June 30, 1999

Taxing the Profits of Multistate Corporations In Wisconsin:

Adopting a "Single Sales Factor" Formula Without Requiring Combined Reporting Will Reduce State Revenues With No Guarantee of More In-State Jobs
by Michael Mazerov

As part of his budget plan for the 1999-2001 biennium, Governor Thompson proposed two significant changes to Wisconsin's "apportionment" rules that determine how multistate corporations assign a share of their profits to the state for tax purposes. There are two basic types of decisions that states must make in taxing multistate corporations. States have latitude to determine both the way in which corporations will report their total profits, and the way in which the share of profits taxable in the particular state will be calculated. Governor Thompson's original proposal affected both these decisions, although he ceased his effort to obtain enactment this session of the first of the two changes.

The business community vehemently opposed combined reporting and mounted an intense campaign against it. On June 8th, the Thompson administration announced it would abandon its effort to mandate combined reporting but would continue to support the single sales factor apportionment formula — a change business supports. The Assembly followed suit, approving a tax package that phases-in single sales factor apportionment over three years beginning in tax year 2001. The Senate, on the other hand, is expected to retain current law by rejecting both combined reporting and the proposed change to a single sales factor formula. A Senate-Assembly conference committee would then decide whether to change the apportionment formula as part of its broader effort to agree on a 1999-2001 biennium budget and a tax restructuring package.

The original Thompson Administration proposal was close to being revenue-neutral; requiring combined reporting was estimated to raise $70 million annually while the change to a sales-only apportionment formula reduces revenue by $80 million annually when fully phased in. Thus, if the legislature adopts the Assembly proposal to phase-in the revenue-reducing single sales factor formula without also implementing the revenue-raising combined reporting requirement, Wisconsin will be left with a combination of corporate income apportionment policies that will widen the state's looming $1.7 billion budget gap for the 2001-03 biennium.

The combination of sales-only apportionment and separate-entity accounting will also provide greater opportunities and incentives than exist at present for multistate corporations to reduce their Wisconsin tax liability by gaming the state's tax system, thereby shifting tax burdens to other Wisconsin citizens and businesses.

Switching to a single sales factor apportionment formula is thus a risky economic development strategy for the state and a threat to its fiscal stability as well. Enactment of a single sales factor apportionment formula without mandatory combined reporting is an invitation to even more serious erosion of Wisconsin's corporate income tax base than is already occurring. Moreover, there is little evidence to support the assertion of single sales factor proponents that Wisconsin will realize a net gain in jobs from changing its corporate tax apportionment formula.


Wisconsin Loses Considerable Tax Revenue from Failing to Require Multistate Corporations to Report Their Profits Using Combined Reporting

When corporations are multistate in nature — when they produce and/or sell their goods and services in more than one state — states that tax corporate profits must implement rules to determine the share of the corporation's total profit they will tax. The U.S. Supreme Court and the Congress have allowed states considerable latitude in designing these so-called "apportionment" rules.

The legal structure of the typical large multistate corporation presents one challenge to the development of state corporate income tax apportionment policy. What we view as one multistate corporation is actually likely to be comprised of a parent corporation and numerous subsidiary corporations. For example, a multistate petroleum business may be comprised of a parent company that manages the operations of different subsidiaries that own oil fields, pipelines, refineries, and gas stations.

In developing apportionment rules, states face two basic alternatives in dealing with the fact that most major multistate corporations are in fact multi-corporate groups. About two thirds of the states with corporate income taxes — including Wisconsin — recognize for tax purposes the separate legal existence of every corporation in a corporate group. Such recognition is referred to as "separate-entity" accounting. Under separate-entity accounting, if a parent corporation and several of its subsidiaries are subject to corporate income tax in Wisconsin, each of them files its own tax return, and the profit each corporation reports on that return is completely determined by the companies' own internal accounting.

An important implication of this tax accounting freedom is that if one member of a corporate group sells a good or service to another member, the profits that both of them realize — and report for tax purposes — will be affected by the "transfer price" at which the sale occurs. Profit is the difference between revenues and expenses. The transfer price charged on a sale from one member of a corporate group to another affects the profits of the seller because it affects the seller's revenues and the profits of the purchaser because it affects the purchaser's expenses. Thus, if the seller is in one state and the purchaser is in another, a corporation's freedom to set transfer prices that will be recognized for tax purposes is tantamount to having freedom to determine in which state its profits will be taxed.

