26 Jan Software tax dispute could go the Supreme Court
Madison, Wis. – Some of the state’s largest corporations could be big financial winners following the latest plot twist in the dispute over how Wisconsin law defines modified software.
The state Court of Appeals has ruled that the state Department of Revenue has been incorrectly taxing business software and will have to refund millions, perhaps hundreds of millions of dollars.
And even though Gov. Jim Doyle, facing a state budget deficit of at least $1.6 billion, seemed resigned to the fate of having the state return upwards of $350 million to affected businesses over a period of years, not everyone thinks the matter has been resolved.
Jim Rice, president of the Information Technology Association of Wisconsin, called the ruling “fantastic” but said the general understanding in the technology community is that the issue is not over.
The case already has taken a number of twists and turns, and the Department of Revenue could appeal the most recent ruling to the Wisconsin Supreme Court, which first would decide whether or not to hear it.
“I don’t think the battle is over,” Rice said. “We’re working with the Capitol group [of legislative consultants] to see what comes next.”
Court imposed tax relief
If the ruling stands, it means that Menasha Corp., which challenged the way modified software was being taxed, would not have to pay the state’s five percent sales tax on a software package it installed in the mid 1990s and later changed. In Wisconsin, off-the-shelf software is taxable, while customized software is not.
In addition to Menasha Corp., which could file a refund claim of about $600,000, Rice said the ruling is likely to benefit companies like Metavante and the state’s major insurers. Many software businesses have watched the Menasha Corp. case with great interest, and some have filed their own refund claims.
In addition to a possible appeal, Rice said the Legislature could step in and amend state law to clarify how the sales tax can be applied to software.
Jim Haney, president of Wisconsin Manufacturers and Commerce, praised the Court of Appeals ruling, saying the Department of Revenue misinterpreted the state tax code and required Menasha Corp. to pay taxes it “clearly didn’t owe under state law.” The organization, which represents 4,000 Wisconsin businesses, also called on the Legislature to enact reforms to prevent the state from trying to expand the tax code beyond legislative intent.
As the case unfolded, the state Tax Appeals Commission overruled the Department of Revenue’s interpretation in 2003, but a Dane County Circuit Court reversed that decision in 2004, setting the stage for the recent Court of Appeals ruling.
The Department of Revenue has 30 days from the date of the Court of Appeals ruling to appeal to the Wisconsin Supreme Court. Attorney Tim Schally, chairman of the Tax Practice Group in the Milwaukee office of Michael Best & Friedrich, declined to predict whether the Supreme Court would hear such an appeal or how it would rule on the case, but he said the Court of Appeals ruling was solidly reasoned.
Schally also noted that the ruling not only applies to the sale of software, but its maintenance as well. “It’s significant as to what is custom [software] and what is not,” he said. “If the ruling stands, that’s a big deal.”
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