Wisconsin's business community will benefit from a recent ruling by the state Supreme Court that provides an additional incentive for companies to invest in technology that can improve overall business performance.
On July 11, the court ruled that enterprise software systems that must undergo significant customization to fit a business's needs are exempt from the state sales and use tax.
The ruling provides clarity on the definition of tax exempt "custom" software, something that was lacking for more than 20 years and led our client Menasha Corporation of Neenah, Wis., to challenge the Wisconsin Department of Revenue in how it taxes computer software.
Many businesses like Menasha Corp. rely on sophisticated, enterprise computer systems produced by developers such as SAP, Oracle, PeopleSoft, BAAN and JD Edwards to manage different facets of their business. These systems typically are sold or licensed in modules that require significant customization and integration to fulfill their intended functions for a particular customer.
In the case of Menasha Corp., the company licensed a software system from SAP and expended substantial resources, time and effort to make the system usable for its particular operations. Menasha Corp. maintained that as a result of the customization, the investment made in the SAP system should be tax exempt under Wisconsin law that exempts "custom" software programs.
The Wisconsin Department of Revenue maintained that despite the customization, the SAP system, or any other enterprise software system, should be subject to a five percent sales tax because it was a "prewritten" system at the time it was licensed from the developer, and before the required customization.
The Menasha case wound its way through the court system, resulting in the state Supreme Court's decision. The decision upheld Menasha Corp.'s position that due to the significant resources required to make the SAP system functional for its needs, the system met the criteria established in state statutes and administrative rules for tax exemption.
As a result of the court's decision, many state businesses are eligible for refunds of sales or use tax paid on the purchase or license of enterprise software or other complex computer programs within the past four years. Annual maintenance costs for such software are also tax exempt in addition to expenses incurred for third-party services to install or implement the software.
Business owners and executives should consult their legal counsel on the implications of the court's ruling based on the facts and circumstances of their particular purchase or license of complex computer software systems. In a challenging economic climate, the court's ruling provides an opportunity for Wisconsin businesses to save on costs and invest in growth and expansion.
- Maureen McGinnity and Andrew Nelson are partners with Foley & Lardner LLP and represented Menasha Corp. in its case against the Wisconsin Department of Revenue. They may be contacted at mmcginnity@foley.com and anelson@foley.com
On July 11, the court ruled that enterprise software systems that must undergo significant customization to fit a business's needs are exempt from the state sales and use tax.
The ruling provides clarity on the definition of tax exempt "custom" software, something that was lacking for more than 20 years and led our client Menasha Corporation of Neenah, Wis., to challenge the Wisconsin Department of Revenue in how it taxes computer software.
Many businesses like Menasha Corp. rely on sophisticated, enterprise computer systems produced by developers such as SAP, Oracle, PeopleSoft, BAAN and JD Edwards to manage different facets of their business. These systems typically are sold or licensed in modules that require significant customization and integration to fulfill their intended functions for a particular customer.
In the case of Menasha Corp., the company licensed a software system from SAP and expended substantial resources, time and effort to make the system usable for its particular operations. Menasha Corp. maintained that as a result of the customization, the investment made in the SAP system should be tax exempt under Wisconsin law that exempts "custom" software programs.
The Wisconsin Department of Revenue maintained that despite the customization, the SAP system, or any other enterprise software system, should be subject to a five percent sales tax because it was a "prewritten" system at the time it was licensed from the developer, and before the required customization.
The Menasha case wound its way through the court system, resulting in the state Supreme Court's decision. The decision upheld Menasha Corp.'s position that due to the significant resources required to make the SAP system functional for its needs, the system met the criteria established in state statutes and administrative rules for tax exemption.
As a result of the court's decision, many state businesses are eligible for refunds of sales or use tax paid on the purchase or license of enterprise software or other complex computer programs within the past four years. Annual maintenance costs for such software are also tax exempt in addition to expenses incurred for third-party services to install or implement the software.
Business owners and executives should consult their legal counsel on the implications of the court's ruling based on the facts and circumstances of their particular purchase or license of complex computer software systems. In a challenging economic climate, the court's ruling provides an opportunity for Wisconsin businesses to save on costs and invest in growth and expansion.
- Maureen McGinnity and Andrew Nelson are partners with Foley & Lardner LLP and represented Menasha Corp. in its case against the Wisconsin Department of Revenue. They may be contacted at mmcginnity@foley.com and anelson@foley.com