Governor Thompson recommended eliminating separate-entity tax treatment of multi-corporate groups in Wisconsin in favor of the principle alternative — mandatory "combined reporting." Under combined reporting, all of the related corporations that are engaged in different pieces of the same basic business that is being conducted in Wisconsin are essentially treated as one taxpayer and their profits are combined (added together) for corporate income tax purposes.(1) For example, if a parent corporation owns dairy farms and a cheese processing plant in Wisconsin, a mail-order subsidiary in South Dakota that sells the cheese, and a subsidiary that operates retail stores throughout the United States that also sell the cheese, a share of the combined profit of the entire enterprise would be taxed by Wisconsin if it required combined reporting.

One of the most important advantages of combined reporting is that it prevents all kinds of games that corporations have learned to play to slash their income tax liabilities in separate-entity states like Wisconsin. In recent years, corporations have become increasingly aggressive in manipulating their legal structures — the way they divide into separate corporations and transact business between parents and subsidiaries — to shift their profits out of separate-entity states like Wisconsin and into tax-haven states like Nevada and Delaware. The Wisconsin Department of Revenue estimates that if Wisconsin were to adopt combined reporting with no other change in current law, multistate corporations would pay $70 million more corporate taxes to the state annually.(2) By eliminating the ability of corporations to artificially shift profits that are actually earned in Wisconsin to related corporations in other states, combined reporting helps insure that corporations pay their fair share of the cost of services that facilitate their Wisconsin operations — like the schools and universities that train their workers and the police that protect their property. The U.S. Supreme Court has twice upheld the fundamental fairness and constitutionality of combined reporting as a means of ensuring that corporations pay their fair share of the costs of state government.(3)

Had the legislature accepted Governor Thompson's recommendation that Wisconsin mandate combined reporting, Wisconsin would have adopted the single most important policy a state can implement to ensure the viability of its corporate income tax. Without combined reporting, Wisconsin faces a steady erosion of its corporate tax base as more and more of its multistate corporate taxpayers devise new strategies for exploiting the weaknesses of separate-entity taxation. (One such strategy, widely employed by Wisconsin's banking industry, is described in the text box on page 8.)


How a Single Sales Factor Apportionment Formula Would Affect the Corporate Income Tax Liability of Wisconsin's Multistate Corporations

Once states have decided what to tax — the profits of individual corporations under "separate-entity" accounting principles or the aggregated profit of the corporate group under combined reporting — the question remains of where to tax it. To avoid the states collectively taxing more than 100 percent of a multistate business' profit, agreement among the states is desirable on what share of a multistate corporation's profit or of a multistate corporate group's combined profit each state shall be allowed to tax. Those agreements are reflected in the apportionment formulas that are an integral component of the tax laws and corporate tax liability calculations of each state levying a corporate income tax.

Basic economic theory teaches that the price a good fetches in the marketplace — and hence the profit the seller earns upon its sale — is determined by the intersection of supply and demand. A general consensus exists among the states that since public services facilitate both sides of the supply-demand equation, the states in which a particular multistate corporation's production occurs and the states in which its selling occurs should be allowed to tax roughly equal shares of its profit. This consensus is reflected in the following apportionment formula that a majority of states — including Wisconsin — use to determine the share of a multistate corporation's total profit they will tax. The proportion of profits taxed in most states reflects the proportion of the company's property and employment located in the state and the proportion of total sales the company makes to the state's residents, with sales given a double weight:

figure 1

Under this formula, if Wisconsin Widget Company has 30 percent of its total company-wide property in Wisconsin, 10 percent of its company-wide employee payroll there, and delivers 50 percent of its company-wide sales to Wisconsin residents, (30% + 10% + 50% +50%) ÷ 4 — or 35 percent — of Wisconsin Widget Company's total nationwide profit will be taxable by Wisconsin.

