Menasha's lawsuit to collect US$342,000 tax refund for software purchase leads to Wisconsin court ruling that state must return US$265M in taxes back to companies

Sandy Yang

MADISON, Wis. , July 11, 2008 (Associated Press) – A Wisconsin Supreme Court decision has blown a $265 million hole into the state budget.

And state lawmakers may have to cancel their summer vacations and campaign plans to come back to balance the books by raising taxes, cutting services, borrowing money or some other accounting maneuver.

The divided court ruled Friday that the state improperly was collecting sales tax on customized computer software sales. That means that an estimated $265 million collected in taxes from companies over the years must be returned.

Another $28 million that was planned to be collected this year won't have to be paid, deepening the state's budget problem.

A spokesman for Gov. Jim Doyle did not immediately return a message. No one was immediately available in the offices of legislative leaders who will have to decide how to react to the opinion.

The lawsuit was brought after Neenah-based Menasha Corp. purchased a computer system from the German computer software company SAP in 1995 and then made 3,000 changes.

At issue is whether software is customized or not. If it is, then no sales or use tax is collected. If it's prewritten software and not customized, then taxes are owed.

The Revenue Department said the software was not customized. The department denied Menasha a $342,000 tax refund in 1998. It argued that SAP mass markets the basics of its software and therefore the program was not customized.

An appeals court ruled that Menasha, which operates in 20 states and eight foreign countries, was due the tax refund. The state appealed.

The Supreme Court agreed with that ruling in determining that the software Menasha bought was customized and should not have been taxed.

The ruling, authored by the court's newest member Justice Annette Ziegler, takes the side of the state's business community which argued that the Revenue Department was incorrectly collecting the taxes from businesses.

Wisconsin Manufacturers and Commerce, the state's largest business lobby, was a major backer of Ziegler in her successful race for the Supreme Court last year.

Through subsidiaries, Menasha provides products to a variety of industries, including paperboard, packaging, plastics, material handling, promotions and printing. It bought the computer system to integrate its business functions and make its operations more efficient.

According to the company's Web site, the company employs 3,200 people and had $974 million in sales in 2007.

The Menasha case will have a broad impact across the state.

The state's Fiscal Bureau estimated in February that the impact on taxes collected by other companies in past years could total about $265 million, with another $28 million lost in taxes that would be due for the current year.

The state budget, which runs through June 30, has a $106 million cushion. This decision means it will be in the red by more than $100 million.

Another looming budget problem is about $100 million in gambling payments the state says the Ho-Chunk tribe owes. The tribe is arguing in a federal lawsuit that it does not owe anything.

The budget passed by the Legislature counts on receiving that money by the end of June.

Thanks to the weakening economy, lawmakers have already had to take special action on the budget, approving a $527 million fix in May.

Joining Ziegler in the majority were justices Pat Crooks, David Prosser, and Pat Roggensack. Dissenting were Chief Justice Shirley Abrahamson and justices Louis Butler and Ann Walsh Bradley.