2019 WI App 62

COURT OF APPEALS OF WISCONSIN

PUBLISHED OPINION

Case No.: 2018AP2024

Complete Title of Case: 

WISCONSIN DEPARTMENT OF REVENUE,

 PLAINTIFF-APPELLANT,

 V.

MICROSOFT CORPORATION,

 DEFENDANT-RESPONDENT.

Opinion Filed: October 31, 2019

Submitted on Briefs: May 24, 2019

JUDGES: Fitzpatrick, P.J., Blanchard and Kloppenburg, JJ.

Concurred:

Dissented:

Appellant

ATTORNEYS: On behalf of the plaintiff-appellant, the cause was submitted on the briefs

of Mark S. Zimmer of Wisconsin Department of Revenue, Madison. 

Respondent

ATTORNEYS: On behalf of the defendant-respondent, the cause was submitted on the 

brief of Timothy G. Schally of Michael Best & Friedrich LLP, 

Milwaukee, and Jeffrey A. Friedman, Daniel H. Schlueter and Ted W. 

Friedman of Eversheds Sutherland (US) LLP, Washington, DC. 
2019 WI App 62

COURT OF APPEALS

DECISION

DATED AND FILED

October 31, 2019

Sheila T. Reiff

Clerk of Court of Appeals

NOTICE

This opinion is subject to further editing. If 

published, the official version will appear in 

the bound volume of the Official Reports. 

A party may file with the Supreme Court a 

petition to review an adverse decision by the 

Court of Appeals. See WIS. STAT. § 808.10 

and RULE 809.62. 

Appeal No. 2018AP2024 Cir. Ct. No. 2017CV2214

STATE OF WISCONSIN IN COURT OF APPEALS

WISCONSIN DEPARTMENT OF REVENUE,

 PLAINTIFF-APPELLANT,

 V.

MICROSOFT CORPORATION,

 DEFENDANT-RESPONDENT.

APPEAL from an order of the circuit court for Dane County: 

SHELLEY J. GAYLORD, Judge. Affirmed. 

Before Fitzpatrick, P.J., Blanchard and Kloppenburg, JJ. 

¶1 FITZPATRICK, P.J. The Wisconsin Department of Revenue 

(DOR) appeals a Dane County Circuit Court order that affirmed a decision of the 

Tax Appeals Commission. The Commission determined that royalties Microsoft 

Corporation received from licensing its software to original equipment 
No. 2018AP2024

2

manufacturers (OEMs) that are not located in Wisconsin, but whose products are 

used in Wisconsin, should not be considered in calculating Microsoft’s franchise 

tax liability to the State of Wisconsin for the tax years 2006 to 2009 under WIS.

STAT. § 71.25(9)(d) (2005-06).1 That statutory subpart concerns the franchise 

taxation of sales of intangibles if the income-producing activity occurs in 

Wisconsin. See § 71.25(9)(d). The DOR argues that the Commission erred in 

failing to apply a statutory exception to § 71.25(9)(d), under which franchise 

taxation of computer software occurs if a “licensee” uses the software in 

Wisconsin. See § 71.25(9)(df). According to the DOR, the § 71.25(9)(df) 

exception requires that the royalties Microsoft received from OEMs not located in 

Wisconsin must be considered in calculating Microsoft’s franchise tax liability 

because the persons who use those OEMs’ products in Wisconsin were, in effect, 

Microsoft’s licensees. We reject the DOR’s arguments and, therefore, affirm the 

circuit court’s order that affirmed the Commission’s decision. 

BACKGROUND

¶2 The following facts are not disputed on appeal. 

¶3 Microsoft is engaged in the business of developing, distributing, and 

licensing computer software. In this context, OEMs are businesses that 

 

1

 The versions of the statutes in effect at the time of the tax assessments in this case were 

versions 2003-04, 2005-06, and 2007-08. During the 2006 to 2009 tax years, the legislature made 

changes to the statutory sections at issue in this case. See, e.g., 2005 Wis. Act 25, § 1349 

(creating WIS. STAT. § 71.25(9)(df) effective July 27, 2005); 2009 Wis. Act 2, § 126 (repealing 

§ 71.25(9)(d) effective March 6, 2009). However, the parties treat the relevant statutory language 

as having been identical for all pertinent tax years, and we do the same. Accordingly, all 

statutory references in this opinion are to the 2005-06 version of the Wisconsin Statutes unless 

otherwise noted. 
No. 2018AP2024

3

manufacture, or at least assemble, computers, which incorporate Microsoft 

software. Examples of OEMs that incorporate Microsoft software include Dell 

and Hewlett Packard. 