Wisconsin Banks to the State’s Treasury:
"Heads I Win, Tails You Lose"

According to numerous press reports over the years, Wisconsin’s banks have been among the most active members of its corporate community in taking advantage of the state’s lack of combined reporting to minimize their tax obligations to the state.

The method used by the banks to reduce their Wisconsin corporate taxes could not be more simple; the banks simply transfer their investment portfolios of bonds and other securities to subsidiaries they establish in Nevada or Delaware in exchange for stock in the subsidiaries. Since Nevada does not have a corporate income tax and Delaware does not tax earnings on intangible assets like securities and patents, the earnings on these securities are not taxed anywhere — not in Nevada, Delaware, or Wisconsin.

According to the Milwaukee Business Journal, by 1991 virtually all of the bank holding companies in Wisconsin had transferred their investment securities portfolios to newly-created subsidiaries in Nevada or Delaware. First National Bank of Milwaukee told the Journal it expected to save $700,000 in Wisconsin taxes each year from its use of a Nevada subsidiary; Valley Bancorporation of Appleton estimated its Wisconsin corporate franchise tax savings at $1.8 million annually. More recently, the Wisconsin-based bank holding company Marshall & Ilsley Corporation acknowledged that its use of Nevada corporations saved between $9 million and $13 million annually in Wisconsin corporate taxes.

These press reports indicate that the banks’ use of Nevada and Delaware subsidiaries to reduce their Wisconsin tax liabilities has not gone unnoticed; indeed, Governor Thompson cited the phenomenon as the prime motivator of his combined reporting recommendation. What has not been noted thus far is that separate entity apportionment allows the banks to reduce their Wisconsin corporate tax liabilities coming and going: even as they succeed in putting the income from their investment securities beyond the state’s tax reach, Wisconsin corporate income tax revenues are likely being further depressed by the deduction of expenses associated with that non-taxable income. For example, the interest paid to Wisconsin depositors, the advertising expenses that help attract the deposits, and the salaries of the tellers who service the depositors are all deductible expenses against the banks’ remaining profits that are taxable by Wisconsin — even as interest earnings on securities purchased with the deposits and transferred to Nevada escape taxation. The banks are in the proverbial, "heads I win, tail you lose" situation.

If Wisconsin adopted combined reporting, the profits of the banks’ tax-haven subsidiaries would be added to the profits of their Wisconsin parents and then a share of this combined profit would be taxed by Wisconsin. The Wisconsin banks have complained that this would increase their Wisconsin taxes. That is true, but it is only because combined reporting prevents them from putting beyond Wisconsin’s tax reach income from assets that are inextricably intertwined with their existing Wisconsin activities. The banks are taking deposits in Wisconsin from Wisconsin residents and earning profits from the assets in which those deposits are invested. Wisconsin governments provide public services to the facilities in which those deposits are taken and from which the investments are made. Wisconsin’s system of laws and its courts are available to both the banks and their depositors, and this contributes to the willingness of each to engage in business with the other. Accordingly, it is entirely reasonable for Wisconsin to insist through the adoption of combined reporting that the banks pay their fair share of tax on the profits that Wisconsin public services help generate.

By counting the share of a corporation's sales that are made in a particular state twice, this so-called "double-weighted sales factor" formula gives equal weight to the two supply- or production-related factors (property and employee payrolls) and the one demand- or market-related factor (sales) in apportioning corporate profits among the states.

Now, however, Governor Thompson and the Assembly would have Wisconsin join a small minority of corporate income tax-levying states that have abandoned the consensus that exists on fair apportionment principles. Under the proposed single sales factor apportionment formula, the shares of Wisconsin Widget's total payroll and property located in Wisconsin would no longer affect the company's Wisconsin tax calculation. Under a single sales factor formula, the proportion of a company's total sales that are made and delivered to Wisconsin residents would be the sole determinant of the share of its total profit that Wisconsin would tax. Fifty percent of Wisconsin Widget Company's profit would be taxable by Wisconsin because 50 percent of its sales are delivered to customers within the state. More generally, the share of Corporation X's total profit taxable by Wisconsin under single sales factor apportionment would be calculated as follows:

