STATE OF WISCONSIN
TAX APPEALS
COMMISSION
______________________________________________________________________________
STATE
BAR OF WISCONSIN, DOCKET
NO. 16-S-139
Petitioner,
vs.
WISCONSIN
DEPARTMENT OF REVENUE,
Respondent.
______________________________________________________________________________
RULING
& ORDER
DAVID L. COON,
COMMISSIONER:
This case comes before
the Commission for decision on Petitioner’s and Respondent's cross-motions for
summary judgment. The Petitioner, the
State Bar of Wisconsin (“the State Bar”), of Madison, Wisconsin, appears by Attorneys
Thomas J. Phillips, Robert B. Teuber, and Courtney A. Hollander, Von Breisen
& Roper, SC.[1]
Respondent, the Wisconsin Department of Revenue (“the Department”), is
represented by Attorney Kelly Altschul.[2] The parties filed a Stipulation of Facts.
Each party filed a brief and affidavits with exhibits in support of its
Motion. Each party filed a response
brief. At the request of the Commission, the parties also filed supplemental
briefs. For the reasons stated below, we grant Petitioner’s motion and deny the
Respondent’s motion.
FACTS
1.
Petitioner is a mandatory
professional association, created by the Wisconsin Supreme Court, for all
attorneys who hold a Wisconsin law license. Members are required to obtain and
report 30 hours of continuing legal education (“CLE”) credits every two years
(with some exceptions for newly admitted attorneys and emeritus members) in
order to maintain their status as active and in good standing, thereby allowing
them to practice law in the State of Wisconsin. (Stipulation of Facts
(“Stip.”), ¶ 1.)
2.
Petitioner offers for sale
legal seminars and written materials that attorneys can utilize to better their
legal knowledge. (Stip., ¶ 1.)
3.
During the period January 1,
2010, through December 31, 2013 ("Audit Period"), Petitioner offered
CLE seminars led by an instructor or a panel of instructors who were often
attorneys themselves and were often experts in their field. Petitioner offered
the option to attend or view CLE seminars in the following ways:
a.
Seminars offered in “Format 1” were live
in-person seminars (“Live Seminars”). These seminars were offered at a specific
date, time, and location, and the attendees and instructors) were physically
present in the same room. Attendees were able to interact with the
instructor(s), ask the instructor(s) questions, hear questions from live
webcast viewers (see description of “Format 2,” below), and receive answers to
those questions in real time.
b.
Seminars offered in “Format 2” were live
webcast seminars (“Live Webcast Seminars”). These seminars were Format 1 Live
Seminars streamed in real time over the internet. Therefore, the Format 2
seminars were offered at the same date and time as the Live Seminars. Attendees
were able to view the seminars on their computers but were not physically
present in the same room as the instructors. Attendees were able to ask the
instructor(s) questions during and/or immediately after the seminar and receive
answers to those questions in real time. Attendees were also able to witness
the questions that were asked by the attendees who attended the live seminar
and witness the responses provided by the instructor(s) to such questions.
c.
Seminars offered in “Format 3” were webcast
replays (“Replay Webcast Seminars”). These seminars were broadcast over the
internet and were replays of the previously recorded Live Seminars. Format 3 Replay
Webcast Seminars were offered at a specific date and time, but the
instructor(s) were not required to be available during that time. Attendees
viewed the Webcast Replay Seminars on their computers and were not physically
present in the same room as the instructor(s). The attendees were able to
listen to and view the seminar, witness the questions that were asked by the
attendees who attended the Live Seminar and by those who attended the Live
Webcast Seminars, if any, and witness the responses provided by the
instructor(s) to such questions. Additionally, attendees could submit questions
to the instructor(s) via email.
d.
Seminars offered in “Format 4” were on-demand
replays (“On-Demand Seminars”). These seminars were broadcast over the internet
and were replays of the previously recorded Live Seminars. On-Demand
Seminars were available to be viewed within a 90-day window from the date of
purchase and could be viewed at any time of the day or night during the 90-day
period. Attendees could not download or save the On-Demand Seminars onto their
own computers, nor could the attendees share or transfer the video to a third
party. At the end of the 90-day period, the program was no longer available to
be viewed by the attendees, unless he or she purchased it again. The attendees
were able to listen to and view the seminar, witness the questions that were
asked by the attendees who attended the live seminar and by those who attended
the Live Webcast Seminars, if any, and witness the responses provided by the
instructor(s) to such questions. Additionally, attendees could submit questions
to the instructor(s) via email. (Stip., ¶ 2.)
