Wis. Admin. Code § Tax 2.39 — Apportionment method

Tax 2.39(1) (1) General. Except as provided in sub. (3) , any person, except resident individuals, resident estates, and resident trusts, engaged in business both in and outside this state shall apportion its apportionable income using the statutory apportionment method as provided in s. 71.04 (4) or 71.25 (6) , Stats., when the person’s business in this state is an integral part of a unitary business unless the department, in writing, allows reporting on a different basis. However, if a corporation is in a combined group, the corporation’s Wisconsin share of the combined group’s apportionable income is computed as provided in s. 71.255 (5) , Stats., and further detailed in s. Tax 2.61 (7) or (8) , as applicable. Nonapportionable income shall be allocated as provided in s. 71.25 (5) (b) , Stats.

Tax 2.39(2) (2) Definitions. In this section:

Tax 2.39(2)(a) (a) “Apportionable income” has the meaning given in s. 71.25 (5) (a) , Stats.

Tax 2.39(2)(ag) (ag) “Combined group” has the meaning given in s. 71.255 (1) (a) , Stats.

Tax 2.39(2)(ar) (ar) “Commercial domicile” has the meaning given in s. 71.22 (1g) , Stats.

Tax 2.39(2)(b) (b) “Engaged in business in and outside this state” means having business activity which is sufficient to create nexus in this state and at least one other state or foreign country. For a combined group, the activities of the combined group are taken as a whole in determining if the combined group is engaged in business in and outside this state, as provided in s. 71.255 (5) (a) , Stats.

Tax 2.39(2)(c) (c) “Gross receipts” means gross sales less returns and allowances, plus service charges, freight, carrying charges or time-price differential charges incidental to the sales. Federal and state excise taxes, including sales and use taxes, shall be included as part of the receipts if the taxes are passed on to the purchaser or included as part of the selling price of the product.

Tax 2.39(2)(cm) (cm) “Intangible property” includes patents, copyrights, trademarks, trade names, service names, franchises, licenses, plans, specifications, blueprints, processes, techniques, formulas, designs, layouts, patterns, drawings, manuals, technical know-how, contracts, and customer lists. Intangible property does not include stocks, bonds, certificates of deposit, or other securities.

Tax 2.39(2)(d) (d) “Nexus” means that a taxpayer’s business activity in a state or foreign country is of such a degree that the state or foreign country has jurisdiction to impose an income tax or franchise tax measured by net income on the taxpayer. For a combined group, the activities of the combined group are taken as a whole in determining if the combined group has nexus in a state or foreign country, as provided in s. 71.255 (5) (a) , Stats. Nexus may exist even if a state or foreign country does not impose a tax on the taxpayer. Conversely, voluntary filing and paying income or franchise taxes when not required to do so, or paying a fee for qualification, organization or for the privilege of doing business in that state or foreign country does not, in itself, create nexus.

Tax 2.39(2)(e) (e) “Nonapportionable income” has the meaning given in s. 71.25 (5) (b) , Stats.

Tax 2.39(2)(f) (f) “State” means any state of the United States, the District of Columbia, the commonwealth of Puerto Rico, and any territory or possession of the United States. A foreign country is not a state.

Tax 2.39(3) (3) Apportionment fraction.

Tax 2.39(3)(a) (a)

Tax 2.39(3)(a)1. 1. For taxable years beginning before January 1, 2006, persons engaged in business in and outside this state, except direct air carriers, financial organizations, telecommunications companies, pipeline companies, public utilities, and railroads, as defined in ss. 71.04 (8) (a) and (b) 1. and 71.25 (10) (a) and (b) 1. , Stats., and corporations that are authorized to use an alternative method of apportionment under s. 71.25 (14) , Stats., shall use an apportionment fraction as described in s. 71.04 (4) (a) or 71.25 (6) (a) , Stats. Property, payroll, or sales related to the production of nonapportionable income may not be included in either the numerator or the denominator of any of the apportionment factors.

Tax 2.39(3)(a)2. 2. If one of the factors described in subd. 1. is omitted pursuant to s. 71.04 (10) or 71.25 (11) , Stats., the percentages of the fraction represented by the remaining factors shall be adjusted as follows:

Tax 2.39(3)(a)2.a. a. If either the property factor or payroll factor is omitted, the other factor shall represent 33.3333 percent of the fraction and the sales factor shall represent 66.6667 percent of the fraction.

Tax 2.39(3)(a)2.b. b. If the sales factor is omitted, the property factor and the payroll factor shall each represent 50 percent of the fraction.

Tax 2.39(3)(a)3. 3. If either the numerator or the denominator of the sales factor is zero or a negative number, the sales factor shall be determined as described in s. 71.04 (4m) (a) 1. , (b) 1. , or (c) 1. or 71.25 (6m) (a) 1. , (b) 1. , or (c) 1. , Stats.