figure 2

Substituting a single sales factor apportionment formula for the current property, payroll, and double-weighted sales formula has the effect of cutting the Wisconsin corporate income tax liability of corporations that produce goods in Wisconsin and sell a disproportionate share of these goods to non-Wisconsin customers. This is most easily understood by contrasting the tax liability of a company with all of its property and payroll in Wisconsin and all of its sales out of state under the double-weighted sales formula and under the sales-only formula. Under the current formula, 50 percent of this company's total profit would be taxable by Wisconsin — 100% of property in Wisconsin + 100% of payroll in Wisconsin + 0% of sales in Wisconsin +0% of sales in Wisconsin ÷ 4 = 50% of total profit taxable in Wisconsin. Under a single sales factor formula, however, such a company will not owe any Wisconsin corporate income tax. With sales-only apportionment, the company's Wisconsin taxable income is determined by multiplying its total profit by the share of its sales delivered in Wisconsin; since this share is zero, the company's Wisconsin taxable income is zero. Thus, a company with a disproportionate share of its sales outside of Wisconsin will pay less corporate tax to Wisconsin if the state switches to a sales-only formula.

A switch from a double-weighted sales factor formula to a sales-only formula would not necessarily cut the taxes of all corporations doing business in Wisconsin, however. This change actually would lead to higher Wisconsin corporate income tax liabilities for out-of-state corporations that make a disproportionate share of their sales to Wisconsin residents. Consider the mirror-image of the example above: a corporation with all of its property and payroll outside of Wisconsin but all of its sales to Wisconsin residents would apportion 100 percent of its profits to Wisconsin under a single sales factor formula while now only 50 percent of its profits are taxable in Wisconsin.

Research by the Wisconsin Department of Revenue confirms that changing to a single sales factor formula could lead to tax cuts for some multistate corporations and tax increases for others. The Department estimates that if a single sales factor apportionment formula had been in place in tax year 1996, 2426 corporations that sell a disproportionate share of their Wisconsin output to customers in other states (comprising less than two percent of all corporations doing business in the state) would have received a $113.5 million tax cut.(4) This tax cut would have equaled nearly 30 percent of all 1996 corporate taxes paid by multistate corporations. Partially offsetting this tax cut would have been a $42.6 million tax increase for 3,997 firms doing most of their production out of state but selling a disproportionate share of it in Wisconsin. As noted above, the Revenue Department also estimates that this net $70.9 million revenue loss estimated for 1996 ($113.5 million minus $42.6 million) would be on the order of $80 million today due to overall growth in Wisconsin's corporate tax base.

An approximately $80 million annual revenue loss from a change to a sales-only apportionment formula is already significant in the context of the $1.7 billion budget gap the Legislative Fiscal Bureau currently estimates will exist in the 2001-2003 biennium.(5) However, there is good reason to expect the actual revenue loss to be significantly larger once a single sales factor formula is fully in place. A significant portion of the increased taxes on predominantly out-of-state corporations that the Wisconsin Revenue Department forecasts might never materialize. The Department's revenue loss estimate did not attempt to factor-in two fundamental changes that might occur in the behavior of the out-of-state corporations that would pay higher taxes under a sales-only formula than they do under the current formula.(6)


Out-of-State Corporations May Avoid Potential Tax Increases by Removing Property and Jobs from Wisconsin

Some corporations doing business in Wisconsin are likely to be in a situation in which they have a significant share of their sales in the state but only a very small share of their property and payroll; as explained above, such corporations will experience substantial Wisconsin corporate tax increases as a result of the shift from a double-weighted sales to a sales-only formula. Such corporations may well seek to eliminate completely the ability of Wisconsin to subject them to a corporate income tax.