4.
If an attendee submitted a
question via email during or immediately following a Format 3 Webcast Replay
Seminar or Format 4 On-Demand) Seminar, Petitioner requested, but did not
require, that the instructors respond within two business days. Instructors generally
responded to questions within two business days. The Wisconsin Board of Bar Examiners (“BBE”)
Rule CLE 5.01 requires that Format 4 (On-Demand Seminar) questions be responded
to within 15 business days. (Stip., ¶ 3.)
5.
None of the CLE seminars
provided by Petitioner, regardless of Format, required attendees to take a test
or submit to evaluation by the instructors of their retention of the
information imparted in the seminar. The BBE imposes no such requirement to get
CLE credit. (Stip., ¶ 4.)
6.
To obtain accreditation by
the BBE for CLE credit, Petitioner's seminars had to meet the standards
required under Supreme Court Rule 31.07 (June 14, 2013). (Stip., ¶ 5.)
7.
Attendees of approved On-Demand
Seminars could only receive CLE credits if the conditions under Supreme Court
Rule 31.05(5)(a) (June 14, 2013) were met. (Stip., ¶ 6.)
8.
Petitioner received a Notice
of Field Audit Action (the “Notice”) dated August 10, 2015, assessing
additional sales and use taxes for the Audit Period in the amount of $354,248
in additional tax and $128,840.67 in interest, as Petitioner did not collect
and remit Wisconsin sales tax for Replay Webcast or On-Demand Seminars.
Petitioner deposited with Respondent $478,080.46, the asserted amounts of
additional tax and interest, which stopped the running of additional interest. (Stip.,
¶ 7.)
9.
In the Notice, Respondent
conducted a sample of Petitioner’s sale of CLE seminars in Replay Webcast and On-Demand
Seminars and determined that sales tax was due on such sales.[3]
Respondent contended these sales were of taxable digital audiovisual works on
which tax was not charged and a valid exemption certificate was not maintained.
(Stip., ¶ 8.)
10.
By letter dated October 5,
2015, Petitioner timely filed with Respondent a Petition for Redetermination
objecting to the taxation of Replay Webcast Seminars and On-Demand Seminars and
requesting that Respondent redetermine the amount of any additional Wisconsin
sales tax and interest due attributable to sales of those formats. (Stip., ¶ 9.)
11.
By Notice of Action dated
April 1, 2016, Respondent granted in part and denied in part Petitioner’s
Petition for Redetermination. (Stip., ¶ 10.)
12.
The only issue remaining
before the Commission for the Audit Period is Petitioner's sales of On-Demand Seminars.
Respondent has refunded to Petitioner the portion of its deposit that is not
attributable to its sales of On-Demand Seminars and other items Petitioner has
since agreed are taxable. (Stip., ¶ 11.)
13.
On May 18, 2016, Petitioner
filed a timely Petition for Review with the Wisconsin Tax Appeals Commission.
(Stip., ¶ 12, Commission File.)
APPLICABLE
LAW
Statutes[4]
Wis.
Stat. § 77.51(3p)
"Digital
audiovisual works" means a series of related images that, when shown in
succession, impart an impression of motion, along with accompanying sounds, if
any, and that are transferred electronically. "Digital audiovisual
works" includes motion pictures, musical videos, news and entertainment
programs, and live events, but does not include video greeting cards or video
or electronic games.
Wis.
Stat. § 77.51(17x)
"Specified
digital goods" means digital audio works, digital audiovisual works, and
digital books. For purposes of this subchapter, the sale, license, lease, or
rental of or the storage, use, or other consumption of a digital code is
treated the same as the sale, license, lease, or rental of or the storage, use,
or other consumption of any specified digital goods for which the digital code
relates.
Wis. Stat. §
77.52(1)(d)
A tax is
imposed on all retailers at the rate of 5 percent of the sales price from the
sale, lease, license, or rental of specified digital goods and additional
digital goods at retail for the right to use the specified digital goods or
additional digital goods on a permanent or less than permanent basis and
regardless of whether the purchaser is required to make continued payments for
such right.