¶4 Relevant to the tax years in dispute, Microsoft entered into software 

copyright license agreements with OEMs.2 Some OEMs with which Microsoft 

entered into license agreements were based in Wisconsin, but the vast majority 

were not based in Wisconsin. Because this appeal does not concern OEMs based 

in Wisconsin, for clarity from this point forward all references to “OEMs” are to 

those OEMs that were not based in Wisconsin.

¶5 Under the license agreements, OEMs paid royalties to Microsoft, in 

exchange for which Microsoft granted the following non-exclusive rights to 

OEMs: (1) to install Microsoft’s software on computers; and (2) to distribute 

Microsoft’s software that was installed on the computers and grant sublicenses for 

end-users to use the software. 

¶6 OEMs sold the computers with the installed Microsoft software to 

consumers directly or through retailers such as Best Buy. The Commission 

referred to the consumers as “end-users,” and we do the same. All that is at issue 

here is end use of the Microsoft software that occurred in Wisconsin, not end use 

that occurred outside Wisconsin. 

 

2

 We observe that, during the tax years at issue, it was Microsoft Licensing, a general 

partnership of which Microsoft Corporation is the general partner, that entered into the license 

agreements with OEMs. The parties do not contend that the distinction between Microsoft 

Corporation and the general partnership is material in this case and, for convenience, we will 

consider the general partnership and the party to this appeal, Microsoft Corporation, to be the 

same entity. 
No. 2018AP2024

4

¶7 Computers sold by OEMs with Microsoft software installed came 

with End-User Licensing Agreements (which we will refer to as “end-user 

agreements”). By accessing and using the Microsoft software on the computers 

sold by OEMs, the end-users agreed to be bound by the terms of the end-user 

agreements. The terms of the end-user agreements were dictated by Microsoft. 

By their terms, the end-user agreements were contracts between OEMs and the 

end-users which started with this sentence: “IMPORTANT—READ 

CAREFULLY: This [end-user agreement] is a legal agreement between you ... 

and the manufacturer [OEM] of the computer system or computer system 

component (‘HARDWARE’) with which you acquired the Microsoft software 

product(s) identified above (‘SOFTWARE’).” The DOR does not contend that 

Microsoft was a party to the end-user agreements. 

¶8 In calculating its franchise tax liability to the State of Wisconsin for 

tax years 2006 to 2009, Microsoft took the position that the software license 

royalties it received from OEMs should not be considered in calculating its 

franchise tax. The DOR subsequently conducted an audit and determined that 

Microsoft was required to include the royalties that it received from OEMs in its 

Wisconsin franchise tax calculations. Based on that determination, the DOR 

assessed against Microsoft additional franchise tax for the tax years 2006 through 

2009 that, with statutory interest, totaled almost $2.9 million. 

¶9 Microsoft petitioned the Commission for review of the additional 

assessed tax. Following a four-day trial, the Commission reversed the additional 

franchise tax assessed by the DOR against Microsoft. 

¶10 The DOR appealed the Commission’s decision to the circuit court, 

which affirmed the Commission’s decision. The DOR appeals. 
No. 2018AP2024

5

¶11 We will consider other pertinent facts in the Discussion that follows.

DISCUSSION

¶12 The DOR contends that the Commission erred when it determined

that the software license royalties that OEMs paid to Microsoft should not be 

considered in calculating Microsoft’s Wisconsin franchise tax. We now set forth 

our standard of review, consider the relevant portions of the statutory scheme at 

issue along with the Commission’s application of that scheme and the DOR’s 

challenge to the Commission’s decision, and explain why we reject the DOR’s 

arguments in support of its challenge. 

I. Standard of Review and Statutory Interpretation.

¶13 In an appeal of a circuit court order affirming or reversing an agency 

decision, we review the decision of the agency, not that of the circuit court. 

Hilton ex rel. Pages Homeowners’ Ass’n v. DNR, 2006 WI 84, ¶15, 293 Wis. 2d 

1, 717 N.W.2d 166.3 When reviewing findings of fact made by the Commission, 

we will affirm the findings if those are supported by substantial evidence. See id., 

¶30. “An agency’s findings are supported by substantial evidence if a reasonable 

person could arrive at the same conclusion as the agency, taking into account all 

the evidence in the record.” Clean Wis., Inc. v. Public Serv. Comm’n of Wis., 

2005 WI 93, ¶46, 282 Wis. 2d 250, 700 N.W.2d 768. When reviewing questions 

of law decided by an agency, including statutory interpretation, our review is de 

 

3

 We agree with the DOR and Microsoft that the “agency” whose decision we are 

reviewing is the Commission rather than the DOR. See, e.g., Wisconsin Bell, Inc. v. LIRC, 2018 