In order to eliminate Wisconsin's legal right to tax its profit, a corporation generally would have to remove from the state all of its property and personnel. However, the need to take such a drastic step has been mitigated by a little-known federal law, Public Law 86-272. This law provides that corporations cannot be subjected to a state's corporate income tax merely because they have personnel within the state's boundaries, provided those personnel are only engaged in the solicitation of sales of goods and provided they work out of their homes or visit from out of state.(7) Thus, the out-of-state manufacturing corporations that would be most likely to face significantly higher Wisconsin corporate income taxes as a result of a shift to a single sales factor apportionment formula could restructure their Wisconsin activities to enjoy the best of both worlds. They could maintain sales personnel in Wisconsin in order to continue availing themselves of Wisconsin's market, while moving non-sales personnel and facilities (like warehouses and R & D labs) outside the state to avoid taxation. If this quite feasible scenario were to transpire in a significant number of cases, the revenue loss from switching to a single sales factor formula could be substantially greater than currently projected by the Wisconsin Department of Revenue. Rather than paying the higher taxes the Department projects, many out-of-state corporations earning profits in Wisconsin might end up paying no Wisconsin corporate income tax at all.


Out-of-State Corporations May Avoid Potential Tax Increases by Taking Advantage of the Absence of Combined Reporting

For some out-of-state corporations that would face significantly higher tax liabilities in Wisconsin resulting from a change to a sales-only apportionment formula, limiting their presence in Wisconsin to a visiting sales force or to salespeople who work out of their homes will not be an option. Some corporations may have so many salespeople in the state that it would not be feasible to have them work out of their homes; a central office would be needed. Other corporations may need to have personnel in the state providing direct services to their customers, such as installing their products, repairing them, or training purchasers in their use. Some corporations may have built a research and development facility in the state and would not wish to incur the cost and suffer the disruption of operations that would be entailed in moving it out of Wisconsin.

Fortunately for such corporations, there is a strategy for counteracting higher tax liabilities resulting from the adoption of a sales-only apportionment formula that does not require the physical removal of their property and personnel from Wisconsin. The out-of-state corporation can avoid the higher taxes that would result from the adoption of a single sales factor formula by separately-incorporating whatever Wisconsin activities or physical presence establishes its taxability in the state and using transfer pricing to insure that the separate Wisconsin corporation never reports much — if any — profit. This strategy works, however, only so long as Wisconsin does not mandate combined reporting.

If a multistate business creates a separate corporation to "house" activities physically present in Wisconsin, it may be able to offset completely the increase in its tax liability that would occur because of the change to a sales-only formula. For example, if an out-of-state manufacturing corporation needs to have a sales office in Wisconsin but otherwise has no need to be physically present in the state, it can separately incorporate this office and the salespeople who work there as a retailing subsidiary. Then, it can sell its manufactured goods to the subsidiary at a high price that allows the subsidiary to earn at most a nominal profit.(8) The subsidiary then resells the goods to the business' existing customers.(9) Through this mechanism, the corporation can ensure that most of the profit on the sale of its goods would accrue to the out-of-state parent that would not be taxable in Wisconsin; only the subsidiary would be taxable on its relatively small earnings.

In sum, if Wisconsin switches to a sales-only apportionment formula without simultaneously adopting combined reporting, it is unlikely the state will be able to offset — to the degree currently predicted — the revenue loss resulting from cutting taxes of in-state corporations by raising taxes on out-of-state corporations. The latter will seek to avoid their higher tax liabilities by dividing themselves up into separate legal entities and stepping up their efforts to shift as much income as possible outside Wisconsin.(10) Wisconsin's current separate-entity taxation policy combined with a change to a single sales factor apportionment formula seems likely to cause even more serious erosion of Wisconsin's corporate income tax base than is already occurring.


The Dubious Economic Development Benefits of Single-Sales Factor Apportionment

Proponents of switching to a single sales factor apportionment formula do not agree that such a change will lead to an erosion of Wisconsin's tax base, at least not in the long run. They argue that adopting a sales-only apportionment formula will encourage additional business investment and job creation in Wisconsin. The earnings and purchases of newly-hired employees will allegedly generate sufficient personal income tax and sales tax revenues to offset any narrowing of the corporate income tax base arising from the change in apportionment formulas. In particular, single sales factor supporters argue that adoption of a sales-only formula will attract to the state many manufacturing businesses that are looking for new places to locate plants that will serve national markets and thus will sell a disproportionate share of their output outside of Wisconsin. They argue as well that adoption of a single sales formula will encourage existing Wisconsin manufacturing businesses to choose to expand operations in Wisconsin rather than elsewhere as demand for their products grows over time.(11)

