Economic Stimulus for the States: Sweeping Changes in California and Wisconsin
In February, California and Wisconsin approved new tax and stimulus plans designed to stimulate economic activity, close budget gaps ($42 billion in California and $700 million in Wisconsin), and create jobs.
Both states approved provisions that may impact businesses and individuals. The new plans add new credits and incentives (or modify the allowable amount of existing credits and incentives) and modify the state’s personal income tax, corporate income tax and sales tax provisions. Several key aspects of both budget plans are discussed below.
California
The California Legislature approved and Governor Schwarzenegger signed the state’s new budget plan on February 20, 2009.
Provisions impacting both individuals and entities. The budget includes a sales tax increase of one percent effective April 1, 2009 through June 30, 2011; an increase in the state’s vehicle license fee from 0.65 percent to 1.15 percent of a vehicle’s value effective May 19, 2009 through June 30, 2009; and a film/television production credit for 20 percent to 25 percent of qualifying expenditures related to motion pictures, television series, or independent films. The temporary sales tax increase would be extended for one year if voters approve a spending cap ballot measure on May 19, 2009.
Individual-specific provisions. The new law includes a personal income tax rate increase of 0.25 percent (it may decrease to 0.125 percent depending upon the amount of federal stimulus funds available to California), effective for tax years 2009 and 2010; a reduction in the Dependent Child Tax Credit from $309 to $99, effective for 2009 and 2010; and a homebuyer’s tax credit equal to the lesser of $10,000 or 5 percent of the price of a never-occupied principal residence effective March 1, 2009. The temporary increases would be extended two years if voters approve a spending cap ballot measure on May 19, 2009.
Business-specific provisions. The State enacted a new “bright line nexus” test, effective for tax years beginning on or after January 1, 2011, under which a corporation is "doing business" in California if its California sales, property and payroll exceed certain thresholds measured in dollars or percentages. In addition, the state has modified its multistate corporate income tax provisions, adding an annual irrevocable election to use a single sales factor, effective for years beginning on or after January 1, 2011, and a revision of the sales factor rules with regards to service income (market sourcing), throwback and eliminating the inclusion of various intangible income from the factor (treasury receipts).
The state has also added a small business hiring credit (effective for the 2009 and 2010 tax years) of $3,000 per full-time employee added by businesses with 20 or fewer employees.
Wisconsin
Wisconsin’s economic recovery law, signed by Governor Jim Doyle on February 19, 2009, institutes a variety of tax and economic development provisions that may significantly impact individual and entity taxpayers.
Sales Tax. Various changes have been made to the state’s sales tax. Specifically, the state has amended its sales and use tax law to conform to the Streamlined Sales and Use Tax Agreement, and has introduced a 5 percent state sales and use tax, effective October 1, 2009, on transactions involving digital products.
Income Tax. For tax years beginning on or after January 1, 2009, combined reporting for Wisconsin income and franchise tax is required for unitary businesses. The new law provides a set of technical rules designed to fully implement the new combined reporting regime.
The state has also changed the way it treats sales of intangible property (excluding securities). Sales of intangibles are now Wisconsin sales if the purchaser was domiciled in Wisconsin, made use of the intangibles in-state, or was billed for the intangibles in Wisconsin. These provisions are effective for the 2009 tax year.
Further, Wisconsin has expanded its definition of “doing business” for income tax purposes. For tax years beginning on or after January 1, 2009, the definition of “doing business” includes, among other things: regular sales of products or services in-state, regularly engaging in transactions with Wisconsin customers involving intangible property; and holding loans secured by real or tangible personal property located Wisconsin.
In addition, starting with the 2009 tax year, the state will require taxpayers to add back amounts deducted or excluded from federal income that represent intangible expenses and management fees paid to related entities. This provision does not apply if such amounts were paid for business purposes and not to avoid tax.
Credits & Incentives. Beginning with the 2008 tax year, the state’s angel investment credit is raised to 25 percent of investments in qualified new business ventures. Wisconsin has also consolidated its various development zones into one program, and enacted new industry specific credits for meat and dairy businesses.