WI 76, ¶¶28-30, 382 Wis. 2d 624, 914 N.W.2d 1. 
No. 2018AP2024

6

novo. See WIS. STAT. § 227.57(11) (2017-18), as amended by 2017 Wis. Act 369, 

§ 80; Tetra Tech EC, Inc. v. DOR, 2018 WI 75, ¶84, 382 Wis. 2d 496, 914 

N.W.2d 21.4 

¶14 This appeal concerns issues of statutory interpretation. Statutory 

interpretation begins with the statute’s text. We give the text its common, 

ordinary and accepted meaning, except that we give technical or specially defined 

words their technical or special definitions. State v. Warbelton, 2008 WI App 42, 

¶13, 308 Wis. 2d 459, 747 N.W.2d 717. If the meaning of the statute is clear from 

its plain language, we do not look beyond that language to ascertain its meaning. 

Lake City Corp. v. City of Mequon, 207 Wis. 2d 155, 163, 558 N.W.2d 100 

(1997). 

II. The Software License Royalties Received by Microsoft from OEMs 

Were Not Subject to the Wisconsin Franchise Tax.

A. Statutory Framework.

¶15 Wisconsin currently imposes, and during the tax years at issue 

imposed, a franchise tax on a corporation based on the corporation’s income 

derived from, or attributable to, sources within Wisconsin. See WIS. STAT.

§§ 71.23(2), 71.25 (2005-06) and (2017-18). When a corporation is engaged in 

business within Wisconsin and at least one other state, Wisconsin has adopted a 

 

4

 This court gives “due weight” to the “experience, technical competence, and 

specialized knowledge” of the Commission in certain circumstances. See Tetra Tech EC, Inc. v. 

DOR, 2018 WI 75, ¶¶6, 108, 382 Wis. 2d 496, 914 N.W.2d 21. The parties dispute whether we 

should give “due weight” to the determination of the Commission here. We need not decide if 

due weight should be given because we would affirm the Commission’s decision with or without 

giving its determination due weight. 
No. 2018AP2024

7

method for determining the portion of the corporation’s income that is subject to 

Wisconsin’s franchise tax. That process is known as “apportionment,” and we 

now discuss the aspects of that process as applied here. See § 71.25 (2005-06) and 

(2017-18).

¶16 The parties agree that Microsoft conducts business within and 

without Wisconsin and that Microsoft’s business income is subject to 

apportionment between Wisconsin and other states. 

¶17 WISCONSIN STAT. § 71.25 divides the income of a corporation 

operating both “within and without” Wisconsin into “apportionable income” and 

“nonapportionable income.” Sec. 71.25(5) (2005-06) and (2017-18). This case 

concerns only apportionable income, which is income that, for franchise tax 

purposes, must be allocated to Wisconsin and at least one other state in which the 

taxpayer, such as Microsoft, is carrying on business. Sec. 71.25(5)(a) (2005-06) 

and (2017-18).

¶18 Wisconsin franchise tax statutes include an “apportionment formula” 

that is used to calculate the portion of a corporation’s income that is properly 

attributed to business transacted in Wisconsin and accordingly is taxable by 

Wisconsin. See WIS. STAT. § 71.25(5), (6) and (9) (2005-06) and (2017-18);

Consolidated Freightways Corp. of Del. v. DOR, 164 Wis. 2d 764, 775, 477 

N.W.2d 44 (1991); United Parcel Serv. Co. v. DOR, 204 Wis. 2d 63, 65-66, 72-

74, 553 N.W.2d 861 (Ct. App. 1996). During the tax years at issue, that 

apportionment formula included a percentage of Microsoft’s sales, referred to in 

§ 71.25(6) as the “sales factor.” See § 71.25(6)(a)-(d). The dispute in this appeal 

centers on the sales factor segment of the apportionment formula. 
No. 2018AP2024

8

¶19 The version of WIS. STAT. § 71.25 in effect during the tax years at 

issue defined the “sales factor” for a taxpayer corporation such as Microsoft as “a 

fraction,” consisting of “[a] numerator ... which is the total sales of the taxpayer 

in this state during the tax period, and [a] denominator ... which is the total sales 

of the taxpayer everywhere during the tax period.” Sec. 71.25(9)(a) (emphasis 

added). The resulting quotient represented the percentage of the sales of the 

corporate taxpayer subject to the Wisconsin franchise tax. See United Parcel 

Serv., 204 Wis. 2d at 73-74. 

