The state Supreme Court, state Attorney General J.B. Van Hollen and the big business lobby Wisconsin Manufacturers & Commerce (WMC) handed Wisconsin residents a $350 million tax hikeand gave corporations a new tax break.
Four justices on the state Supreme CourtPatrick Crooks, DavidProsser, Patience Roggensack and Annette Ziegler, who wrote the majority opinionruled last week in favor of Menasha Corp. in a sales tax case. The court ruled that Menasha did not have to pay $265,093 in sales or use taxes on computer software worth $5.2 million.
That figure could turn into a budget-busting $350 million as state corporations ask for tax rebates. State taxpayers will have to pick up the tab. The ruling represents a triumph for WMC, which was instrumental in electing Ziegler to the state Supreme Court and Van Hollen to the position of state attorney general. WMC spent $2 million on negative ads attacking Ziegler’s opponent in 2007, $2.5 million on ads attacking Van Hollen’s opponent in 2006 and helped Menasha argue its appeals. WMC had made the Menasha decision a “priority issue,” even though its campaign ads attacked big business opponents for being soft on crime and bad for Wisconsin.
So WMC was a well-known ally to both the prosecution and the defense (Van Hollen’s Department of Justice and Menasha Corp.) as well the state Supreme Court justice who provided the tie-breaking vote. Yet Van Hollen’s Department of Justice did not ask Ziegler to recuse herself from the case, even though she had a clear conflict of interest. If he had truly represented the best interests of the state, he would have. Nor did the WMC-backed Menasha Corp., sensing that it had an ally on the court, ask Ziegler not to participate in the case. Anyone see a conflict of interest? Now Wisconsin taxpayers will have to foot the $350 million bill for this decision, and our schools, roads, social services, law enforcement and natural resources will suffer. Corporations, on the other hand, will get a big tax break in the futureand huge tax refunds.
A New Corporate Tax Exemption
Chief Justice Shirley Abrahamson, in her blistering dissent, accused the majority of creating “a new exemption in the tax laws that the Legislature did not see fit to enact.”
Wisconsin law does not require companies to pay sales tax on “custom computer programs” for their businesses. But companies must pay tax on “prewritten programs” that are “prepared, held or existing for general use normally for more than one customer.
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Menasha had leased R/3 software from a German company, SAP, for $5.2 million in 1995. It then spent $16 million during the next seven years to customize it. No one is arguing about the fact that Menasha Corp. paid no taxes on the $16 million that it spent to customize the software. But Menasha did pay $265,093 in taxes on the $5.2 million it spent for the “prewritten” software.
So the corporation asked for a refund, plus interest. The Tax Appeals Commission granted it. The state Department of Revenue appealed that decisionand won in Dane County Circuit Court.
The Court of Appeals then sided with Menasha Corp. The case then went to the state Supreme Court, with the assistance of WMC. Ziegler, who greatly benefited from WMC’s influence in her Supreme Court race, wrote in the majority decision that the state’s highest court should abide by the Tax Appeals Commission’s finding, since it knows tax policy best. Ziegler also argued that since Menasha couldn’t immediately use the software as if it were purchased ready-to-use “off the shelf,” it did not meet the definition of a “prewritten program.”
But Abrahamson, in her dissent, cried foul, claiming that the four justices overstepped their boundaries. “A court should not effectively override court’s views of economic policy or of the wisdom of a tax law,” the chief justice wrote.
In other words, the four justices were “activist judges.” Abrahamson noted that when Menasha Corp. had leased the original software from SAP, more than 20,000 other customers had leased the same softwarehardly custom software.
“[T]he R/3 System was not written solely for Menasha Corporation or upon its request,” Abrahamson wrote. “SAP developed the R/3 System before meeting up with Menasha Corporation and has leased the same R/3 system to thousands of customers.”
Abrahamson looked into the history of this tax statute and found that the computer lobby had tried to argue that any program not ready to use off the shelf was customized and therefore not taxable. Ziegler’s ruling echoes that position.
But Abrahamson found that the state Legislature rejected that argument, and the Department of Revenue specifically communicated that tax must be paid on programs that are pre-written but not necessarily ready to use immediately.
Abrahamson wrote that the four justices and the Tax Appeals Commission’s interpretation of the tax law is “plainly inconsistent with the rule’s language, meaning and purpose.”
Huge Budget Consequences
Abrahamsonsupported by justices argued that the tax imposed on Menasha Corporation was fair. “Each taxpayer should pay the taxes that he or she owes under the tax lawsno more, no less,” she wrote.
She also noted that “the fiscal implications of the new tax exemption created by the majority opinion are substantial”the state will have to refund about $265 million in taxes already collectedplus millions of dollars in interestand the $28 million it had expected to collect this year won’t be paid to the state.
“Wisconsin taxpayers will pick up the tab left by those who have escaped taxation as a result of the majority opinion,” Abrahamson wrote.
The state is already strapped for cash, thanks to the downturn in the economy and the rising costs of fuel and health care. The WMC, not surprisingly, cheered the result.
“This is a major victory for taxpayers,” WMC’s Jeff Schoepke said in a statement apparently not thinking about the average individual taxpayer who must now foot the bill for the corporate tax exemption.
Van Hollen, who typically sends out a self-promoting press release whenever the Department of Justice does anything, stayed mum. Ziegler defended her decision, saying, “I did my job.”
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