after receipt of the proposed alternative method, the cochairpersons of the joint committee for review of administrative rules do not notify the department of revenue that the proposed alternative must be promulgated as an administrative rule in order to be used, the department of revenue may give final approval to the proposed method without promulgating an administrative rule. If the cochairpersons of the joint committee for review of administrative rules notify the department of revenue within 14 days after receipt of the proposed alternative that the proposed alternative must be promulgated as an administrative rule, the proposed alternative may not be used until it is promulgated as an administrative rule under ch. 227.

71.25(15) (15) Partnerships and limited liability companies.

71.25(15)(a) (a) A general or limited partner’s share of the numerator and denominator of a partnership’s apportionment factors under this section are included in the numerator and denominator of the general or limited partner’s apportionment factors under this section.

71.25(15)(b) (b) If a limited liability company is treated as a partnership, for federal tax purposes, a member’s share of the numerator and denominator of a limited liability company’s apportionment factors under this section are included in the numerator and denominator of the member’s apportionment factors under this section.

71.25(16) (16) Disaster relief work. For purposes of the apportionment of any income under this section, the disaster relief work, as defined in s. 323.12 (5) (a) 3., of an out-of-state business, as defined in s. 323.12 (5) (a) 6., shall not increase the amount of income apportioned to this state. For purposes of sub. (7), any property brought temporarily into this state by an out-of-state business in connection with performing disaster relief work is not considered property located in this state. For purposes of sub. (8), compensation paid to out-of-state employees, as defined in s. 323.12 (5) (a) 7., who are performing disaster relief work is not considered compensation paid in this state. For purposes of sub. (9), gross receipts from the sale of property or services as part of performing any disaster relief work are not considered gross receipts from sales received in this state.

71.25 History History: 1987 a. 312; 1987 a. 411 ss. 57, 62, 117 to 123; 1989 a. 31; 1991 a. 39, 269; 1993 a. 112; 1997 a. 299; 1999 a. 9; 2001 a. 16; 2003 a. 37; 2005 a. 25; 2009 a. 2, 28, 276; 2015 a. 84, 216; 2017 a. 59; 2021 a. 239.

71.25 Cross-reference Cross-reference: See also s. Tax 2.39, Wis. adm. code.

71.25 Annotation Under sub. (6), it is within the Department of Revenue’s discretion to decide whether to permit a multistate business to deviate from the apportionment method. Nelson Brothers Furniture Corp. v. DOR, 152 Wis. 2d 746, 449 N.W.2d 328 (Ct. App. 1989).

71.25 Annotation Discussing subjecting an entity’s income to apportionment when the entity’s operations constitute a “unitary business” under sub. (6). Chilstrom Erecting Corp. v. DOR, 174 Wis. 2d 517, 497 N.W.2d 785 (Ct. App. 1993).

71.25 Annotation A corporation’s investment income that served an “operational” function and was not unrelated to corporate functions within the state was subject to apportionment. Port Affiliates, Inc. v. DOR, 190 Wis. 2d 271, 526 N.W.2d 806 (Ct. App. 1994).

71.25 Annotation Sub. (9) (df) is limited to a “licensee” who uses software in Wisconsin. The provision makes no reference to use of the computer software in this state by a “sublicensee.” In this case, when the defendant taxpayer received royalties from licensing its software to businesses that were not located in this state and that manufactured or assembled computers that incorporated the defendant’s software but whose products were used in this state under a sublicense, the royalties were not considered in calculating the defendant’s franchise tax liability under this section. The software end-users were not licensees of the defendant. DOR v. Microsoft Corp., 2019 WI App 62, 389 Wis. 2d 350, 936 N.W.2d 160, 18-2024.

71.255 71.255 Combined reporting.

71.255(1) (1) Definitions. In this section:

71.255(1)(a) (a) “Combined group” means the group of all persons whose income and apportionment factors are required to be taken into account under sub. (2) to determine a member’s share of the net business income or loss apportionable to this state that is attributable to a unitary business.