Wis.
Stat. § 77.52(2)
For the
privilege of selling, licensing, performing or furnishing the services
described under par. (a) at retail in this state, as determined under s.
77.522, to consumers or users, regardless of whether the consumer or user has
the right of permanent use or less than the right of permanent use and
regardless of whether the service is conditioned on continued payment from the
purchaser, a tax is imposed upon all persons selling, licensing, performing or
furnishing the services at the rate of 5% of the sales price from the sale,
license, performance or furnishing of the services.
Wis.
Stat. § 77.54(50)
The sales
price from the sale of and the storage, use, or other consumption of specified
digital goods or additional digital goods, if the sale of and the storage, use,
or other consumption of such goods sold in a tangible form is exempt from, or
not subject to, taxation under this subchapter.
Summary Judgment
Summary judgment is
granted if the pleadings, depositions, answers to interrogatories, and
admissions on file, together with affidavits, show there is no genuine issue as
to any material fact and that the moving party is entitled to judgment as a
matter of law. Wis. Stat. § 802.08(2). Here, the parties have stipulated to the
material facts and have both moved for summary judgment. The effect of
simultaneous motions for summary judgment is an assertion that the facts
presented are not in dispute and only questions of law remain for
determination. Healthcare Services, Inc. v. Dep’t of Revenue, Wis. Tax
Rptr. (CCH) ¶ 402-085 (WTAC 2016).
Burden of Proof
The Department’s
determinations are presumed to be correct, and it is Petitioner’s burden to
prove by clear and convincing evidence that the Department erred in its
determination. Puissant v. Dep’t of Revenue, Wis. Tax Rptr. (CCH) ¶
202-401 (WTAC 1984).
ANALYSIS
A service is not
subject to sales or use tax unless it is specifically listed in the statutes as
a taxable service. “For a service to be taxable in Wisconsin, under Wis.
Stat. § 77.52(2),
the seller must be ‘selling, licensing, performing or furnishing the services
described under par. (a).’ Thus, only services which are listed in the statute
are to be taxed.” Healthcare Services, Inc. v. Dep’t of Revenue, Wis.
Tax Rptr. (CCH) ¶ 402-085 (WTAC 2016). Educational services are not one of the
specifically listed taxable services and are not otherwise defined in the
statutes for tax purposes. The Department has agreed that the purchase from
Petitioner of a Live Seminar is the purchase of an educational service that is
not subject to sales tax. These Live Seminars (Format 1) are not directly at
issue before the Commission.
The
Department has also determined that purchasers of a Live Webcast Seminar, the
right to view a streamed video of a Live Seminar at approximately the same time
as the Live Seminar but at a remote location, including the lawyer’s home or
office or wherever the lawyer has the proper equipment and internet connection,
is also not subject to sales tax. For Live Webcast Seminars, the lawyer does
not obtain a copy of the video in any form, such as DVD, USB drive, download to
hard drive, or, going back to the technological dark ages, videotape.
The
live video stream is a “digital audiovisual work” per Wis.
Stat. § 77.51(3p). Audiovisual works are “specified digital goods” under Wis. Stat. § 77.51(17x) and would be a taxable per Wis.
Stat. § 77.52(1)(d). However,
where a digital good sold in “a tangible form” would be exempt from the sales
or use tax, that digital good is also exempt from the tax. Wis. Stat. § 77.54(50).
The
Department issued guidance that, while the Live Webcast Seminar data stream to
the lawyer’s computer or other device that creates the audiovisual images is a
specified digital good, its “tangible form” is the Live Seminar. Following this
reasoning, according to the Department, Live Webcast Seminars would also be
exempt from sales tax. Wisconsin Tax Bulletin 170-January 2011 (Tax Releases)
pp. 8-9; Online Seminars, Wis. Dep’t
of Revenue, Tax Treatment of Online Seminars, Jan. 28, 2011. The Live
Webcast Seminars (Format 2) are also not directly before the Commission.
As
noted above, for purposes of this action, the parties do not dispute that the Live
Seminars and Live Webcast Seminars are non-taxable. It is still necessary to
understand the issues involving their non-taxable status in analyzing the
taxability of the On-Demand Seminars, which are at issue.
