26 Jul `Single-sales factor' extends tax treatment to tech, service firms
Madison, Wis. – The two-year state budget signed into law Monday by Gov. Jim Doyle will sharpen the competitive edge of many Wisconsin technology firms by changing how corporate income from out-of-state sales is taxed, according to the Wisconsin Technology Council.
With bipartisan support from the Legislature, Doyle embraced a proposal to extend the “single-sales factor” sales apportionment for corporate income to technology and service firms in Wisconsin. Two years ago, the state began a phase-in of the single-sales factor tax treatment for firms in other business sectors, such as manufacturing.
The proposal was a top priority of the Wisconsin Technology Council in its fall 2004 policy recommendations to the governor and the Legislature. The council is the independent, non-profit science and technology adviser to the governor and the Legislature.
“It just makes no sense to have a corporate tax policy that penalizes Wisconsin employers for every job they create in our state,” Doyle’s budget message said. “This change places Wisconsin technology firms on the same footing as manufacturers and in a more favorable tax climate than many other states.”
Under current state law, Wisconsin-based software companies face the threat of double taxation when they make sales outside Wisconsin. Wisconsin has used a three-factor approach to compute taxes on software and other IP companies – payroll, property and sales.
By changing the rules for such “intangible personal property” to reflect the destination of the goods, Wisconsin will join a growing number of states that tax gross receipts from intellectual property, software and services based on the “destination state.”
Had the Wisconsin rules not been changed, Wisconsin-based tech companies would have continued to be doubly taxed on each sale – by Wisconsin, which has treated out-of-state sales as Wisconsin sales, and by the destination state. By moving to destination state sourcing rules, Wisconsin can shift some tax burden to out-of-state and foreign sources without losing state revenue.
Republican legislators who pushed for the change said it will help Wisconsin-based firms compete nationally and around the world.
“The single-sales factor will definitely help the technology economy in Wisconsin,” said Sen. Ted Kanavas, R-Brookfield, who has launched software and IT companies. “Wisconsin companies that are in a position to extend their reach globally will be a better position with this change.
Effective for tax years starting in 2005, revenue from the licensing of computer software and services will be treated as Wisconsin revenue only if the purchaser of the software or services uses them in Wisconsin. That change equalizes the tax treatment of affected tech companies compared to traditional manufacturing companies.
Some major firms that may use the tax change to continue their expansion plans in Wisconsin include Metavante and GE HealthCare in the Milwaukee area and Epic Systems in the Madison area, the Wisconsin Technology Council reported.
“There is still more to do to fully equalize tax treatment for all tech companies, but the changes promoted by the governor and the Legislature represent a substantial step forward,” said Mark Bugher, chairman of the Wisconsin Technology Council and a former secretary of the state Department of Revenue.
Under the new rules, licensing revenue as well as maintenance and support revenue will now follow the state in which the licensee uses the software and service.Ê However, any tech company that has revenue from consulting, support, repair or installation activity will also benefit from the new law.
For example, if a tech company provides phone consultation on the use of its technology or provides consulting services to evaluate or install technology at its customer sites, that service revenue would no longer be treated as Wisconsin revenue as long as the customer is outside of Wisconsin.