71.255(1)(b) (b) “Combined report” means a report in the form and manner prescribed by the department that specifies a combined group’s income from the unitary business, apportionment factors attributable to the unitary business, and any other tax return information prescribed by the department.

71.255(1)(c) (c) “Commonly controlled group” means any of the following:

71.255(1)(c)1. 1. A parent corporation and any one or more corporations or chains of corporations that are connected to the parent corporation by direct or indirect ownership by the parent corporation, if the parent corporation owns stock representing more than 50 percent of the voting power of at least one of the connected corporations or if the parent corporation or any of the connected corporations owns stock that cumulatively represents more than 50 percent of the voting power of each of the connected corporations.

71.255(1)(c)2. 2. Any 2 or more corporations if a common owner, regardless of whether the owner is a corporate entity, directly or indirectly owns stock representing more than 50 percent of the voting power of the corporations or connected corporations.

71.255(1)(c)3. 3. Any 2 or more corporations if stock representing more than 50 percent of the voting power in each corporation are interests that cannot be separately transferred.

71.255(1)(c)4. 4. Any 2 or more corporations if stock representing more than 50 percent of the voting power in each corporation is directly owned by, or for the benefit of, family members. In this subdivision, “family member” means an individual related by blood, marriage, or adoption within the 3rd degree of kinship, as computed under s. 990.001 (16), or the spouse of such individual.

71.255(1)(d) (d) “Consolidated foreign operating corporation” means a corporation that, for the taxable year, satisfies all of the following conditions:

71.255(1)(d)1. 1. It is a member of a unitary business.

71.255(1)(d)2. 2. It is included in the same federal consolidated return as at least one other corporation in that unitary business.

71.255(1)(d)3. 3. It has active foreign business income, as defined in section 861 (c) (1) B of the Internal Revenue Code, in an amount that is 80 percent or more of the corporation’s worldwide income.

71.255(1)(e) (e) “Corporation” means any corporation, as defined in s. 71.22 (1k), wherever located, which if it were doing business in this state would be subject to this chapter. “Corporation” does not include a tax-option corporation.

71.255(1)(f) (f) “Department” means the department of revenue.

71.255(1)(g) (g) “Doing business in this state” has the meaning given in s. 71.22 (1r).

71.255(1)(h) (h) “Domestic” means incorporated, organized, or created in the United States or under the laws of the United States or any state.

71.255(1)(i) (i) “File” has the meaning given in s. 71.22 (2m).

71.255(1)(j) (j) “Foreign” means not incorporated, organized, or created in the United States or under the laws of the United States or any state.

71.255(1)(k) (k) “Intangible expenses” has the meaning given in s. 71.22 (3g) for corporations taxable under this subchapter and the meaning given in s. 71.42 (1sg) for corporations taxable under subch. VII.

71.255(1)(L) (L) “Interest expenses” has the meaning given in s. 71.22 (3m) for corporations taxable under this subchapter and the meaning given in s. 71.42 (1t) for corporations taxable under subch. VII.

71.255(1)(m) (m) “Pass-through entity” means a general or limited partnership, an organization of any kind treated as a partnership for tax purposes under this chapter, a tax-option corporation, a real estate investment trust, a regulated investment company, a real estate mortgage investment conduit, a financial asset securitization investment trust, a trust, or an estate.

