Menasha software decision viewed as a boon to Wisconsin business

Madison, Wis.—Wisconsin businesses are in a better position to remain globally competitive following the Wisconsin Supreme Court’s 4-3 decision in favor of Menasha Corp. in a sales tax dispute involving customized software, according to local businesspeople and lawyers.

The decision will result in an estimated $265 million, with nine percent interest, being sent back to Wisconsin businesses that filed refund claims after paying too much tax on software that they spend additional money to customize. It also provides clarity in the definition of taxable software, according to Maureen McGinnity, a partner in Foley & Lardner, who filed a brief and made oral arguments on behalf of Menasha Corp.

“It sure looks to be a slam dunk for the company,” said Jeff Schoepke, director of tax and corporate policy for Wisconsin Manufacturers & Commerce.

The case

Menasha Corp alone paid $600,000 in sales taxes on the software, which was purchased in 1995 from SAP, and customized with the help of consultants and SAP. Menasha paid sales taxes on the customized part of its transaction, but filed for a state tax refund. That claim was denied by the Department of Revenue.

According to the Supreme Court opinion, written by Justice Annette Ziegler, Menasha Corp. paid $5.2 million for the core software in 1995, but more than 3,000 modifications were made to the software, which helped bring the company’s total cost for installation and customization to $23 million. Menasha’s board of directors had approved the licensing of SAP software with a projected total implementation cost of $46.6 million.

In the legal road leading to the state Supreme Court, the case was heard by the Wisconsin Tax Appeals Commission, whose ruling in favor of Menasha Corp. was overturned by Dane County Circuit Judge Steven D. Ebert, who was overruled by the state Court of Appeals. That set up the Supreme Court’s review.

Citing the expense of customizing software, business interests supported Menasha Corp., contending the sales tax should not have been applied to the customized SAP product because such a policy provides a disincentive for upgrading technology to improve business performance.

“We became more competitive globally today,” state Senator Ted Kanavas, R-Brookfield, said in response to the Supreme Court decision. “These management systems that companies use need to be transformed along with the companies, themselves, in terms of their business practices.”

Budget hole

In the short term, the Supreme Court ruling leaves a hole in the state budget, but the long-term economic development benefit will help state tax receipts, Shoepke stated. “When these companies make more money, they pay more in corporate income taxes,” he said.

Scot Ross, executive director of One Wisconsin Now, contended that WMC’s reported $2 million worth of support to Ziegler's election campaign made the difference in the ruling. Ross said his organization had called on Ziegler to recuse herself from the Menasha case, and said in a statement that her decision will mean “more cuts to services or higher taxes for the people of Wisconsin, and all to give more tax cuts for businesses.”