Tax 2.39(3)(b) (b)

Tax 2.39(3)(b)1. 1. For taxable years beginning after December 31, 2005, and before January 1, 2007, persons engaged in business in and outside this state, except direct air carriers, financial organizations, telecommunications companies, pipeline companies, public utilities, and railroads, as defined in ss. 71.04 (8) (a) and (b) 2. and 71.25 (10) (a) and (b) 2. , Stats., and corporations that are authorized to use an alternative method of apportionment under s. 71.25 (14) , Stats., shall use an apportionment fraction as described in s. 71.04 (4) (b) or 71.25 (6) (b) , Stats. Property, payroll, or sales related to the production of nonapportionable income may not be included in either the numerator or the denominator of any of the apportionment factors.

Tax 2.39(3)(b)2. 2. If one of the factors described in subd. 1. is omitted pursuant to s. 71.04 (10) or 71.25 (11) , Stats., the percentages of the fraction represented by the remaining factors shall be adjusted as follows:

Tax 2.39(3)(b)2.a. a. If either the property factor or payroll factor is omitted, the other factor shall represent 25 percent of the fraction and the sales factor shall represent 75 percent of the fraction.

Tax 2.39(3)(b)2.b. b. If the sales factor is omitted, the property factor and the payroll factor shall each represent 50 percent of the fraction.

Tax 2.39(3)(b)3. 3. If either the numerator or the denominator of the sales factor is zero or a negative number, the sales factor shall be determined as described in s. 71.04 (4m) (a) 1. , (b) 1. , or (c) 1. or 71.25 (6m) (a) 1. , (b) 1. , or (c) 1. , Stats.

Tax 2.39(3)(c) (c)

Tax 2.39(3)(c)1. 1. For taxable years beginning after December 31, 2006, and before January 1, 2008, persons engaged in business in and outside this state, except direct air carriers, financial organizations, telecommunications companies, pipeline companies, public utilities, and railroads, as defined in ss. 71.04 (8) (a) and (b) 2. and 71.25 (10) (a) and (b) 2. , Stats., and corporations that are authorized to use an alternative method of apportionment under s. 71.25 (14) , Stats., shall use an apportionment fraction as described in s. 71.04 (4) (c) or 71.25 (6) (c) , Stats. Property, payroll, or sales related to the production of nonapportionable income may not be included in either the numerator or the denominator of any of the apportionment factors.

Tax 2.39(3)(c)2. 2. If one of the factors described in subd. 1. is omitted pursuant to s. 71.04 (10) or 71.25 (11) , Stats., the percentages of the fraction represented by the remaining factors shall be adjusted as follows:

Tax 2.39(3)(c)2.a. a. If either the property factor or payroll factor is omitted, the other factor shall represent 11.1111 percent of the fraction and the sales factor shall represent 88.8889 percent of the fraction.

Tax 2.39(3)(c)2.b. b. If the sales factor is omitted, the property factor and the payroll factor shall each represent 50 percent of the fraction.

Tax 2.39(3)(c)3. 3. If either the numerator or the denominator of the sales factor is zero or a negative number, the sales factor shall be determined as described in s. 71.04 (4m) (a) 1. , (b) 1. , or (c) 1. or 71.25 (6m) (a) 1. , (b) 1. , or (c) 1. , Stats.

Tax 2.39(3)(d) (d) For taxable years beginning after December 31, 2007, persons engaged in business in and outside this state, except direct air carriers, financial organizations, telecommunications companies, pipeline companies, public utilities, and railroads, as defined in ss. 71.04 (8) (a) and (b) 2. and 71.25 (10) (a) and (b) 2. , Stats., and corporations that are authorized to use an alternative method of apportionment under s. 71.25 (14) , Stats., shall use only the sales factor to compute the apportionment fraction, as provided in s. 71.04 (4) (d) or 71.25 (6) (d) , Stats. Sales related to the production of nonapportionable income may not be included in either the numerator or the denominator of the sales factor. If either the numerator or the denominator of the sales factor is zero or a negative number, the sales factor shall be determined as described in ss. 71.04 (4m) (a) 2. , (b) 2. , or (c) 2. or 71.25 (6m) (a) 2. , (b) 2. , or (c) 2. , Stats.

Tax 2.39(3)(e) (e) The apportionment method may be used only if the taxpayer or combined group is engaged in business both in Wisconsin and at least one other state or foreign country and its business in Wisconsin is an integral part of a unitary business. For a combined group that has made the controlled group election provided in s. 71.255 (2m) , Stats., the entire combined group’s business is deemed to be a single unitary business.

Tax 2.39(4) (4) Property factor.