Economic development arguments in support of sales-only apportionment are of dubious validity for a number of reasons. First, there is a strong consensus among economists that a low level of aggregate state and local taxes in a particular state is unlikely by itself to affect significantly the state's attractiveness as a business location. Other business costs for workers, transportation, and energy are much greater than the costs of state and local taxes and often vary much more among locations as well. Accordingly, the aggregate cost of state and local taxes has at most a small impact on the investment location decisions of most businesses.(12) A low effective rate for a single tax, like the corporate income tax, seems even less likely to affect many such decisions.(13) Given that the short-term revenue cost of changing to sales-only apportionment is $80 million annually and any investment incentive effect is unlikely to be strong, the cost-effectiveness of this policy change seems particularly questionable.

Moreover, the reduction in revenue available to Wisconsin state government from the change to a sales-only formula could have a negative impact on the state's attraction as a business location because it could interfere with the state's ability to preserve public services and to achieve fiscal stability. Businesses and their employees need and want high-quality public services, such as good schools and public universities, a modern transportation infrastructure, and adequate public recreation facilities. Before they make long-term investments, businesses also want to be assured that the state's long-term revenues and expenditures are in balance so that the state will be less likely to need to cut services that businesses require or increase business taxes. An $80 million cut in revenues from the switch to sales-only apportionment could force the state to reduce aid to local education, defer road maintenance, or otherwise degrade the quality of public services. As noted previously, Wisconsin also appears to be facing a serious budget gap in the 2001-2003 biennium; enacting what is intended to be a permanent cut in the corporate tax through the change in apportionment formulas is likely to widen this gap further. In short, even if a change in the apportionment formula taken by itself could provide a modest incentive for new investment in Wisconsin in the long run, that incentive effect could be negated by the immediate effects of the attendant revenue loss on the quality of Wisconsin public services and the state's fiscal stability.

Finally, even if a sales-only formula might be an attractive feature of a state's tax system for the small minority of corporations that are "in the market" at any given time for the establishment or major expansion of a plant that will sell a large share of its output to out-of-state customers, such a formula can actually be a double-edged sword that both destroys existing jobs and discourages the creation of new ones. As discussed above, a single sales factor formula can create strong incentives for out-of-state corporations that would pay higher corporate taxes under such a policy to remove all non-sales personnel and facilities from Wisconsin. Public Law 86-272 makes this decision even easier, because it permits an out-of-state corporation to continue making sales in Wisconsin and even maintain sales personnel in Wisconsin without being subject to Wisconsin's corporate tax. There is no inherent reason to believe that a switch to a single sales factor formula is more likely to attract new jobs than it is to encourage the removal of existing ones.

In addition to encouraging some out-of-state corporations to eliminate existing jobs in Wisconsin, adoption of a sales-only formula can combine with Public Law 86-272 to create a disincentive for the creation of new jobs in the state. Take as an example a Missouri manufacturer of brewery supplies that makes 50 percent of its sales to Wisconsin customers; assume the business of these customers is solicited by a few sales people who visit from Missouri. Such a manufacturer would not currently pay any Wisconsin corporate income tax because its activities in Wisconsin are limited to solicitation of sales and it is therefore rendered immune from Wisconsin taxation by Public Law 86-272. Now imagine that the Missouri manufacturer currently is contemplating opening a sales office in Wisconsin and is evaluating whether doing so is worth the cost. (On the one hand, the company is having difficulty recruiting salespeople who are willing to travel such a long distance; on the other hand, the cost of the office space to house them in Milwaukee will exceed the cost in St. Louis.) Assume that the Wisconsin sales office would account for 10 percent of the manufacturer's total property and 10 percent of its total payroll. Under the current double-weighted sales apportionment formula, if the manufacturer opened the Wisconsin office, 30 percent of its profits would become subject to Wisconsin's corporate tax (10% WI property + 10% WI payroll + 50% WI sales +50% WI sales ÷ 4 = 30% of total profit taxable by Wisconsin). If Wisconsin switches to a sales-only apportionment formula, however, 50 percent of this corporation's profit would be taxable in Wisconsin, because 50 percent of its sales are in Wisconsin. If the benefit of opening the Wisconsin sales office only slightly outweighs the cost under the current double-weighted sales formula, it seems entirely feasible that the increase in Wisconsin corporate tax liability resulting from the change in formulas could be enough to tip the decision against the new investment.

