Gain From the Sale of Federal Environmental Credits Treated as Apportionable Income in Wisconsin

January 31, 2022

Wisconsin Welcome sign at Marinette WI

By: Jess Johannesen, SALT Senior Manager

At a glance

  • The main takeaway: A ruling by the Wisconsin Tax Appeals Commission addresses why the sale of federal environmental credits is classified as apportionable income.
  • Assess the impact: Determining whether income should be treated as apportionable can have a significant impact on a corporation’s state income tax liability and how much a pass-through entity is required to withhold.
  • Take the next step: Aprio’s State and Local Tax (SALT) team constantly monitors important state tax topics and can assist your business with its treatment of income as either apportionable or allocable.

The full story:

 The Wisconsin Tax Appeals Commission (Commission) recently ruled in favor of the Department of Revenue (DOR) by determining that American Honda Motor Company’s (AHM) sale of environmental credits should have been included as apportionable income for corporate income and franchise tax purposes.[1] In a previous article, we discussed how Arkansas concluded that income from the sale of tax credits constituted apportionable income. However, this Wisconsin ruling involves environmental (i.e., non-tax) credits generated under a national program aimed at making vehicles more fuel-efficient and eco-friendly.

AHM is headquartered in California and operates as the U.S. distribution arm for Honda brand vehicles, equipment, parts and accessories. Specifically, AHM buys Honda products from affiliated manufacturing companies that are part of AHM’s unitary group, and resells the products to dealers and other retailers in the U.S. As the U.S. distributor of Honda vehicles, AHM is required to comply with a national program regulating fuel economy and greenhouse gas emission that is jointly coordinated by the National Highway and Transportation Safety Administration (NHTSA) and the Environmental Protection Agency (EPA).

Under the program, AHM receives credits since its automobiles are more fuel efficient and eco-friendly than applicable standards. AHM can then sell those credits to other automakers who use them as payment for failure to meet the applicable standards. Compliance with the program as well as the credit sale activity were conducted by AHM’s Product Regulatory Office located in California.

During the tax periods at issue in this case, AHM sold its credits and reported the income as capital gain on its federal tax return. On its combined Wisconsin corporate income and franchise tax return, income from the sale of the credits was treated as non-apportionable income and sourced outside Wisconsin since the program compliance and credit sales activities were run entirely from California.

The DOR disagreed on the audit, and this case ensued.

The Commission explained that under Wisconsin law, income is treated as apportionable if such income is either (1) unitary income, (2) operational income or (3) other income that has a taxable presence in Wisconsin.

The Commission addressed these concepts in reverse order by briefly noting that the income from the sale of the credits does not have a taxable presence in Wisconsin since the sales activity is conducted entirely from California. The Commission explained that such sales generated operational income (as opposed to non-operation or investment income) because the credits were an integral part of the unitary business. The Commission raised two points:

  • First, the credits are “inextricably tied to” the core automaking operations.
  • Second, the Commission notes that AHM did not purchase or invest in the credits in a speculative nature commonly understood for an appreciating investment.

The Commission then explained that the credit sales also fall within the category of unitary income. To not be considered unitary income, AHM would need to demonstrate that the income from the sale of credits was earned from activities unrelated to the business of the unitary group. The Commission determined, however, that the compliance activities performed through its Product Regulatory Office are “clearly functionally integrated with the vehicle manufacturing for the benefit of the whole.” In other words, the income is unitary because such income was earned in the course of compliance activities, which are very much related to the automaking business.

The Commission concluded its analysis with an interesting analogy related to sales of scrap and by-products, which is one of the income categories that Wisconsin’s statutes presume as apportionable.[2] While noting that the credits are not literally a by-product, the Commission explained that if an auto manufacturer sold excess upholstery, the income from that sale would be apportionable income under the Wisconsin statute. In AHM’s case, vehicle production results in credits for the unitary business, which like the sale of by-products, creates unitary income that is apportionable.

The bottom line

The determination of whether income gives rise to apportionable or allocable income can have a significant impact on a corporation’s effective state income tax rate and how much a pass-through entity is required to withhold on behalf of a nonresident. In addition, the specific facts and circumstances of each company’s situation and type of transaction will impact the analysis.

Aprio’s SALT team can assist your business with its treatment of income as apportionable or allocable, which may result in a lower effective state tax rate. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jess Johannesen, SALT Senior Manager, State & Local Tax Services at  [email protected] or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at [email protected] for more information.

This article was featured in the January 2022 SALT Newsletter.

[1] American Honda Motor Co., Inc. v. Wisconsin Dept. of Rev., Wisconsin Tax Appeals Commission Docket No. 19-I-227, 11/29/2021.

[2] WI Stat. §71.25(5)(a)


Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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About the Author

Jeff Glickman

Jeff Glickman is the partner-in-charge of Aprio, LLP’s State and Local Tax (SALT) practice. He has over 18 years of SALT consulting experience, advising domestic and international companies in all industries on minimizing their multistate liabilities and risks. He puts cash back into his clients’ businesses by identifying their eligibility for and assisting them in claiming various tax credits, including jobs/investment, retraining, and film/entertainment tax credits. Jeff also maintains a multistate administrative tax dispute and negotiations practice, including obtaining private letter rulings, preparing and negotiating voluntary disclosure agreements, pursuing refund claims, and assisting clients during audits.

(770) 353-4791