¶20 WISCONSIN STAT. § 71.25(9) contained detailed subparts governing 

computation of the sales factor. The provisions in the subparts varied depending 

on the type of sale generating the income. See § 71.25(9)(b)-(dh). The subpart 

that the Commission applied, § 71.25(9)(d), concerned sales of intangibles and 

stated in pertinent part: “Except as provided in pars. (df) and (dh), sales ... are in 

this state [and should therefore be included in the numerator of the sales factor] if 

the income-producing activity is performed in this state.” The Commission 

determined that, under this subpart, OEMs’ royalties to Microsoft should not be 

included in the numerator of the sales factor because those royalties were not 

income-producing activities in Wisconsin. 

¶21 The DOR does not question the Commission’s application of WIS.

STAT. § 71.25(9)(d). Rather, the DOR argues that the Commission erred in failing 

to apply one exception to § 71.25(9)(d), namely, § 71.25(9)(df), which states in 

pertinent part: “Gross receipts from the use of computer software are in this state 
No. 2018AP2024

9

if the ... licensee uses the computer software at a location in this state.” 

(Emphasis added.)5 

¶22 Thus, the question in this appeal is whether the Wisconsin end-users

of the Microsoft software in computers sold by OEMs were “licensees” as that 

term is used in WIS. STAT. § 71.25(9)(df). We now address, and reject, the DOR’s 

arguments that we should answer that question in the affirmative.

B. End-Users Were Not Licensees of Microsoft.

¶23 As stated, WIS. STAT. § 71.25(9)(df) created franchise tax liability 

when a “licensee uses the computer software at a location in this state.” The DOR 

asserts that the end-users were licensees of Microsoft in two respects: (1) as a 

matter of law; and (2) viewing “the transactions ... as a whole.” 

¶24 Before considering those arguments, we note the following 

applicable definitions. The pertinent statutes do not contain definitions of the 

common terms license, licensor, licensee, sublicense, or sublicensee. But, the 

meanings are well known, and neither party offers a different definition of these 

terms. A licensor grants a portion of its rights, such as intellectual property rights 

in software, to a licensee through a license. See BLACK’S LAW DICTIONARY 1061, 

1062 (10th ed. 2014). A licensee may grant to another, through a sublicense, a 

 

5

 WISCONSIN STAT. § 71.25(9)(df)1. also applies to a “purchaser.” No party claims that 

the term “purchaser” makes any difference to our analysis, and the Commission’s decision did 

not rely on the term “purchaser.” Accordingly, for clarity we limit our discussion to 

“licensee[s].” 

Separately, we note that the parties do not dispute that the end-users “use[d]” the 

Microsoft software, but OEMs did not “use” the Microsoft software as that term is used in WIS.

STAT. § 71.25(9)(df)1. 
No. 2018AP2024

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portion or all of the rights granted to the licensee by the original license. See id. at 

1652. The party holding a sublicense is known as a sublicensee. See WEBSTER’S 

THIRD NEW INTERNATIONAL DICTIONARY 2276 (1993).6

1. End-Users Were Not Licensees of Microsoft as a Matter of Law.

¶25 The DOR contends that the end-users were licensees of Microsoft 

“as a matter of law.” More specifically, the DOR argues that, “[w]hile the [enduser agreement] is a sublicense of the right to use Microsoft’s software, it is in fact 

a license with Microsoft for the end[-]user to use that software,” and “[a] 

sublicensee is still a licensee of the licensor.” However, the only support that the 

DOR provides for this argument has no content. The DOR relies solely on the 

following language contained in a footnote in Rhone-Poulenc Agro, S.A. v. 

DeKalb Genetics Corp., 284 F.3d 1323 (Fed. Cir. 2002), which the DOR refers to 

as a “holding” in that opinion: “An authorized sublicense is in effect an agreement 

with the [original] licensor. Unless the agreement with the licensee provides 

otherwise, the sublicense will continue despite the early termination of the license 

agreement.” Id. at 1332 n.7 (quoting BRIAN G. BRUNSVOLD & DENNIS P.

O’REILLEY, DRAFTING PATENT LICENSE AGREEMENTS 37 (BNA 4th ed. 1998)). 

¶26 But, this footnote passage is not a holding. Rather, the passage 

merely repeats a statement contained in a treatise on patent licensing that was cited 

 

6

 The weakness of the DOR’s position is reflected in its inconsistent use of terminology 

in its briefing on appeal. The DOR often says that each end-user had a “sublicense.” However, 

at other points in its briefing, the DOR refers to the end-user agreements as “licenses” between 

the end-users and Microsoft. As we note in the next section of this opinion, the DOR also 

contends that each end-user had both a license with Microsoft and a sublicense with the OEM 

through the terms of the end-user agreement.
No. 2018AP2024

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to the Rhone-Poulenc Agro court, and that court declined to adopt the reasoning 

of the treatise. Id. at 1332. For that reason, alone, we reject this argument. 