Corporations generally try to minimize the number of states in which they are subject to corporate income tax, if for no other reason than to avoid the cost of complying with different states' tax rules. Still, there are times at which they do contemplate expanding into states in which they are making sales but are not currently taxable; the above example shows that a change to a single sales factor apportionment formula can reduce Wisconsin's ability to attract such firms and the jobs they bring with them. The lesson, again, is that adopting a sales-only apportion formula is by no means guaranteed to improve Wisconsin's desirability as a business location, despite the $80 million annual price tag of adopting such a policy.


1. Even under combined reporting, the separate corporations in the corporate group are generally required to file their own tax returns. Combined reporting differs from separate-entity accounting, first, in that the calculation of tax liability is based on the combined profit of the corporate group engaged in a common "unitary business" and, second, that the combined profit ignores (subtracts out) profits earned as a result of transactions between members of the group.

2. Wisconsin Legislative Fiscal Bureau Paper #112, June 7, 1999, p. 14, paragraph 19.

3. Container Corporation of America v. California Franchise Tax Board, 1983; Barclays Bank v. California Franchise Tax Board, 1994.

4. Wisconsin Legislative Fiscal Bureau Paper #111, June 7, 1999, p. 7, paragraph 15 and Table 2.

5. Letter dated May 11, 1999 from Robert W. Lang, Director, Wisconsin Legislative Fiscal Bureau, to Senator Brian Burke and Representative John Gard, Table 3, page 9.

6. Conversation with Dennis Collier, Director of State Tax Policy, Wisconsin Department of Revenue, on June 23, 1999.

7. If the corporation wants to be protected from taxation in a particular state, Public Law 86-272 also requires that the orders resulting from its in-state solicitation activities be "accepted" out-of-state (an easily-satisfied formality) and that the ordered goods be shipped into the state from an out-of-state location.

8. Theoretically, transfer prices could be set to reduce the in-state subsidiary's profit to zero. However, this is likely to attract an auditor's attention and could lead to a legal challenge by the state of the corporation's transfer prices or an effort to treat the Wisconsin corporation as a sham established only for tax avoidance purposes. Like the tax laws of most separate-entity states, Wisconsin's laws provide discretionary authority to tax officials to reallocate profit to in-state corporations in particularly abusive situations. Most corporations would seek to avoid the exercise of such authority by allowing the in-state business to report a nominal profit.

9. There is no need under this arrangement for the newly-created retailing subsidiary to incur additional costs associated with receiving and storing in Wisconsin goods sold to it by its parent. When the Wisconsin subsidiary makes a sale to one of its customers, it can simply fulfill the order by directing the out-of-state parent to ship the product directly to the customer. In other words, although on paper the parent is selling the product to the subsidiary, which is in turn reselling it to the final customer, this does not preclude the parent from delivering the product directly to the customer as it has always done.

10. It is worth noting that three of Wisconsin's neighboring states that have adopted a single sales factor apportionment formula — Illinois, Nebraska, and Minnesota — would not be subject to revenue losses from corporations' restructuring themselves in this manner because they mandate combined reporting.

11. Again, recall that a single sales factor formula reduces taxes for businesses that sell a disproportionate share of their goods outside of the state in which the goods are produced.

12. Stephen T. Mark, Therese J. McGuire, and Leslie E. Papke, "What Do We Know About the Effect of Taxes on Economic Development? Lessons from the Literature for the District of Columbia," State Tax Notes, August 25, 1997.

13. Single sales factor apportionment does not appear to be an economic development panacea. Iowa and Missouri have allowed corporations to use the sales-only formula for decades, and yet both states have a poorer record in generating manufacturing jobs than does supposedly "high-tax" Wisconsin. Between 1978 and 1998, manufacturing employment grew approximately eight percent in Wisconsin but only four percent in Iowa; it fell eight percent in Missouri.