Exempt
Tangible Form
For
On-Demand Seminars, the lawyer purchases Continuing Legal Education that
includes the right to access pre-recorded, saved data of Live Seminars, which are
then streamed to the lawyer’s computer or other device creating the audiovisual
playback of the pre-recorded CLE Live Seminars. Like Live Webcast Seminars, the
lawyer can watch the On-Demand Seminars at any location at which he or she has
the proper equipment and an internet connection. Again, just as with Live
Webcast Seminars, the lawyer does not obtain a copy of the video in any form,
DVD, USB drive, download to hard drive, or videotape. The lawyer can view the
video stream of the On-Demand Seminar at any time of the lawyer’s choosing, not
at the approximate time of the Live Seminar, hence the name On-Demand. The
lawyer can stop and start the stream at any time and re-watch it multiple times
within a contracted period of time, here 90-days.
The
Department asserts that the tangible form of an On-Demand Seminar is a data
storage medium, for example a DVD. The Department says that the sale of a video
on a tangible DVD is not exempt, therefore, the On-Demand Seminars are not
exempt from the sales tax under Wis. Stat. § 77.54(50).
Petitioner
admits that the On-Demand Seminars are digital audiovisual works and, therefore,
are specified digital goods, but Petitioner argues that under the statute, if “a”
tangible form is exempt, the specified digital good can fall within the
exemption of Wis. Stat. § 77.54(50). Even if a DVD is one tangible
version of a specified digital good, the statute says “a” rather than “the,”
so, Petitioner asserts, if there is another tangible version (i.e. “a” tangible
version) that is exempt, the On-Demand Seminars should also be exempt.[5] According to Petitioner,
“a” tangible form of the On-Demand Seminar is the Live Seminar, which is exempt,
so it follows that, like the Live Webcast Seminars, the On-Demand Seminar
should also be exempt.
Petitioner
points to the Department’s guidance which indicates that the Live Seminar is “a
tangible” version of the Live Webcast Seminar and asks the Commission to apply the
Department’s rationale to On-Demand Seminars, alleging that the Live Seminars are
also a tangible form of the On-Demand Seminar. However, the Department’s
guidance relative to the exemption for Live Webcast Seminars specifically noted
that the same rationale for exemption would not apply to On-Demand type
seminars. In the guidance, the
Department stated, regarding pre-recorded digital and DVD versions of seminars,
“The exemption under sec. 77.54(50), Wis. Stats., does not apply to the sale of
this digital good, since the recorded version of the seminar sold in a tangible
form (i.e., on a DVD) is subject to Wisconsin sales and use taxes.” Because of
this statement in the guidance, the Petitioner cannot reasonably rely upon the
guidance to show that the On-Demand Seminars are exempt. Nevertheless, Petitioner
does essentially request the Commission to extend the rationale of the guidance
for Live Webcast Seminars to On-Demand Seminars.
From
the beginning, the Commission has had concerns with the proposition that a Live
Seminar, for the purposes of Wis. Stat. § 77.54(50), could be a “tangible”
version of any specified digital good. The Live Seminar appears to be an
educational service which one would think is not “tangible.” This, though, depends
on how “tangible” is defined for the purposes of Wis. Stat. § 77.54(50).
Petitioner
asserts that the Commission should derive a definition of the word “tangible”
from Wis. Stat. § 77.51(20), which defines “tangible personal property.” In
that statute, the phrase “tangible personal property” is defined to include
things that can be touched, but also has a more expansive definition for
tangible personal property to include things that can be “seen, weighed, measured,
felt, or touched, or that is in any other manner
perceptible to the senses, and includes electricity, gas, steam, water,
and prewritten computer software, regardless of how it is delivered to the
purchaser.” (Emphasis added).
Petitioner
asks the Commission to parse the word “tangible” from the specific phrase
“tangible personal property” then attach the definition “that is in any other
manner perceptible to the senses” to the parsed word “tangible” to create a
new, expansive definition of the word “tangible” for use throughout the
statutes. The Commission declines to engage in definitional gymnastics to create
expansive definitions for disparate statutory sections.