¶27 Moreover, the quoted portion of the treatise relied on by the DOR 

does not support the DOR’s assertion. The treatise does not state that 

sublicensees, such as the end-users here, have direct licenses with a licensor, such 

as Microsoft. It states that a sublicense is, at most, “in effect” an agreement 

between the sublicensee and the licensor, and that effect is exclusively for the 

limited purpose of continuation of the sublicense when the license has been 

terminated. 

¶28 The quoted language from the treatise does not stand for the 

proposition that, as a matter of law, the end-user agreements were licenses 

between the end-users and Microsoft. 

2. End-Users Were Not Licensees of Microsoft When Viewing 

the Transactions as a Whole.

¶29 Next, the DOR argues that the Commission’s determination that the 

end-users were not licensees of Microsoft was “myopic” and “disregard[ed] the 

economic reality” of these transactions. The DOR contends that, although OEMs 

were licensees of Microsoft, the end-users were also licensees of Microsoft when 

viewing the “transactions ... as a whole.” As we now discuss, the DOR’s 

arguments are rejected based on: the pertinent statutory framework; the 

Commission’s findings of fact regarding the Microsoft and OEM transactions and 

the OEM and end-user transactions; and the terms of the end-user agreements. 

¶30 Initially, we note that the question of whether the end-users had 

licenses with Microsoft as the DOR proposes, or instead the end-users did not 
No. 2018AP2024

12

have a contractual relationship with Microsoft and had only a sublicense with 

OEMs as the Commission concluded, must be viewed in the light of the applicable 

statutory language. To repeat, the exception in the statutory subpart the DOR 

relies on, WIS. STAT. § 71.25(9)(df), is limited to a “licensee” who uses 

Microsoft’s software in Wisconsin. See § 71.25(9)(df). The text of the statutory 

provision makes no reference to use of the computer software in Wisconsin by a 

sublicensee. As already discussed, the terms “license,” “licensor,” “licensee,” 

“sublicense,” and “sublicensee” have commonly understood meanings in the law.7 

In construing the subpart in this fact situation, we must be mindful of those 

meanings and the distinction between a license and a sublicense. See WIS. STAT.

§ 990.01(1) (“All words and phrases shall be construed according to common and 

approved usage; but technical words and phrases and others that have a peculiar 

meaning in the law shall be construed according to such meaning.” (emphasis 

added)); see also State v. Hemp, 2014 WI 129, ¶31, 359 Wis. 2d 320, 856 N.W.2d 

811 (appellate courts “should not read into [a] statute language that the legislature 

did not put in” (quoted source omitted)). We presume that the legislature chose 

the term “licensee” carefully to express the statute’s intended meaning. See

Hemp, 359 Wis. 2d 320, ¶31. 

¶31 With those precepts in hand, we conclude that the DOR’s argument 

fails because both the findings of the Commission, and the terms of the end-user 

agreements, foreclose the assertion of the DOR that the end-users were licensees 

of Microsoft. 

 

7

 See ¶24, above.
No. 2018AP2024

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¶32 The Commission determined that the end-users were not licensees of 

Microsoft software, in part, because of the Commission’s factual findings that the 

end-users did “not purchase software and software licenses from, and [were] not 

the customers of, Microsoft.” Consistent with that finding, the Commission found 

that there was no “direct relationship” between Microsoft and the end-users. 

Those findings inevitably lead to the conclusion that there was no license between 

Microsoft and the end-users because the end-users did not purchase anything, 

including a license, from Microsoft. The DOR gives no reason for us to reject 

those factual findings and that conclusion. 

¶33 The Commission’s determination is confirmed by the terms of the 

end-user agreements, the only contracts that the end-users agreed to in this factual 

context. As a starting point, we note that the parties do not dispute that a license is 

a contract. See Fraunhofer-Gesellschaft Zur Förderung der Angewandten 

Forschung E.V. v. Sirius XM Radio, Inc., 2019 WL 5250712, at *6 (Fed. Cir. 

Oct. 17, 2019) (“[W]e are confident that in the future, parties to license contracts 

will resolve this issue by including contract language specifically addressing the 

survival of sublicense rights.”). The parties also do not dispute that a sublicense is 

a contract. See id. at *6 (“[A] district court may [not] forgo contract interpretation 

and assume that a sublicense survives by operation of law.”). 