71.255(1)(n) (n) “Unitary business” means a single economic enterprise that is made up either of separate parts of a single business entity, of multiple business entities that are related under section 267 or 1563 of the Internal Revenue Code, or of a commonly controlled group of business entities that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts. Two or more business entities are presumed to be a unitary business if the businesses have unity of ownership, operation, and use as indicated by a centralized management or a centralized executive force; centralized purchasing, advertising, or accounting; intercorporate sales or leases; intercorporate services, including administrative, employee benefits, human resources, legal, financial, and cash management services; intercorporate debts; intercorporate use of proprietary materials; interlocking directorates; or interlocking corporate officers. In no event and under no circumstances shall the preceding sentence be construed as exclusive of any and all other factors indicative of a unitary business. For purposes of this section, the term “unitary business” shall be broadly construed, to the extent permitted by the U.S. Constitution. The members of a combined group shall be jointly and severally liable for costs, penalties, interests, and taxes associated with the combined report. Any business conducted by a pass-through entity that is owned directly or indirectly by a corporation shall be treated as conducted by the corporation, to the extent of the corporation’s distributive share of the pass-through entity’s income, regardless of the percentage of the corporation’s ownership interest. A business conducted directly or indirectly by one corporation is unitary with that portion of a business conducted by another corporation through its direct or indirect interest in a pass-through entity if there is a synergy and exchange and flow of value between the 2 parts of the business and the 2 corporations are members of the same commonly controlled group.

71.255(2) (2) Corporations required to use combined reporting.

71.255(2)(a) (a) A corporation, not including a corporation of which all its income is exempt from taxation under s. 71.26 (1) or 71.45 (1), engaged in a unitary business with one or more other corporations in the same commonly controlled group shall report its share of income from that unitary business in the amount determined by a combined report filed by a designated agent of the unitary business, as determined under sub. (7). The combined report shall include the income, determined under sub. (3), and apportionment factor or factors determined under sub. (5), of every corporation in the commonly controlled group that is engaged in the unitary business, except as provided in pars. (b) to (f).

71.255(2)(b) (b) A foreign corporation that is a combined group member shall include in the combined report income that is derived only from sources within the United States as provided in sections 861 to 865 of the Internal Revenue Code. The foreign corporation shall include in the combined report its apportionment factor or factors related only to that income.

71.255(2)(c) (c)

71.255(2)(c)1. 1. Except as provided in par. (d), if 80 percent or more of a corporation’s worldwide income is active foreign business income, the income and apportionment factor or factors of the corporation shall not be included in the combined report, but the corporation shall compute and allocate or apportion its income from the unitary business separately.

71.255(2)(c)2. 2. For purposes of subd. 1., “active foreign business income” means gross income derived from sources outside the United States, as determined in subchapter N of the Internal Revenue Code, including income of a subsidiary corporation, and attributable to the active conduct of a trade or business in a foreign country or in a U.S. possession.

71.255(2)(c)3. 3. For purposes of subd. 2., a corporation is considered a subsidiary if the parent corporation owns, directly or indirectly, stock with at least 50 percent of the total voting power of the corporation and the stock has a value equal to at least 50 percent of the total value of the stock of the corporation.

71.255(2)(d) (d) The combined report of the unitary business of which a consolidated foreign operating corporation is a member shall include, and the separate return filed by the consolidated foreign operating corporation shall exclude, the following amounts, to the extent that they are attributable to the unitary business:

71.255(2)(d)1. 1. An income amount equal to the interest expenses and intangible expenses that are paid, accrued, or incurred by any combined group member to or for the benefit of the consolidated foreign operating corporation, except to the extent such amounts constitute income to the consolidated foreign operating corporation from sources outside the United States under sections 861 to 865 of the Internal Revenue Code.

71.255(2)(d)2. 2. To the extent that the amounts were not included under subd. 1., interest income and income generated from intangible property received or accrued by the consolidated foreign operating corporation, except to the extent such amounts constitute income from sources outside the United States under sections 861 to 865 of the Internal Revenue Code. For purposes of this subdivision, income generated from intangible property includes income related to the direct or indirect acquisition, use, maintenance, management, ownership, sale, exchange, or any other disposition of intangible property; income from factoring transactions or discounting transactions; royalty, patent, technical, and copyright fees; licensing fees; and other similar income.

