By Tom Still
MADISON – The first study of Wisconsin’s tax burden in 25 years was designed to answer one overriding question: Is that burden fairly distributed among the rich, the middle class and the poor? The conclusion, announced last week, was a mildly convincing “yes” — but that won’t be the end of Wisconsin’s never-ending debate over tax policy.
The next question to be asked by Gov. Jim Doyle, the Legislature and taxpayers themselves is whether Wisconsin’s current tax system will help the state create a 21st century economy, or hold us back?
That answer is more likely a “no,” as a pending court case involving Neenah’s Menasha Corp. so thoroughly illustrates.
Menasha Corp. began life in 1849 making pails and buckets. Today, the company is best known for making corrugated boxes – products most people would view as decidedly “low-tech.” But that’s only part of the 2004 Menasha story. The company is really five companies, each of which is independently operated under the direction of a corporate office that handles central functions. Menasha Corp.’s largest two companies help businesses package their products and move them through the supply chain. Another Menasha business specializes in engineered plastics. Others focus on customer promotion of products in stores across the United States and help the pharmaceutical industry maintain zero-defect product integrity.
In short, competitive technology is core to the 21st century Menasha Corp. Without it, the company might as well go back to making wooden buckets. That is why Menasha Corp. is fighting the state Department of Revenue on a ruling that could affect every other Wisconsin company that buys and adapts technology.
Menasha Corp. will appeal a judge’s ruling that it must pay sales tax on a software package it bought and then changed, the company’s attorney said last week. Other businesses are helping to underwrite this widely watched case, which is a test of how Wisconsin law defines “modified” software.
Unlike off-the-shelf software programs, “modified” software is not subject to sales tax. In the Menasha case, the company purchased a multimillion dollar company software package from the German company SAP in the mid-1990s. Menasha then used consultants and SAP personnel to adapt it for its own uses.
At the time, the company paid sales tax on the adaptive part of the transaction. The company then filed for a tax refund, claiming the software qualified as modified. With interest, about $500,000 is at stake. That’s only the tip of the tax iceberg, however. State officials have estimated that, in total, businesses have paid about $260 million in sales tax in similar circumstances. If Menasha prevails, the state could owe refunds to all of those companies, with 9 percent interest.
Last year, the state Tax Appeals Commission ruled in favor of Menasha. In October, that ruling was reversed by Dane County Circuit Judge Steven Ebert, who said the Department of Revenue was correct in assessing the sales tax.
Menasha is now expected to ask the District IV Court of Appeals in Madison to review Ebert’s ruling, but a decision in the case isn’t likely until fall.
How Wisconsin tax law treats companies that are using the tools of the 21st century – information technology, biotechnology and nanotechnology – will greatly influence the state’s economic health. To keep antiquated laws in place, or to essentially tax companies twice for trying to stay competitive, will make it harder for those companies to compete.
Wisconsin policymakers must know that outmoded tax law isn’t just a drag on technology start-up companies. It also slows the growth of established companies, many of which are stalwarts in Wisconsin’s manufacturing sector. Without cutting-edge technology, those companies will lose ground in their fight to compete in the global marketplace.
Wisconsin’s tax burden may be reasonably distributed among the rich, the middle class and the poor, but a “fair” system can still be bad for the economy. Let’s construct a tax system that is simultaneously progressive in how the burden is distributed, and smart in how it encourages economic growth.
–Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal in Madison.
