United States: Wisconsin Circuit Court Rules That Intercompany Transfer of Assets is Subject to Wisconsin Use Tax

A recent Wisconsin decision serves as a useful reminder that intercompany transfers of assets between related companies – although generally not subject to federal and state income taxes – will sometimes trigger state sales or use taxes. In Wisconsin Department of Revenue v. River City Refuse Removal, Inc. (#03-CV-2774, Aug. 2, 2004), the Wisconsin circuit court overturned a decision of the Wisconsin Tax Appeals Commission and ruled that the taxpayer, River City Refuse Removal, Inc. ("River City"), was liable for Wisconsin use taxes upon the acquisition of assets from several affiliates.

River City, a wholly-owned subsidiary of Browning Ferris Industries, Inc. ("BFI"), was in the business of collecting and transporting garbage. Several other subsidiaries of BFI transferred trucks and other fixed assets (the "Assets") to River City. River City did not pay a use tax upon the acquisition of the Assets. The Wisconsin Department of Revenue assessed Wisconsin use taxes on River City with respect to the Assets. River City contested the assessment and this litigation ensued.

Wisconsin’s sales and use tax regime is pretty standard. Wisconsin imposes a sales tax on retailers for the privilege of selling tangible personal property and a corresponding use tax on the use in Wisconsin of tangible personal property purchased from a retailer. Wisconsin Stat. §77.52(1), §77.53(1). Persons using tangible personal property in Wisconsin that was purchased from a retailer are liable for the use tax. The definition of "retailer" is broad and includes every seller who makes any sale of tangible personal property and every person engaged in the business of making sales of tangible personal property for storage, use or consumption. Wisconsin Stat. §77.51(13). "Purchase" is defined to include any transfer of title, possession, ownership, enjoyment or use by cash or credit transaction, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatever of tangible personal property for consideration. Wisconsin Stat. §77.1(12).

River City asserted that it did not "purchase" the Assets and that the Assets were merely transferred to it for no consideration. River City also argued that the affiliates who transferred the assets were not retailers. The court disagreed on both counts. First, the court looked to the broad definition of "retailer" and found that River City’s affiliates were in the business of making retail sales because they engaged in the Asset transfers with the "object of gain, benefit or advantage." The court also looked to the bookkeeping entries made with respect to the transfers of Assets. It found that in River City’s books, an entry was made to its payables account and that a corresponding entry was made in the receivables accounts of the affiliates that transferred the Assets. The court concluded that this constituted sufficient consideration.

The Wisconsin statute contains an "occasional sale" exemption to the sales and use tax. The court gave the exemption short shift in its analysis. However, the exemption is a narrow one. An "occasional sale" is defined to include isolated and sporadic sales by persons not required to hold a seller’s permit and a sale of business assets after the seller has ceased operating the business. Wisconsin Stat. §77.51(9). The court concluded that at least one of the affiliates had a seller’s permit and the affiliates apparently did not transfer the assets in connection with the cessation of business. Hence, there was insufficient evidence to establish that the exemption applied.

The court’s decision – although flawed in several respects – does serve as a useful reminder that one must consider sales and use tax aspects of intercompany transactions. While there is sometimes a tendency to focus on the income tax consequences of corporate restructurings and the reshuffling of assets among related corporations, it is important to consider the potential sales and use tax consequences as well.

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