Iowa does not have a special apportionment formula for interstate public utilities and telecommunications companies. The apportionment formula consists solely of a sales factor. Sales of tangible personal property are sourced on a destination basis. Sales of services are sourced where the benefit of the service is received. In the case of the transportation of electricity, “traffic units" are used to determine where the benefit is received. Rules prescribe where the benefit is received for services provided by telecommunications companies.

Michigan does not have a special apportionment formula for interstate public utilities and telecommunications companies. The apportionment formula consists of a three-factor formula with sales weighted 90%, and property and payroll each weighted 5%. Sales of tangible personal property are sourced on a destination basis. Sales of services are sourced where the income-producing activity occurred. If the income-producing activity occurred in more than one state, the sale is attributed to the state with the greater costs of performance.

Minnesota does not have a special apportionment formula for interstate public utilities and telecommunications companies. The apportionment formula consists of a three-factor formula with sales weighted 75%, and property and payroll each weighted 12.5%. Sales of tangible personal property are sourced on a destination basis. Sales of services are sourced where the benefit of the service is received, where the service was ordered, or where the service was billed, depending on the circumstances.

Summary of factual data and analytical methodologies: 2003 Wisconsin Act 37 changed the apportionment formula used by multistate businesses for determining the income taxable by Wisconsin. As a result of this legislation, single sales factor apportionment will be phased in for most businesses, including any public utility that owns or operates any plant, equipment, property, franchise, or license for 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. The phase-in of single sales factor apportionment begins for taxable years beginning on January 1, 2006. 2003 Act 37 also provides that multistate telecommunications companies are to apportion their income under rules of the Department of Revenue. 2005 Wisconsin Act 25 changed how gross receipts from the use of computer software and from services are sourced for purposes of the apportionment formula. Receipts from the use of computer software are sourced to the location where the software is used. Receipts from services are sourced where the benefit of the service is received. The change in the sourcing rules first applies to taxable years beginning January 1, 2005. Telecommunications companies have requested that in addition to excluding them from single sales factor apportionment as provided by 2003 Act 37, the rule would exclude them from the special sourcing rules for gross receipts from the use of computer software and from services. In consultation with telecommunications company personnel, the department developed language and used it to create this proposed rule order.

Analysis and supporting documents used to determine effect on small business: The department has prepared a fiscal estimate regarding this proposed rule order. It was determined that there is not a significant fiscal effect on small business.

Anticipated costs incurred by private sector: This proposed rule order does not have a significant fiscal effect on the private sector.

Effect on small business: This proposed rule order does not have a significant fiscal effect on small business.

Agency contact person: Please contact Dale Kleven at (608) 266-8253 or dkleven@dor.state.wi.us, if you have any questions regarding this proposed rule order.

Place where comments are to be submitted and deadline for submission: Comments may be submitted to the contact person shown below no later than one week after the public hearing on this proposed rule order is conducted. Information as to the place, date, and time of the public hearing will be published in the Wisconsin Administrative Register.

Dale Kleven

Department of Revenue

Mail Stop 6-40

2135 Rimrock Road

P.O. Box 8933\

Madison, WI 53708-8933

SECTION 1. Tax 2.50 is repealed and recreated to read:

Tax 2.50 Apportionment of apportionable income of interstate public utilities. (1) SCOPE. A public utility that is engaged in business both in and outside this state shall apportion its apportionable income as provided in this section. Nonapportionable income shall be allocated as provided in s. 71.25 (5) (b) 1., Stats.

(2) DEFINITIONS. In this section:

(a) “Payroll factor" means the payroll fraction computed under s. 71.04 (6) or 71.25 (8), Stats., and s. Tax 2.39.

(b) “Property factor" means the property fraction computed under s. 71.04 (5) or 71.25 (7), Stats., and s. Tax 2.39.

(c) “Public utility" means any business entity that owns or operates any plant, equipment, property, franchise, or license for 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.

(d) “Sales factor" means the sales fraction computed under ss. 71.04 (4m) and (7) or 71.25 (6m) and (9), Stats., and s. Tax 2.39.

(3) APPORTIONMENT FORMULA COMPUTATION. For taxable years beginning after December 31, 2004, a public utility that does business in and outside this state shall determine its net income for state franchise or income tax purposes as provided in this section. The public utility shall first deduct from its total net income its nonapportionable income, less related expenses. Nonapportionable income shall be allocated as provided in s. 71.25 (5) (b) 1., Stats. The public utility shall apportion its remaining net income to this state as follows:

(a) For taxable years beginning before January 1, 2006, apportionable income shall be apportioned using an apportionment fraction obtained by taking the arithmetical average of the sales factor, property factor, and payroll factor.

(b) For taxable years beginning after December 31, 2005, and before January 1, 2007, apportionable income shall be apportioned using an apportionment fraction composed of the sales factor, representing 60% of the fraction, the property factor representing 20% of the fraction, and the payroll factor representing 20% of the fraction.

(c) For taxable years beginning after December 31, 2006, and before January 1, 2008, apportionable income shall be apportioned using an apportionment fraction composed of the sales factor representing 80% of the fraction, the property factor representing 10% of the fraction, and the payroll factor representing 10% of the fraction.

(d) For taxable years beginning after December 31, 2007, apportionable income shall be apportioned using an apportionment fraction composed of the sales factor.

Note: The provisions of s. Tax 2.50 first apply for taxable years beginning on January 1, 2005.

Note: Section Tax 2.50 interprets ss. 71.04 (8) (b) and (c) and 71.25 (10) (b) and (c), Stats.

SECTION 2. Tax 2.502 is created to read:

Tax 2.502 Apportionment of apportionable income of interstate telecommunications companies. (1) SCOPE. A telecommunications company that is engaged in business both in and outside this state shall apportion its apportionable income as provided in this section. Nonapportionable income shall be allocated as provided in s. 71.25 (5) (b) 1., Stats.

(2) DEFINITIONS. In this section:

(a) “Payroll factor" means the payroll fraction computed under s. 71.04 (6) or 71.25 (8), 2001 Stats., and s. Tax 2.39.

(b) “Property factor" means the property fraction computed under s. 71.04 (5) or 71.25 (7), 2001 Stats., and s. Tax 2.39.

(c) “Sales factor" means the sales fraction computed under s. 71.04 (7) or 71.25 (9), 2001 Stats., and s. Tax 2.39.

(d) “Telecommunications company" means any business entity that owns or operates any plant, equipment, property, franchise, or license for the transmission of communications 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.

(3) APPORTIONMENT FORMULA COMPUTATION. For taxable years beginning after December 31, 2004, a telecommunications company that does business in and outside this state shall determine its net income for state franchise or income tax purposes as provided in this section. The telecommunications company shall first deduct from its total net income its nonapportionable income, less related expenses. Nonapportionable income shall be allocated as provided in s. 71.25 (5) (b) 1., Stats. The telecommunications company shall apportion its remaining net income to this state using an apportionment fraction obtained by taking the arithmetical average of the property factor, payroll factor, and sales factor.

Note: The provisions of s. Tax 2.502 first apply for taxable years beginning on January 1, 2005.

Note: Section Tax 2.502 interprets ss. 71.04 (8) (b) and (c) and 71.25 (10) (b) and (c), Stats.

This proposed rule order does not have a significant economic impact on a substantial number of small businesses.