Services
are actions or activities that create something, make something, or accomplish
something. The Petitioner asserts that the service, the activity, that creates
or makes a good or product be the “tangible” form of the good the activity
creates. We disagree. Services are by their very nature, whether completed in
an instant or performed over a period of time, ephemeral and intangible and
cannot be the “tangible form” of an item that the activity of the service
creates. Therefore, the Live Seminar, an educational service, cannot be a
tangible form of a digital good under Wis. Stat. § 77.54(50). The Department
has subsequently also agreed that their guidance “regarding the reason
live-streamed seminars are not taxable is incorrect and will be revised.”[6] As we find that the Department’s rationale in
its guidance for the exemption of the Live Webcast Seminars is, at best,
questionable, we will not extend that rationale to On-Demand Seminars. We therefore find that the Live Seminar is
not a tangible form of the On-Demand Seminar and cannot be a basis for the
exemption of the On-Demand Seminar under Wis. Stat. § 77.54(50).
We have answered Petitioner’s argument
that the Live Seminar is a tangible version of the On-Demand Seminar; it is
not. Petitioner has not presented/briefed any other tangible form. Because we
find for Petitioner as explained below, we decline to broaden our analysis on
this issue.
True Objective Test
The parties agree
that Petitioner’s On-Demand Seminars are digital audiovisual works and,
therefore, are specified digital goods, which are generally taxable. However,
the seminars might nevertheless be exempt depending upon the purchasers’ true
objective for purchasing them. Under the “True Objective Test,” sales of On-Demand
Seminars would not be taxable, if the “true objective” of the purchasers of the
CLE seminars, is to buy an exempt educational service with the specified
digital good being incidental to that true objective. To make a determination regarding
the true objective, the focus is on the intent of the purchaser.
The True Objective Test
states:
When
a transaction involves the transfer of tangible personal property or items,
property, or goods under s. 77.52(1)(b), (c), or (d), Stats., along with the
performance of a service, and the transaction is neither a bundled transaction,
as defined in s. Tax 11.985, nor a transaction to which s. 77.52 (2m)(b),
Stats., applies,[7]
the true objective of the purchaser shall determine whether the transaction is
a sale of tangible personal property or items, property, or goods under s.
77.52 (1)(b), (c), or (d), Stats., or the performance of a service with the
transfer of the property, item, or good being incidental to the performance of
the service. If the objective of the purchaser is to obtain the personal
property, item, or good, a taxable sale of that property, item, or good is
involved. However, if the objective of the purchaser is to obtain the
service, a sale of a service is involved even though, as an incidence to the
service, some tangible personal property or items, property, or goods under s.
77.52(1)(b), (c), or (d), Stats., may be transferred. (emphasis added).
Wis. Admin.
Code § Tax 11.67(1).
The True Objective
Test requires the Commission to consider what the purchasers are actually
attempting to receive via the transaction. We need to “look at the essence of the transaction to determine if it
is fundamentally a sale of property or a performance of a service.” Dep’t
of Revenue v. Dow Jones & Co.,
Inc., 148 Wis. 2d 872,
877, 436 N.W.2d 921 (Ct. App. 1989). See also Janesville Data Center v. Dep’t.
of Revenue, 84 Wis. 2d 341, 346, 267 N.W.2d 656, 658
(1978). The Commission has also determined that it is the “bigger picture” and
“the root” of the transaction that should be considered. See Cannon & Dunphy S.C. v.
Dep’t of Revenue, Wis. Tax Rptr. (CCH) ¶ 401-982 (WTAC
2015) (tangible copies of
medical records were incidental to the service of medical care which was the
root or essence of the transaction).
While Janesville[8] and Dow, for example,
pre-date the digital goods statute, the True Objective Test is now codified in
the Wisconsin Administrative Code. As codified, the True Objective Test is specifically
applicable to digital goods as defined in Wis. Stat. § 77.52(1)(d). Wis. Admin.
Code § Tax 11.67(1). We find that the True Objective Test does apply to the situation
at issue here.
