By Brian E. Clark
WisBusiness.com
A pivotal $350 million sales tax case before the state Supreme Court brought sharp questioning from the chief justice on why companies shouldn’t pay tax on software and intellectual property like they do for more tangible goods.
Chief Justice Shirley Abrahamson honed in on Menasha Corp. attorney Maureen McGinnity, asking her why pre-written software available to any company that could afford it shouldn’t be taxed.
“Because it is not for general use like something you can buy off-the-shelf at Circuit City,” McGinnity replied. “It doesn’t take millions of dollars to adapt.”
Responding to a question from Justice Patience Roggensack, the state’s attorney, F. Thomas Creeron III, said any pre-written software should be taxed, regardless of how much money a company spends to modify it to its specific needs.
McGinnity, however, said this software was only a “shell.”
When Menasha bought the software in the mid-90s, it wasn’t paying $5.2 million for a series of plastic disks, she said. It was buying intellectual property that needed extensive customization – a process that took seven years to complete.
The justices peppered both sides with questions, trying to understand if they should defer to a the state Tax Appeals Commission, which ruled in favor of Menasha in an appeal, or the Department of Revenue, a position Creeron backed.
At stake is more than $350 million, which the state might have to return to the packaging company Menasha and other companies. Menasha alone is seeking a $600,000 refund.
“This software is like paint,” argued Creeron. He said the agency was justified in taxing Menasha for its $5.2 million purchase of SAP software because it was a “tangible” item.
But he said the agency didn’t tax Menasha for the millions more it spent on consultants who worked on the software to customize it for the company.
“That is a service, like hiring a company to paint your house,” he said.
Annette Ziegler, the junior justice in the case, asked only one minor question in the case, dealing with the cost of the software.
Her decision to participate had drawn criticism from the left-leaning organization called One Wisconsin Now.
The group said Ziegler should not take part in the case because Wisconsin Manufacturers & Commerce – a Menasha supporter – spent more than $2 million backing Ziegler in her recent run for the bench.
Ziegler has declined to comment. She disclosed WMC’s involvement in her campaign to both sides in the case earlier this month.
Revenue, represented by Attorney General J.B. Van Hollen, did not ask Ziegler to disqualify herself.
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.”
Speaking at a question-and-answer session during earlier in the day following a Dairy Business Association conference, Gov. Jim Doyle said he hopes the state wins the case.
“But I can’t predict what the court will do,” he said, acknowledging that the $350 million at stake is a great deal of money.
He said it is too early for him to discusss replacing those tax dollars, should Menasha prevail.
“We’ll have to see what the decision is,” he said.
See the background story at WisBusiness.com: http://www.wisbusiness.com/index.iml?Article=111645