71.255(2)(d)3. 3. Dividends paid or accrued by a real estate investment trust to the consolidated foreign operating corporation, if the real estate investment trust is not a qualified real estate investment trust as defined in s. 71.22 (9ad) and the dividend income is from sources within the United States under sections 861 to 865 of the Internal Revenue Code.

71.255(2)(d)4. 4. Income of the consolidated foreign operating corporation that is equal to gains derived from the sale of real or personal property located in the United States.

71.255(2)(d)5. 5. The apportionment factor or factors attributable to the income described in subds. 1. to 4.

71.255(2)(e) (e) Except for the amounts in par. (d), a consolidated foreign operating corporation shall compute and allocate or apportion its income from the unitary business separately.

71.255(2)(f) (f)

71.255(2)(f)1. 1. The department may require that a combined report include the income and associated apportionment factor or factors of any person who is not otherwise included in a combined group under this subsection, but who is a member of a unitary business, in order to reflect proper apportionment of income of the entire unitary business. The department may require that a combined report include the income and associated apportionment factor or factors of persons that are not corporations.

71.255(2)(f)2. 2. If the department determines that the reported income or loss of a member of a combined group engaged in a unitary business with any person not otherwise included in the combined group under this subsection represents an avoidance or evasion of tax by the person or the combined group member, the department may require all or any part of the income or loss and associated apportionment factor or factors of the person be included in or excluded from the combined report for the unitary business or may require the use of a different apportionment factor or factors. The department may require that a combined report include or exclude the income or loss and associated apportionment factor or factors of persons that are not corporations.

71.255(2)(f)3. 3. The authority granted under this paragraph is in addition to, and not a limitation of or dependent on, the provisions in this chapter enacted to prevent tax avoidance or evasion or to clearly reflect the income of any person. Any determination by the department under this paragraph is presumed correct and the person challenging the determination has the burden of proving by clear and convincing evidence that the determination is incorrect.

71.255(2m) (2m) Election to include every member of commonly controlled group.

71.255(2m)(a) (a) The designated agent as provided in sub. (7) may elect, without first obtaining written approval from the department, to include in its combined group every corporation in its commonly controlled group, regardless of whether such corporations are engaged in the same unitary business as the designated agent. Corporations included in the combined group by operation of this election are required to use combined reporting only to the extent described in sub. (2). The commonly controlled group shall calculate its Wisconsin income and apportionment factors as provided under subs. (3), (4), and (5), and all income of all members of the commonly controlled group, whether or not such income would otherwise be subject to apportionment or allocable to a particular state in the absence of an election under this subsection, shall be treated as apportionable income for purposes of the combined report.

71.255(2m)(b) (b) The election under this subsection shall be executed by the designated agent on an original, timely filed combined report. Any corporation that becomes includable in the commonly controlled group subsequent to the year of election shall have waived any objection to its inclusion in the combined report.

71.255(2m)(c) (c) An election under this subsection shall be binding for and applicable to the taxable year for which it is made and for the next 9 taxable years. An election may be renewed for another 10 taxable years, without prior written approval from the department after it has been in effect for 10 taxable years. The renewal shall be made on an original, timely filed return for the first taxable year after the completion of a 10-year period for which an election under this subsection was in place. An election that is not renewed shall be revoked. In the case of a revocation, a new election under this subsection shall not be permitted in any of the immediately following 3 taxable years.

71.255(2m)(d) (d) The department may not disregard the tax effect of an election under this subsection, or disallow the election, with respect to any controlled group member or members for any year of the election period.

71.255(3) (3) Components of income subject to tax. Each member is responsible for tax based on its taxable income or loss apportioned or allocated to this state, including:

71.255(3)(a) (a) Its share of any business income apportionable to this state of each of the combined groups of which it is a member, as determined under subs. (4) and (5). For financial organizations, as defined in ss. 71.04 (8) (a) and 71.25 (10) (a), business income includes interest, dividends, and receipts from investments of any kind. For purposes of this section, a financial organization shall treat the expenses associated with an investment as business expenses.