The Supreme Court of Wisconsin has set forth
a series of rules regarding continuing legal education for lawyers, who must
obtain 30 credits in every two-year reporting period. SCR 31.02(1). The Supreme
Court has determined that some of these credits may be earned by “an on-line
program delivered over the Internet, repeating a program previously approved by
the board, and given at a time of the attendee's choosing within twelve (12)
months of the approval of the on-demand on-line program.” SCR 31.01(6m). There
are limitations and conditions placed upon this on-demand, on-line programming,
including that only 10 credits may be earned in a reporting period by this
educational method. Nevertheless, the Supreme Court has determined that such an
online, on-demand programming is legal education potentially eligible for
credit for the lawyer under the terms and conditions of the Supreme Court
Rules. An On-Demand Seminar is, therefore, an educational program per the
Supreme Court. An attorney participating in a CLE program over the internet
that meets the requirements of the Supreme Court Rules is obtaining an
educational service for which the lawyer earns and is eligible to claim CLE credits.
Under
Supreme Court Rules, the lawyer has multiple means by which to receive such a
service and accomplish these goals, including Live Seminars, Live Webcast Seminars,
Replay Webcast Seminars, or On-Demand Seminars. For convenience, the lawyer may
choose to gain some of his or her credits through the On-Demand Seminars. The
lawyer does not have the objective of merely obtaining, or even primarily
obtaining, a digital good. The lawyer is trying to obtain the educational
service that accomplishes his or her goals of legal education, competence, and
good standing.
The
Petitioner sells four different CLE packages. In three of them, a digital good
is included as the transmission vehicle, incidental to the purchased
educational service. These delivery methods have been approved by the Supreme
Court of Wisconsin. It is clear that lawyers, as the purchasers, are buying the
overall CLE, not just a video. When considering the bigger picture of the
transaction, the educational service, which is the essence and root of the
transaction, is what the purchaser is trying to obtain. Much like the Live Webcast
Seminar digital stream (also a digital good), the on-demand digital stream is
incidental to the true objective of obtaining that overall educational service.
As the lawyer watches the seminar, whether in person, at a remote location by
online video feed, or by on-demand streaming, the lawyer actively accrues eligibility
for CLE credit. The lawyer is not merely obtaining something which has some
educational content, but he or she is receiving the educational service that
accomplishes the accrual of credit, legal competence, and the ability to
maintain good standing with the Supreme Court and the Board of Bar Examiners.
In addition, as Petitioner points out, as part of the overall educational
service provided, the lawyer is guaranteed the right to have contact with, and
ask questions of, the CLE seminar presenter via email interaction. Also, other
aspects of the CLE seminars, related to Petitioner obtaining and maintaining
CLE certification of these seminars, compliance with Supreme Court Rules
including any associated record keeping, are part of the overall educational
service provided beyond the mere selling of a digital good in the form of a
streamed video.
The statistical evidence supports the conclusion that the
true objective of lawyers purchasing these CLE seminars is more than just the
desire to obtain a digital good, a video. By affidavit, the Department provides
the uncontroverted fact that the State Bar offers many On-Demand Seminars for
which CLE credit is not available, do not have the right to contact the
presenter, and are not accredited or do not comply with the rules set by the
Supreme Court. Specifically, by percentage of the whole and by year, those
seminars which are not eligible for credit are as follows:
2010: 7 out of 79, or 8.86%
2011: 7 out of 153, or 4.58%
2012: 71 out of 221, or 32.13%
2013: 94 out of 255, or 36.86%[9]
While
by 2012 and 2013, about one third, or more, of the On-Demand Seminars available
online were not eligible (or no longer were eligible) for credit under the
Supreme Court Rules, the uncontroverted sales statistics provided by Petitioner
show that almost all of the On-Demand Seminars purchased were ones for which
the lawyer would earn eligibility for CLE credit as well as all other benefits
of such an educational service. By percentage of sales, by year, these were as
follows:
2010: 99.17% provided CLE
credit
2011: 97.24% provided CLE
credit
2012: 97.66% provided CLE credit
2013: 99.44% provided CLE
credit[10]
In
looking at the sales data versus the overall array of On-Demand Seminars
available, there is a very clear picture of the true objective of the purchasers
of the On-Demand Seminars. While by 2013 more programs were not eligible for
CLE credit due to the age of the programs or other circumstances such as
Supreme Court rules not allowing ethics credits to be earned by On-Demand
Seminars, nearly all, over 99%, of the On-Demand Seminars sold were of the
variety for which CLE credit could be earned and which met other Supreme Court
rules and record-keeping requirements.
