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The Wisconsin Supreme Court provided a major sales and use tax victory to businesses that purchase and those that sell custom software.

In the "Menasha" decision, the Court found that the Menasha Company's modifications to the SAP system, both directly and using consultants, allowed the software to meet the definition of exempt "custom" rather than taxable "canned" software.

What influenced the Court towards a finding of "custom" software (which is a non-taxable computer programming service) were the significant elements of pre-sale consulting, as well as the training, documentation required, over 3,000 modifications, software patches, and seven (7) year period required to install the software on the Menasha computer system.  Moreover, the installation and customization costs exceeded $23 million, only 25% of which was for the core system.  The Department’s argument that software is not deemed "custom" unless the customer can alter the "source code" was firmly rejected by the Court. 

This favorable outcome has tremendous implications for taxpayers in Wisconsin. It has been estimated that total refunds and reduced audit assessments related to the "Menasha" case will exceed $400 million.  Many have likely paid sales tax on software investments to vendors in the last few years.  The Wisconsin statute of limitations for buyer refund claims from vendors is four years from the un-extended due date of a taxpayer's tax year-end.

The "Menasha" victory does not mean that all software is exempt in Wisconsin.  So-called "canned" software continues to be taxable (even if it is delivered on-line).  And, the Wisconsin Department of Revenue can be expected to contest refund claims where it believes the software falls outside the scope of the Court's decision. However, we expect that if software generally qualifies as "custom" there is a good chance of obtaining a refund. 

The Amper SALT Group can assist clients that sell software.  Many vendors have been the subject of substantial sales tax assessments on audit or forced into collecting tax as a precaution on software that should have been treated as exempt.  Our SALT team can provide guidance to these clients on which of their services and products are exempt. 

Note that New Jersey – in addition to exempting custom software – has chosen to exempt software that is used directly and primarily in business and delivered electronically, even if it is "canned".  In New York and Pennsylvania on the other hand, "canned" software is taxable regardless of method of delivery.

If you have any questions, do not hesitate to contact a member of the Amper State and Local Tax Group. 

~ Amper, Politziner & Mattia, State and Local Tax (SALT) Group