71.255(3)(b) (b) Its share of any business income apportionable to this state of a distinct business activity conducted within and outside the state wholly by the member, as determined under s. 71.25 or 71.45.

71.255(3)(c) (c) Its income from a business conducted wholly by the member entirely within the state. If a combined group consists only of corporations that are conducting business entirely within this state, sub. (4) (f) to (j) applies to those corporations.

71.255(3)(d) (d) Its income sourced to this state from the sale or exchange of capital assets, and from involuntary conversions, as determined under sub. (4) (i).

71.255(3)(e) (e) Its nonbusiness income or loss allocable to this state.

71.255(3)(f) (f) Its income that is realized from the purchase and subsequent sale or redemption of lottery prizes, if the winning tickets were originally bought in this state.

71.255(3)(g) (g) Its income or loss allocated or apportioned in an earlier year, required to be taken into account as state source income or loss during the taxable year, other than a net business loss carry-forward.

71.255(3)(h) (h) Its net business loss carry-forward, as determined under sub. (6).

71.255(4) (4) Business income of the combined group.

71.255(4)(a) (a) The business income of a combined group is the sum of the income of each member of the combined group as determined under the Internal Revenue Code, as modified under s. 71.26 or 71.45, and except as provided under pars. (b) to (j). If a unitary business includes income from a pass-through entity, the pass-through entity income to be included in the total income of the combined group shall be the member of the combined group’s direct and indirect distributive share of the pass-through entity’s unitary business income.

71.255(4)(b) (b)

71.255(4)(b)1. 1. Subtract any apportionable income of a distinct business activity conducted within and outside the state wholly by the member, income from a business conducted wholly by the member entirely within this state, the member’s nonbusiness income, the member’s income realized from the purchase and subsequent sale or redemption of lottery prizes if the winning tickets were originally bought in this state, and its income allocated or apportioned in an earlier year required to be taken into account as state source income during the taxable year.

71.255(4)(b)2. 2. Add any apportionable expense or loss of a distinct business activity conducted within and outside the state wholly by the member, expense or loss from a business conducted wholly by the member entirely within this state, the member’s nonbusiness expense or loss, its loss allocated or apportioned in an earlier year required to be taken into account as state source loss during the taxable year, and its net business loss carry-forward.

71.255(4)(c) (c) For combined group members that are consolidated foreign operating corporations, include only the income described in sub. (2) (d) 2. to 4. A combined group may deduct expenses properly attributable to a consolidated foreign operating corporation’s income described in sub. (2) (d) 2. to 4., subject to ss. 71.30 (2) and (2m) and 71.80 (1) (b) and (1m).

71.255(4)(d) (d) The modifications provided under ss. 71.26 (2) (a) 7., 8., and 9. and 71.45 (2) (a) 16., 17., and 18. shall not apply with respect to interest expenses or intangible expenses paid, accrued, or incurred by a combined group member to or for the benefit of a consolidated foreign operating corporation.

71.255(4)(f) (f) Except as provided in sub. (2) (d) 3. and except if the modification under s. 71.26 (3) (j) applies, dividends paid by one combined group member to another shall be, to the extent that the dividends are paid out of the earnings and profits of the unitary business included in the combined report, whether in the current taxable year or in a prior taxable year, subtracted from the income of the recipient. This paragraph does not apply to dividends received from members of the unitary business that were not part of the combined group at the time that the dividends were paid.

71.255(4)(g) (g) Except as otherwise provided by rule, business income or loss from an intercompany transaction between members of the same combined group shall be deferred as provided under U.S. Treasury Regulation 1.1502-13. Upon the occurrence of any of the following events, deferred business income or loss resulting from an intercompany transaction between members of a combined group shall be included in the income of the seller and shall be apportioned as business income or loss recognized immediately before the event:

71.255(4)(g)1. 1. The object of the deferred intercompany transaction is resold by the buyer to an entity that is not a member of the combined group.