¶34 Upon our independent review of the end-user agreements, we agree 

with the Commission’s interpretation that those were contracts only between 

OEMs and the end-users. See Tufail v. Midwest Hosp., LLC, 2013 WI 62, ¶22, 

348 Wis. 2d 631, 833 N.W.2d 586 (contract interpretation presents a question of 

law an appellate court reviews de novo). As noted in the Background section, the 

end-user agreements explicitly stated that the contracts were between the endusers and OEMs, and the DOR does not contend that Microsoft was a party to the 
No. 2018AP2024

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end-user agreements. It then follows that there could not have been mutual 

expression of assent to the end-user agreements, a requirement for a valid contract

such as a license, by both Microsoft and an end-user because Microsoft was not a 

party to the end-user agreement. See Gustafson v. Physicians Ins. Co. of Wis., 

Inc., 223 Wis. 2d 164, 173, 588 N.W.2d 363 (Ct. App. 1998) (setting forth the 

requirements for a contract). Without that basic requirement for a contract, there 

were no licenses between Microsoft and the end-users, and the end-users were not 

licensees of Microsoft. 

¶35 The DOR makes three arguments concerning these transactions that, 

according to the DOR, demonstrate that the end-users were licensees of Microsoft. 

However, each contention of the DOR is overcome by findings of the 

Commission.

¶36 The DOR argues, first, that the end-users were licensees of 

Microsoft because “[e]nd users pay a premium for the license to use Microsoft’s 

software, over the cost of the hardware alone.” However, the DOR’s argument is 

nothing more than a re-wording of the unremarkable proposition that OEMs paid 

Microsoft for the software licenses, and the end-users paid OEMs for the 

sublicenses as part of the cost of the purchased computers. The DOR makes no 

viable argument that the mere fact that the end-users had to pay for the Microsoftcreated software made them licensees of Microsoft. 

¶37 Second, the DOR asserts that each end-user had a license with 

Microsoft because each paid Microsoft “indirectly” for the right to use Microsoft 

software. That is based on the DOR’s further assertion that “Microsoft receives 

these gross receipts [using the phrase in WIS. STAT. § 71.25(9)(df)] for end users’ 
No. 2018AP2024

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licenses to use Microsoft’s computer software.” The DOR gives no record citation 

for either assertion. 

¶38 The Commission rejected this argument and found that “Microsoft’s 

gross receipts were not a function of use by actual end-users.” We affirm the 

Commission’s finding because substantial evidence in the record demonstrates 

that the amounts paid to Microsoft by OEMs for the software licenses were not 

paid as a result of end-user payments to OEMs for the sublicenses as the DOR 

asserts. The Commission found, and the DOR does not dispute, that the 

obligations of OEMs to pay royalties to Microsoft for licenses did not depend on 

OEMs’ sales of the computers because OEMs were required to pay royalties to 

Microsoft even when OEMs did not sell the computers on which the Microsoft 

software was installed. Microsoft, in briefing in this court, relies on evidence in 

the record that Microsoft was paid by OEMs for the licenses months (if not years) 

before OEMs sold the computers, with licensed Microsoft software included, to 

the end-users. In reply, the DOR does not dispute those facts. The Commission 

further found, and the DOR does not dispute, that the royalties that OEMs paid to 

Microsoft were not tied in any way to the prices for which OEMs sold the 

computers, and that OEMs, not Microsoft, were entitled to the sale proceeds and 

profits from the sales of all of the OEMs’ computers, including any amounts 

attributable to the software. Thus, the licensing royalties that OEMs paid 

Microsoft were not paid indirectly by the end-users. 

¶39 Third, again without any citation to the record, the DOR argues that 

the end-users were licensees of Microsoft because, in this factual setting, the only 

agreements between Microsoft and OEMs, or between OEMs and the end-users, 

with any monetary value were the end-user agreements. We reject that assertion 

because, as already noted, the Commission found (and the DOR does not dispute) 
No. 2018AP2024

16

that OEMs paid royalties to Microsoft even when OEMs did not sell the 

computers on which the software was installed. This uncontested finding 

establishes that the licenses between Microsoft and OEMs also had monetary 

value. 

¶40 The DOR makes several other arguments, each of which we decline 

to accept. 

¶41 The DOR asserts that the end-users were licensees of Microsoft 

because the licenses that Microsoft granted to OEMs “fully contemplate[d] that [] 

OEMs [would] grant ... sublicenses to ... [end-users].” However, the DOR does 

not explain how or why that fact created a licensor-licensee relationship between 

Microsoft and the end-users. We will not abandon our neutrality by attempting to 

construct an argument for the DOR. See Industrial Risk Insurers v. American 

Eng’g Testing, 2009 WI App 62, ¶25, 318 Wis. 2d 148, 769 N.W.2d 82.

