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Menasha, a packaging company in Wisconsin, installed SAP R/3 in 1995. Some media reports estimate that the project cost roughly $23 million, including $5 million for a license, and over $16 million in expenses incurred as a result of paying SAP, Deloitte, and other consultants to modify the R/3 system; documents filed with the Wisconsin Court of Appeals indicate that the total cost was over $46 million. Whatever the case, Menasha reportedly made 3,000 changes to the SAP software after purchase.
Menasha paid Wisconsin over $342,000 in sales tax for the SAP transaction but argued that, because the system was so heavily modified, sales tax was not in fact owed on it (state tax codes typically levy tax on out-of-the-box software purchased by businesses, which is counted as tangible property under the law, but not on customized software). After thirteen years of litigation, the Wisconsin Supreme Court agreed with Menasha and ruled that the state could not collect sales tax on customized software. This has profound implications for Wisconsin, which will now have to pay back $265 million to businesses who have paid such sales tax over the years. SAP and other enterprise applications customers in Wisconsin who have modified their systems should anticipate receiving these sales tax refunds soon. The ruling brings Wisconsin into line with other states whose tax codes forbid taxation of modified software.
One pertinent question raised by the ruling is why sales tax is collected on enterprise software at all. True enterprise software is always modified, and not in any trivial way; as in Menasha’s case, it is the rule rather than the exception for consultants, integrators, and other providers of value-added services to modify enterprise software for business use. Logically, then, enterprise software should only be taxed as tangible property when such value-added services providers are not present and the software is truly out-of-the-box.
The ruling in Menasha’s case should encourage all U.S.-based SAP, Oracle, and other enterprise applications users to aggressively challenge their state department of revenue’s procedures. Under the letter of the law, there is no such thing as non-modified enterprise software, so why not attempt to recoup all sales taxes paid on such software?
Demir Barlas, Site Editor