By Tom Still
MADISON – A drug development company in the Madison area
that raised $8 million in financing from angel and venture investors, some of it
from outside Wisconsin, received an unhappy surprise from state government when
it learned it would be taxed on the capital raised.
That’s not a tax on earned revenue from sales of products –
the young company is still pursuing federal regulatory approval for its drugs,
which have yet to hit the market – but a tax on the capital raised from
investors itself.
“The company is on a very tight budget,” said John Neis,
managing director of Venture Investors LLC, a lead Wisconsin investor. “They
were shocked to learn they were starting out $24,000 behind budget as soon as
they closed on the financing.”
Wisconsin is perhaps the only state that taxes private investments
in so-called “foreign corporations,” which are C Corporations most often
registered in the state of Delaware. Many U.S. companies incorporate in The
First State: Nearly two-thirds of all Fortune 500 companies are incorporated in
Delaware and three-quarters of all initial public offerings in the United
States involve Delaware companies.
Companies don’t do so to dodge taxes at home, as state tax
laws in Wisconsin and elsewhere largely boil down to a test of where the
company physically does business, hires workers and makes sales.
Rather, they do so because Delaware’s incorporation process is
modern and efficient. Politicians of both parties in Delaware understand the
importance of keeping the state’s corporate law up to date, and Delaware courts
are renowned for their expertise and expedited dockets.
As a result, many startup companies in Wisconsin are – or,
should be if they expect to get professional financing – C Corporations. Like
similar companies in other states, many of Wisconsin’s homegrown “C Corps” are
incorporated in Delaware.
With angel and venture capital investment dollars scarce for
many young companies, the question arises: Why is Wisconsin virtually alone in
taxing capital raised by those companies?
“I know of no other state that taxes the capital raised at
the time of investment like this,” said Neis, an early stage investor for
nearly 30 years. “It is always a shock to investors from outside the state that
are investing in the state for the first time.”
That’s why some members of the Legislature want to repeal
Wisconsin’s investment tax on companies that are registered out of state, even
though their roots, offices and workers are here.
“C-Corps have no issue with paying taxes on earned income,
but capital from investors is difficult to come by for Wisconsin startup
companies,” said Rep. Mike Kuglitsch, R-New Berlin. “Our position is that these
companies are doing business in Wisconsin; their staff is in Wisconsin and the
vast majority of – if not all – of their dollars raised from investors are
spent in Wisconsin.”
If enacted, this idea would help Wisconsin’s early stage economy
produce more companies and jobs. Here are other examples of Wisconsin policy initiatives
that have received national attention:
- In its annual report on trends in tech-based
development, the State Science and Technology Institute cited Wisconsin and New
York as two recent examples of creative approaches to capital development. This
was due to the Legislature’s overwhelmingly support for a “fund-of-funds” that
will begin with a $25 million state investment and attract matching private
dollars.
- That same report by SSTI cited Wisconsin’s
decision to amend state securities laws to permit equity crowdfunding. In other
states where similar laws are already in effect, there are signs of increased
economic activity.
- It also highlighted the Wisconsin Economic
Development Corp.’s $300,000 investment in the BrightStar Wisconsin Foundation,
which is beginning to invest in Wisconsin companies. In mid-February, WEDC and
the UW System announced creation of a $2 million fund to help transfer
technology from other system campuses.
- The latest Halo Report by the Angel Capital
Association cited a Madison angel network, Wisconsin Investment Partners, as
one of the nation’s most active in the third quarter of 2013. Milwaukee’s
Golden Angels Network was called out in another Halo report as one of the top
groups in the nation for dollars invested per deal.
- In a recent report on Colorado’s efforts to
create a statewide angel network, Xconomy cited the experience of the Wisconsin
Angel Network and the overall success of Wisconsin’s investor tax credits program.
If Wisconsin wants to build a truly competitive capital
market, eliminating archaic barriers to investment would help. Ending
Wisconsin’s tax on investments in so-called “foreign corporations” would signal
to investors everywhere that Wisconsin understands what it takes to build young
companies.
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