Opinion ID: 1288234
Heading Depth: 2
Heading Rank: 1

Heading: Tax Appeals Commission's Decision

Text: ¶ 25 Menasha petitioned the Commission for review of the DOR's determination. The DOR had determined that the R/3 System was not custom and, therefore, it was subject to sales and use tax. [8] Both parties moved for summary judgment and submitted briefs, proposed findings of facts, affidavits, and exhibits. Thus, both parties, Menasha and the DOR, had the opportunity to present their respective arguments to the Commission. The Commission concluded that no genuine issues of material fact existed, and as a result, decided the matter at summary judgment. The Commission concluded that the R/3 System was a custom program because of the significant investment [Menasha] made in presale consultation and analysis, testing, training, written documentation, enhancement, and maintenance support, and because it [was] not a prewritten program. As a result, it found the R/3 System exempt from sales and use tax. The Commission turned to the definition of custom in Wis. Admin. Code § Tax 11.71(1)(e). That definition instructs one to consider all the facts and circumstances, and it recites seven factors to be considered. The Commission concluded that every factor need not be met for the program to be deemed custom, but rather, it determined that the factors in the rule are to be weighed along with all the other facts and circumstances. [9] ¶ 26 The Commission considered each factor. Under the first factor, regarding presale consultation, the Commission found the DOR had conceded that significant presale consultation and analysis occurred. Under the second factor, regarding loading and testing of the software, the Commission found that a former SAP employee loaded the software and thus, [a]rguably, this part of the factor is a draw, but the fact that a former SAP employee loaded the software weighs in favor of finding that the software at issue is custom software. Factor two also includes testing as a consideration and the Commission concluded that the testingregardless of who conducted the testingtook three to four months, and thus, the second factor supported the conclusion that the software was custom. ¶ 27 Under the third factor, regarding training and written documentation, the Commission found that the DOR conceded that substantial training and written documentation was required. Under the fourth factor, regarding enhancement and maintenance support, the Commission found that the DOR conceded that the R/3 System needed enhancement and maintenance support. Under the fifth factor, regarding a rebuttable presumption that a program is not custom if it cost $10,000 or less, the Commission concluded that factor five did not apply because the cost greatly exceeded $10,000. ¶ 28 The Commission determined, with regard to factor six, that [t]his case hinge[d] on whether the R/3 System [was] a prewritten program. The other factors set forth in the rule either lead to a conclusion that the R/3 System is custom software or are neutral. The Commission concluded that the R/3 System was not a prewritten program under the rule's definition of prewritten. Wisconsin Admin. Code § Tax 11.71(1)(k) states: Prewritten programs, often referred to as canned programs, means programs prepared, held or existing for general use normally for more than one customer, including programs developed for in-house use or custom program use which are subsequently held or offered for sale or lease. (Emphasis added.) ¶ 29 The Commission utilized the rule's definition of prewritten and reasoned that the R/3 System was not prepared, held or existing for general use. The DOR urged the Commission to consider the dictionary definition of prewritten, but the Commission rejected this argument because the definition of prewritten was provided by the rule. ¶ 30 The DOR also utilized numerous descriptions of the R/3 System as providing standard solutions or being a standard package (emphasis omitted). The Commission, however, concluded the DOR appears to equate the rule's phrase `general use' with standard. This misses the point. The Commission reasoned that [t]he issue is not whether the end result is a program that provides standard business applications, but rather the obstacles one must overcome to get to apply the software. Thus, the Commission declined to construe the phrase general use with the word standard as the DOR repeatedly described the R/3 System as providing standard solutions or being a standard package. What matters[, the Commission concluded,] is the process by which the application is accomplished, regardless of whether the application is standard or not. ¶ 31 Under the DOR's analysis, the Commission stated, a vendor could develop a software program completely from scratch ..., and if the resulting program provided standard business applications, the software would not be custom software. This, however, the Commission concluded does not make sense. ¶ 32 The Commission stated that even the [DOR] concedes the following facts: 1. The basic modules of the R/3 System must be subject to a certain degree of customization, and it is only after this customization process is complete that the client has a usable software system; 2. As delivered, the R/3 System was inadequate for petitioner's use; 3. Members of petitioner's implementation team working with SAP and ICS Deloitte determined the operational and functional needs of each subsidiary in order to configure and customize the system; 4. The implementation team worked to configure and modify the R/3 System to adapt the system to each subsidiary's identified needs; 5. The implementation and ABAP programming teams worked to customize the R/3 System to meet petitioner's functional needs; 6. The ABAP programming teams created codes for hundreds of user exits to integrate external programs with the R/3 System, so that petitioner was able to realize the functionality needed for its unique business while preserving the functional efficiencies of the R/3 System; 7. The ABAP programming teams created new subsystems to run parallel to the R/3 System for operations not available within the R/3 System more critical to petitioner's business; 8. The ABAP programming teams customized fields and reports within the R/3 System to insure it produced output to be useful to petitioner's business; 9. SAP provided petitioner with patches to correct functional gaps identified during implementation, some of which included new source code written to address shortfalls of the R/3 System; 10. In total, more than 3,000 modifications were made to petitioner's R/3 System. Menasha Corp. v. DOR, Wis. Tax Rptr. (CCH) ¶ 400-719, at 32,855-56 (WTAC 2003). ¶ 33 Therefore, the Commission concluded, it took a significant amount of time, effort, and resources to make the R/3 System usable for Menasha. The distinction between custom and prewritten programs hinges on the amount of effort necessary to get the software operational for the particular customer's needs. Because of the substantial amount of resources, time, and effort needed to make the R/3 System usable, the Commission stated, we cannot conclude that the software at issue is prewritten. The Commission reasoned that if a program exists for general use, it will take little effort for it to be put in place for any user, whereas, if a program is useful only after a significant investment in planning, testing, training, enhancement, and maintenance, then the software cannot be said to be prepared, held or existing for general use. ¶ 34 Under factor seven, regarding significant modification to an existing program, the Commission concluded that this factor did not apply in this case because the R/3 System was a custom program rather than an existing program. The Commission stated, [t]his factor only makes sense in the overall scheme presented by [Wis. Admin. Code] section Tax 11.71(1)(e) if one concludes that `existing program' means an `existing program for general use' as that phrase is used in the definition of `prewritten programs' in [Wis. Admin. Code] section Tax 11.71(1)(k). ¶ 35 Finally, because all facts and circumstances must be considered, the Commission considered the cost of the software. It reasoned that because there is a presumption that anything under $10,000 is not custom, cost could be considered. The Commission concluded that the significant cost, $5.2 million, favored a conclusion that the R/3 System was custom.