State Avoids Tax Refund on ERP System

Computerworld - A judge has refused to order the state of Wisconsin to refund more than $340,000 in sales tax paid on a customized SAP system, which may set a precedent that relieves the state of the need to pay a total of about $300 million to corporate users. Lawyers said the decision could also prove costly to companies with large ERP installations in other states with similar tax laws.
At issue in the legal opinion is a sales tax refund sought by Menasha Corp., a pulp and paper manufacturer that claimed modifications it made to SAP AG's R/3 software were custom development, which is tax-exempt in Wisconsin. Packaged software is taxable.
The Neenah, Wis.-based company's 1995 installation of R/3 cost $23 million, of which $5 million was for a license for the ERP software. The rest of the money was spent on modifications and implementation costs, according to court papers released Oct. 26 by Judge Steven Ebert of Circuit Court Branch 4 in Dane County, Wis.
After Menasha paid a sales tax of $342,614 on the implementation to the state's Department of Revenue, the company tried to recover the money by petitioning the state Tax Appeals Commission. Menasha is now seeking a total of $500,000, including interest.
The appeals commission agreed with Menasha that the software was custom-written, but Ebert overturned that decision, ruling that R/3 "was existing and prewritten" when sold.
Agony and Ecstasy
The DOR "is pleased with the decision," said spokeswoman Eva Robelia, who explained that a Menasha victory would have set a precedent allowing other companies that have paid similar taxes over the past four years to file appeals. The state potentially would have had to refund about $300 million in taxes and interest.
Officials at Menasha, which has up to 90 days to appeal, are unhappy, their lawyers said. "Wisconsin has taken the position that all software is off-the-shelf unless it's written from scratch, which no one does anymore," said Leonard Sosnowski, an attorney at law firm Foley & Lardner LLP, which represents Menasha. The larger issue, he said, is that not only is the modified software itself taxable, but potentially so are the services required to fix or reprogram it during the implementation. Sosnowski also said the case could be used as a reference in other states, where some IT executives are keeping an eye on its progress.
"Clearly, the judge is not understanding the real world of IT," said Bubba Tyler, CIO at Quaker Chemical Corp. in Conshohocken, Pa., which runs PeopleSoft Inc. applications.