WisBusiness: Supreme Court ruling means state take $300 million tax hit

By Brian E. Clark

The state Supreme Court has ruled in favor of the Menasha Corp. and against the state in a high-profile sales tax case that will cost the state nearly $300 million. The decision means lawmakers may have to return to Madison to modify the budget.

A divided court affirmed the appeals court decision in the case, ruling that the state incorrectly collected sales tax on customized computer software sales.

In addition to the $265 million collected from companies with similar tax situations, the ruling means $28 million that would have been collected this year won’t have to be paid.

The 4-3 decision upheld the state Tax Appeals Commission, which ruled that the Menasha Corporation, a packaging company, was illegally charged the 5 percent state sales tax on specialized software it bought and modified. State tax collectors had argued what the company bought was prewritten computer software, which is subject to the sales tax. Menasha argued it was not.

Writing the majority opinion, Justice Annette Ziegler said the three-member Tax Appeals Commission was created as “the final authority for hearing and determination of all questions of law and fact” on taxation issues. The commission’s Menasha ruling was later overturned by Dane County Circuit Judge Steven D. Ebert.

In a blistering dissent, Chief Justice Shirley Abrahamson wrote that the “majority opinion rewrites the plain language of the governing law and creates a new exemption in the tax laws that the legislature did not see fit to enact.

“The majority opinion states that its decision ‘has great import to the average taxpayer in this state.’

“I agree. The fiscal implications of the new tax exemption created by the majority opinion are substantial: According to the Legislative Fiscal Bureau’s January 30, 2007, revenue and expenditure projections, the state’s projected loss in revenue as a result of the erroneous decision in the present case will exceed $277.6 million prior to the end of the 2007-09 biennium and $28.3 million annually thereafter.

Wisconsin taxpayers will pick up the tab left by those who have escaped taxation as a result of the majority opinion.”

Tom Still, president of the Wisconsin Technology Council, said he was not terribly surprised by today’s Supreme Court ruling on the Menasha software case.

“I think the facts throughout demonstrated that customized software is really part and parcel of today’s IT world and should not be taxed as a new product,” he said.

Still acknolwedged that the tax loss to the state budget will have big implications “for the short term.”

But he said there are “longterm advantages in terms of the state signaling that this is a place where companies can do business and construct the kinds of new economy tools they need to help grow their companies and jobs.”

Gov. Jim Doyle’s office had no comment on the decision this morning, but Revenue Secretary Roger M. Ervin “it will be our goal to work with industry to consider any legislative or rule changes to bring more clarity to our sales tax statutes.

“We all have the same goal to promote growth in our state and I am confident that we can move forward to continue to modernize Wisconsin’s tax code through initiatives such as the Streamlined Sales Tax Agreement.”

At issue was 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 contended.

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

He said the law should be 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.

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 a Dane County judge.

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