Tax 2.39(4)(a) (a) Numerator; denominator. The numerator of the property factor shall include the average value of the real and tangible personal property owned or rented and used by the taxpayer in Wisconsin in the production of apportionable income during the tax period. The denominator shall include the average value of all of the real and tangible personal property located everywhere owned or rented and used by the taxpayer in the production of apportionable income during the tax period. Property in transit on the date or dates for determining its average value, as described in par. (f) , shall be considered to be at its destination, for purposes of computing the property factor. The value of mobile or movable property such as construction equipment, trucks, airplanes or other equipment which is located within and without Wisconsin during the tax period shall be determined for purposes of the numerator of the factor on the basis of the ratio of time used, serviced and stored within Wisconsin to total time used, serviced and stored during the tax period. However, an automobile assigned to a traveling employee shall be included in the numerator of the factor if the employee’s compensation is assigned to Wisconsin under the payroll factor.

Tax 2.39(4)(b) (b) Owned property. Property owned by the taxpayer is valued at its original cost for purposes of computing the property factor. As a general rule “original cost” is deemed to be the basis of the property for federal income tax purposes, prior to any adjustments, at the time of acquisition by the taxpayer and adjusted by subsequent capital additions or improvements to the property and partial disposition of the property, by reason of sale, exchange, abandonment or other means. If the original cost of property is unascertainable, the property shall be included in the factor at its fair market value as of the date of acquisition by the taxpayer. Any subsequent adjustments, other than depreciation or amortization, to net income which affect property, such as capitalizations of repairs and adjustments to inventory, shall also be included in the property factor. The original cost of depletable property such as mines, oil and gas wells and timber shall be reduced by any extraction to the extent that cost depletion has been allowed. Inventories shall be included in the factor in accordance with the valuation method used for Wisconsin income or franchise tax purposes. Property acquired by gift or inheritance shall be included in the factor at its basis for federal income tax purposes. Pollution abatement equipment or waste treatment facilities written off as an expense under s. 71.04 (2b) and (2g) , 1985-86 or prior years Stats., but still in use, shall be included at original cost.

Tax 2.39(4)(c) (c) Rented property. Property rented by the taxpayer is valued at 8 times the net annual rental determined at arm’s length for purposes of computing the property factor. Net annual rental is the annual rental paid by the taxpayer, or allocated by the department pursuant to s. 71.10 (1) , 71.30 (2) or 71.80 (1) (b) , Stats., less any annual rental received by the taxpayer from sub-rentals. In exceptional cases this definition of net annual rental may result in a negative value or clearly inaccurate valuation. In these exceptional instances, any other method which will properly reflect the net annual rental value may be required by the department or may be requested by the taxpayer; however, in no case may the net annual rental be less than an amount which bears the same ratio to the total annual rental paid by the taxpayer as the rental value of the part of the property used by the taxpayer in the production of apportionable income bears to the total rental value of the same rental property.

Tax 2.39(4)(cm) (cm) Annual rental. In this subsection, annual rental:

Tax 2.39(4)(cm)1. 1. Is the amount paid as rental for the property for a 12-month period. Where property is rented for less than a 12-month period, the net rent paid for the actual period of rental shall constitute the “annual rental” for the tax period. Where a taxpayer has rented property for a term of 12 or more months and the tax period for which the property factor is being computed covers a period of less than 12 months, such as may be due to a reorganization or change of accounting period, the net rent paid for the short tax period shall be annualized; however, if the rental term is for less than 12 months, the rent shall be adjusted accordingly.

Tax 2.39(4)(cm)2. 2. Is the actual sum of money or other consideration payable, directly or indirectly, by the taxpayer or for its benefit for the use of the property and includes:

Tax 2.39(4)(cm)2.a. a. Any amount payable for the use of real or tangible personal property, or any part of the property, whether designated as a fixed sum of money or as a percentage of sales, profits, or otherwise.

Tax 2.39(4)(cm)2.b. b. Any amount payable as additional rent or in lieu of rents, such as interest, taxes, insurance, repairs or any other items which are required to be paid by the terms of the lease or other arrangement, but does not include amounts paid as service charges, such as utilities or janitor services. If a payment includes rent and other charges unsegregated, such as rental charges for public warehouses, the amount of rent shall be determined by making a reasonable allocation between the rent and the other items.

Tax 2.39(4)(cm)3. 3. Does not include incidental day-to-day expenses such as hotel or motel accommodations, daily rental of automobiles or royalties based on extraction of natural resources, whether represented by delivery or purchase. For this purpose, a royalty includes an amount paid to a holder of an interest in real property which constitutes a sharing of current or future production of natural resources from the property, whether denominated as royalty, advanced royalty, rental, delay rental or otherwise.

Tax 2.39(4)(d) (d) Leasehold improvements. Leasehold improvements shall, for the purposes of the property factor, be treated as property owned by the taxpayer regardless of whether the taxpayer is entitled to remove the improvements or the improvements revert to the lessor upon expiration of the lease. The original cost of leasehold improvements shall be included in the factor.

Tax 2.39(4)(e) (e) Construction in progress. Property or equipment under construction during the tax period, except inventoriable goods in process, shall be excluded from the factor until the property is actually used by the taxpayer in the regular course of its trade or business. If the property is partially used by the taxpayer in the regular course of its trade or business while under construction, the value of the property to the extent used shall be included in the property factor.