30 Apr Wisconsin's new definition of taxable prewritten computer software
Gov. Jim Doyle recently signed the 2009 Wisconsin Act 2 into law. The legislation includes several provisions that significantly impact Wisconsin taxpayers.
A significant change is how the law defines tangible personal property, which was intended to prospectively “reverse” the decision in Wisconsin Department of Revenue v. Menasha Corporation (Wisconsin Supreme Court, No. 2004AP3239, July 11, 2008).
All retailers of computer software are advised to review whether their sales of software and related maintenance services, which previously were not subject to tax, are now taxable as a result of the new definitions under Act 2.
Under prior law, tangible personal property included computer programs except custom computer programs. In Menasha, the Supreme Court ruled that the SAP R/3 System software purchased by the taxpayer was custom software that was not subject to Wisconsin sales or use tax when sold, leased, or licensed. As of March 6, the following definition of “prewritten computer software” takes effect:
- Computer software, including prewritten upgrades that are not designed and developed by the author or other creator to the specifications of a specific purchaser.
- The combining of 2 or more “prewritten computer software” programs or prewritten portions of computer software does not cause the combination to be other than “prewritten computer software.”
- “Prewritten computer software” includes software designed and developed by the author or other creator to the specifications of a specific purchaser if it is sold to a person other than the specific purchaser. For purposes of this subsection, if a person modifies or enhances computer software of which the person is not the author or creator, the person is the author or creator only of the person’s modifications or enhancements.
- “Prewritten computer software” or a prewritten portion of computer software that is modified or enhanced to any degree, with regard to a modification or enhancement that is designed and developed to the specifications of a specific purchaser, remains “prewritten computer software,” except that if there is a reasonable, separately stated charge or an invoice or other statement of the price given to the purchaser for the modification or enhancement, the modification or enhancement is not “prewritten computer software.”
The tax treatment of a computer software maintenance contract is also impacted by Act 2, in that such treatment follows the tax treatment of the purchase of the software to which the contract relates.
Another notable change in Wisconsin Act 2 includes a provision that requires corporate taxpayers who are members of a unitary group to file on a combined basis. This change is estimated to cost taxpayers $215,000,000 over the 2009-11 biennium. The legislation also implements the Streamlined Sales Tax provisions, a change which is estimated to cost taxpayers $60,000,000 over that same period. This provision becomes effective in October.
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