¶42 The DOR also argues that WIS. STAT. § 71.25(9)(df) should apply 

here because it is more “specific” than § 71.25(9)(d); that is, § 71.25(9)(df) 

concerns the sale of computer software, whereas § 71.25(9)(d) concerns sales of 

intangibles generally. Even though § 71.25(9)(df) is specific to computer 

software, it must be applicable in the first instance for the DOR’s contention to 

have any basis. The DOR’s assertion about the specificity of § 71.25(9)(df) does 

not answer the question of whether the terms of that subpart are applicable in this 

factual situation. 

¶43 In addition, the DOR argues that it has “express authority to consider 

... ‘any other factors that reflect the use of computer software’” in Wisconsin, 

“which gives [the DOR] broad discretion in the interpretation of [WIS. STAT. 

§ 71.25(9)(df)1].” Section 71.25(9)(df)2. provides that “[t]o determine computer 
No. 2018AP2024

17

software use in this state, [the DOR] may consider ... any other factors that reflect 

the use of computer software in this state.” However, the DOR’s argument 

ignores the plain directive of § 71.25(9)(df)1., which we have discussed at length 

above, that the software must be used by a licensee in order for § 71.25(9)(df)1. to 

apply. The phrase “any other factors” in subdivision 2. allows the DOR only to 

consider diverse facts in determining the extent of a licensee’s use of software in 

Wisconsin. That language does not give the DOR the authority to reject statutory 

language in favor of the DOR’s desired result. 

¶44 Accordingly, we reject the DOR’s arguments that the end-users were

licensees of Microsoft. 

C. OEMs Were Not Agents of Microsoft.

¶45 The DOR attempts another challenge to the Commission’s decision. 

It argues that OEMs acted as agents of Microsoft “for the limited purpose of 

granting sublicenses of Microsoft’s computer software to end[-]users,” and,

therefore, “the licenses are, in effect, between Microsoft and the end[-]users.” We 

are not persuaded. 

¶46 “[A]n agent is one who acts on behalf of and is subject to reasonably 

precise control by the principal for the tasks the person performs within the scope 

of the agency.” Westmas v. Creekside Tree Serv., Inc., 2018 WI 12, ¶36, 379 

Wis. 2d 471, 907 N.W.2d 68. The agent has the duty to act solely for the benefit 

of the principal in all matters connected with the agency, even at the expense of 

the agent’s own interest. Losee v. Marine Bank, 2005 WI App 184, ¶16, 286 Wis. 

2d 438, 703 N.W.2d 751. Whether an agency relationship exists is a question of 

fact that turns on the understanding between the alleged principal and the alleged 

agent of the relationship. See Noll v. Dimiceli’s, Inc., 115 Wis. 2d 641, 643, 340 
No. 2018AP2024

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N.W.2d 575 (Ct. App. 1983) (citing Soczka v. Rechner, 73 Wis. 2d 157, 163, 242 

N.W.2d 910 (1976)). 

¶47 The DOR asserts that OEMs were Microsoft’s agents because

Microsoft “tightly control[ed] ... OEMs with regard to ... OEMs’ authority to 

grant [sub]licenses to end[-]users.” The Commission found that OEMs did not act 

“as agents of Microsoft but as actors in their own right.” More specifically, the 

Commission found the following in rejecting the DOR’s agency argument, some 

of which are findings to which we have already referred:

 Microsoft “had no say in whether or to whom” OEMs would sell their 

computers and the accompanying software licenses. 

 OEMs, not Microsoft, determined which components to include in their 

computers, chose the markets in which to sell their computers, and 

determined pricing and other aspects of the sale of their computers. 

 OEMs were responsible for paying royalties for the Microsoft license 

regardless of whether OEMs ultimately sold the computers into which the 

Microsoft software was installed. 

 The royalties paid to Microsoft from OEMs were not tied in any way to the

prices at which OEMs sold the computers. 

 OEMs, not Microsoft, were entitled to the sale proceeds and profits from 

the sale of any of the OEMs’ computers, including any amount attributable 

to the software. 
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 OEMs owed no accounting to Microsoft for the proceeds of their sale of 

their computers, as OEMs would if OEMs were agents that were 

transacting on Microsoft’s behalf.8 

 Microsoft did not provide product support to the end-users; instead, OEMs 

were responsible for providing any product support to the end-users. 

¶48 These findings provide substantial evidence that OEMs were not 

Microsoft’s agents. See Wisconsin Bell, Inc. v. LIRC, 2018 WI 76, ¶42, 382 Wis. 

