WisBusiness: $350 Million Sales Tax Case Gets Argued Thursday before High Court

By Brian E. Clark
WisBusiness.com

As controversy swirls around the high court’s newest justice, the Wisconsin State Supreme Court on Thursday will hear arguments about an important sales tax case that could result in more than $350 million in refunds from the Department of Revenue.

At issue is whether companies should be taxed for software they buy and then adapt to their individual needs. Menasha, a diversified packaging company, paid $600,000 – the 5 percent sales tax on software purchased in the mid 1990s from the German company SAP.

Modified software shouldn’t be subject to sales tax, Menasha lawyers contend. Revenue officials disagree. The two sides will present their arguments Thursday morning in the high court chambers.

“This sales tax on modified software is a major impediment to businesses upgrading their technology,” said John Gee, president and CEO of the Information Technology Association of Wisconsin.

“It’s not like they are just buying software off the shelf,” he said. “It takes a phenomenal amount of money to adapt software.”

“At a minimum, the Legislature needs to clarify the law so it reduces the burden on companies that are paying a lot of extra money to modify their software packages,” he said.

Todd Berry, president of the Wisconsin Taxpayers Alliance, said the disagreement boils down to when software becomes “custom” as opposed to “off the shelf.”

He agreed that it would be helpful to have the law clarified by the Legislature. He said Wisconsin’s sales tax – in its present form – was put in place in the 1960s when computers were huge and there was no such thing as pre-packaged software.

“Things are quite different now,” he said.

Tom Still, president of the Wisconsin Technology Council, said he hopes the court sides with Menasha.

“Wisconsin has been pro-active with its tax policy dating back to the 1970s, when the Legislature gave companies a tax exemption for equipment used in manufacturing,” he said.

That change caused a “huge burst” in investment in 20th Century tools, he noted. It also brought praise from the Wall Street Journal, which called the Badger State the “star” of the snowbelt.

“Our tax policy should be consistent with what’s going on in the economy now,” he said. “If we want to promote companies’ use of 21st Century tools, that should include information technology and software.”

In the short term, Still acknowledged that the state would take a big hit in lost taxes.

“But over the long term, a decision in the company’s favor will spur economic growth and create even more tax revenues,” he said. “I believe the gains would be significant.”

The Menasha case has gone through many legal venues. The company first appealed and won before the Wisconsin Tax Appeals Commission. However, that decision was later challenged by Revenue and then overturned by Dane County Circuit Judge Steven D. Ebert.

Next, the state Court of Appeals overruled Ebert. Revenue then took its case to the high court.

Menasha is backed by business organizations such as Wisconsin Manufacturers and Commerce. It says Revenue has misinterpreted the sales tax law. Like Gee, it is asking for legislation to clarify the tax law.

WMC’s involvement has added a twist to the case and prompted the left-leaning group One Wisconsin Now to call for new state Supreme Court Justice Annette Ziegler to recuse herself from a case.

One Wisconsin Now has questioned her impartiality and said Ziegler shouldn’t take part in the case because WMC spent more than $2 million backing Ziegler’s run for the bench.

Ziegler, who disclosed WMC’s involvement in her campaign to both sides in the case earlier this month, has declined to comment.

Revenue, represented by Republican Attorney General J.B. Van Hollen, hasn’t asked Ziegler to disqualify herself in the Menasha case.

In a statement, Ziegler’s office said “parties are always able to notify the court when they feel a justice should not participate in any given case.”

—–Original Message—–
From: “Brian E. Clark”
Sent: Wednesday, November 28, 2007 3:51pm
To: mayers@wispolitics.com, clark@wisbusiness.com
Subject: Menasha court case

Jeff:

Please give this a read.

Brian

By Brian E. Clark
WisBusiness.com

Wisconsin businesses could end up getting more than $350 million in refunds from the state if the Supreme Court decides in favor of the Menasha Corp. in its sales tax challenge to the Department of Revenue.

At issue is whether companies should be taxed for software they buy and then adapt to their individual needs. Menasha, a diversified packaging company, paid $600,000 – the 5 percent sales tax on software purchased in the mid 1990s from the German company SAP.

Modified software should not be subject to sales tax, Menasha lawyers contend. Revenue officials disagree. The two sides will present their arguments Thursday morning in the high court chambers.

“This sales tax on modified software is a major impediment to businesses upgrading their technology,” said John Gee, president and CEO of the Information Technology Association of Wisconsin.

“It’s not like they are just buying software off the shelf,” he said. “It takes a phenomenal amount of money to adapt software.”

“At a minimum, the Legislature needs to clarify the law so it reduces the burden on companies that are paying a lot of extra money to modify their software packages,” he said.

Todd Barry, president of the Wisconsin Taxpayers Alliance, said the disagreement boils down to when software becomes “custom” and opposed to “off the shelf.”

He agreed that it would be helpful to have the law clarified by the Legislature. He said Wisconsin’s sales tax – in its present form – was put in place in the 1960s when computers were huge and there was no such thing as pre-packaged software.

“Things are quite different now,” he said.

Tom Still, president of the Wisconsin Technology Council, said he hopes the court sides with Menasha.

“Wisconsin has been pro-active with its tax policy dating back to the 1970s, when the Legislature gave companies that a tax exemption for equipment used in manufacturing,” he said.

That change caused a “huge burst” in investment in 20th Century tools, he noted. It also brought praise from the Wall Street Journal, which called the Badger State the “star” of the snowbelt.

“Our tax policy should be consistent with what’s going on in the economy now,” he said. “If we want to promote companies’ use of 21st Century tools, that should include information technology and software.

In the short term, Still acknowledged that the state would take a big hit in lost taxes.

“But over the long term, a decision in the company’s favor will spur economic growth and create even more tax revenues,” he said. “I believe the gains would be significant.”

The Menasha case has gone through many legal venues. The company first appealed and won before the Wisconsin Tax Appeals Commission. However, that decision was later challenged by Revenue and then overturned by Dane County Circuit Judge Steven D. Ebert.

Next, the state Court of Appeals overruled Ebert. Revenue then took its case to the high court.

Menasha is backed by business organizations such as Wisconsin Manufacturers and Commerce (WMC). It says Revenue has misinterpreted the sales tax law. Like Gee, it is asking for legislation to clarify the tax law.

WMC’s involvement has added a twist to the case and prompted the left-leaning group One Wisconsin Now to call for new state Supreme Court Justice Annette Ziegler to recuse herself from a case.

One Wisconsin Now has questioned her impartiality and said Ziegler should not take part in the case because WMC spent more than $2 million backing Ziegler run for the bench.

Ziegler, who disclosed WMC’s involvement in her campaign to both sides in the case earlier this month, has declined to comment.

Revenue, represented by Attorney General J.B. Van Hollen, has not asked Ziegler to disqualify herself in the Menasha case.

In a statement, Ziegler’s office said “parties are always able to notify the court when they feel a justice should not participate in any given case.”