2d 624, 914 N.W.2d 1 (an appellate court will affirm an agency’s finding if the 

finding is supported by substantial evidence). The DOR neither disputes these 

factual findings of the Commission nor points this court to evidence in the record 

sufficient to overcome the Commission’s factual findings supporting its 

determination that OEMs did not act as an agent, solely for Microsoft’s benefit,

when selling their computer systems containing the Microsoft software. See 

Westmas, 379 Wis. 2d 471, ¶36 (describing agency relationship); Losee, 286 Wis. 

2d 438, ¶16 (describing agency relationship). 

¶49 The DOR then argues that, regardless of the factual findings of the 

Commission, OEMs were, as a matter of law, Microsoft’s agents in this factual 

context. In support, the DOR relies solely on the following language from a 1947 

federal Tax Court opinion: “A sublicense can be granted only where the license 

expressly authorizes, and the main licensee is the agent of the licensor in 

 

8

 See Degner v. Moncel, 6 Wis. 2d 163, 167, 93 N.W.2d 857 (1959) (“[A]n agent who 

makes a profit in connection with the transactions conducted by him on behalf of the principal is 

under a duty to give such profit to the principal.”).
No. 2018AP2024

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negotiating a sublicense.” Federal Labs., Inc. v. Commissioner of Internal Rev., 

8 T.C. 1150, 1157 (1947) (emphasis added). 

¶50 We reject the DOR’s position for several reasons. First, we are not 

bound by the Tax Court opinion. City of Weyauwega v. Wisconsin Cent. Ltd., 

2018 WI App 65, ¶12 n.4, 384 Wis. 2d 382, 919 N.W.2d 609 (other than United 

States Supreme Court decisions on federal law, we are not bound by federal court 

decisions, but we may follow federal court decisions that we consider persuasive). 

¶51 Second, the DOR’s contention that the question of agency can be 

decided in this case as a matter of law is contrary to Wisconsin law on agency, 

under which we are to consider this to be an issue of fact. In Noll, it was argued 

that whether a principal-agent relationship exists is a question of law. Noll, 115 

Wis. 2d at 643. We rejected that contention and held: “On the contrary, the 

determination of whether a principal-agent relationship exists is a question of fact 

for the trier-of-fact.” Id. And, as already discussed, the Commission as the trier 

of fact made findings that rejected the notion that OEMs were agents of Microsoft 

in this factual context.

¶52 Third, we question whether the language used by the Tax Court 

supports the DOR’s broad position. At most, the quoted language states that the 

licensee is an agent in the discrete process of “negotiating a sublicense” in 

anticipation of possible contract formation, not an agent under an enforceable 

contract. See Federal Labs, 8 T.C. at 1157. That phrase cannot reasonably be 

construed to mean that, because OEMs granted sublicenses to the end-users, those 

separate sublicenses were transformed into license agreements between Microsoft 

and the end-users. 
No. 2018AP2024

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¶53 In sum, we reject the DOR’s arguments that OEMs were agents of 

Microsoft and, on this basis, Microsoft should be deemed to have granted licenses 

to the end-users. 

D. Use of the Software, Alone, Does Not Satisfy the Statutory Requirement.

¶54 Finally, the DOR argues that WIS. STAT. § 71.25(9)(df) “depends 

entirely on ‘use.’” More specifically, the DOR contends that “the only relevant 

factor is where the software is used” and “[t]he location of [] OEM[s], which [do] 

not use the software, is not germane .... OEM[s] [are] essentially irrelevant.” For 

this reason, according to the DOR, to the extent that the end-users used the 

Microsoft software in Wisconsin pursuant to sublicenses from OEMs, royalties to 

Microsoft from OEMs for the software licenses should be considered in 

calculating Microsoft’s Wisconsin franchise tax liability.

¶55 As with other arguments we have rejected above, the DOR’s 

exclusive focus on the use of the software ignores the statutory requirement that 

there must be a “licensee” that uses the software in this state for WIS. STAT.

§ 71.25(9)(df) to apply. See § 71.25(9)(df). The royalties paid by OEMs to 

Microsoft were not subject to the Wisconsin franchise tax because, as noted, the

end-users were not licensees of Microsoft. 

¶56 As we have already stated, it is beyond the purview of this court to 

redraft WIS. STAT. § 71.25(9)(df) as the DOR requests. See Hemp, 359 Wis. 2d 

320, ¶31. For that reason, we reject this contention of the DOR. 
No. 2018AP2024

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CONCLUSION

¶57 For the reasons discussed above, we affirm the order of the circuit 

court.

By the Court.—Order affirmed.