The
only reasonable inference is that the purchasers of these On-Demand Seminars are
seeking to obtain something more than just a digital good. If the purchasers were
merely wanting a digital good, as a reference work for example, it would be
expected that a larger percentage of the non-credit CLE seminars would be
purchased, rather than the near unanimous purchase of credit eligible CLE
seminars.[11] The Department argues that
“the purchasers' true objective was to receive the ‘series
of related images that, when shown in succession, impart an impression of
motion, along with accompanying sounds, if any, and that are transferred
electronically.’" However, based upon the statistical evidence, it is
clear that lawyers purchasing the On-Demand Seminars, in an overwhelming
majority, are seeking, as their true objective, something more than just a
succession of images transferred electronically.
Nevertheless,
that “something more,” the true objective, must be an exempt service, with the
digital good being incidental to it, for the On-Demand Seminars to be exempt
from tax. If the service provided is not an exempt service, even if the service
is the true objective, the whole will be subject to the sales tax. If there is
no service, then it is just a taxable digital good, unless another exemption
applies.
In
the context of the True Objective Test, the Department claims that no “service”
is purchased. The Department claims that any service was “performed” in the
past (at the time of the presentation of the “Live Seminar”) and there is
nothing additional that rises to the level of an educational service being
purchased “along with” the digital good.
The Department asserts that the term “along with” in the Administrative
Code means that the service and the tangible personal property or digital good
must be transferred at the same moment in time. Nothing in the statutes, or the
rule, requires this type of time-element reading.
The majority of the activity of the service may have
happened in the past, but the service may be ongoing under the particular facts
of the matter. In Cannon & Dunphy, S.C., the medical procedure or
recording of medical information had already occurred prior to the request for
and provision of the paper copies in that case. The information related to a medical
care service can only be recorded prior to the copies being made. Copies of
that information, especially for use in later litigation, will almost always be
sought long after a medical procedure is completed (“performed”), and the
medical information recorded. The services of medical care and recording of
medical information were not done in a single transaction. The provision of the
later paper copies of the recorded information may come long after the medical
procedure is completed, and the information recorded. A service may be an
ongoing process over time. Therefore, in Cannon & Dunphy, S.C., the exempt
service was still provided “along with” the later produced copies as part of a larger,
ongoing process of a medical care service. Here, while the actual live lecture
was completed at a particular time, the service is an ongoing process and is more than just the
recording. The service includes the recordkeeping and compliance with the rules
set forth for On-Demand Seminars by the BBE and Supreme Court so that the CLE carries
credit eligibility. These CLE seminars are presented
in various formats, at different times and places, but are still all continuing
legal education, which is, in this case, an exempt educational service.
In the context of educational services, the CLEs in their
various approved formats are educational programs that accomplish the
eligibility to receive credit under the Supreme Court Rules and maintain good
standing. The
Department argues that the format of the program offered does matter by
equating the On-Demand Seminars with pre-recorded videos that, for example,
teach knitting or the reading of a textbook on advanced biology. In the
hypothetical situations posed, the knitting video and the textbook may well be
educational in nature, but the Department asserts they are not an educational
“service.”
We
understand the Department’s concern. For example, even some purely
entertainment videos may be educational to some extent. Young teenagers, who
find their way to stream an explicit “for mature audiences only” movie on
Netflix may receive information and a premature education in anatomy, but they
cannot be said to have purchased an educational “service” merely because they
learned something. Here, though, there is an actual educational service that,
through the overall program, ultimately accomplishes the eligibility for
Supreme Court mandated credits and education and competence of the members of
the legal bar.
The
Department contends that the utilization of the On-Demand Seminar is merely
“self-study.” The Department relies on a quote from the BBE Petition before the
Supreme Court for approval of On-Demand Seminars for CLE credit, which states,
“On-demand programs represent a close approach to self-study, which is
not permitted in Wisconsin (nor most states with mandatory CLE).” (Emphasis
added) (Resp. Reply Brief, Appendix A.) The Department fixes on the words
“self-study” to equate the On-Demand Seminars with a knitting instructional
video. While quoting the language of the BBE Petition, the Department ignores
the qualifying language “a close approach” in front of “self-study” and the
fact that the CLE programs include more than just a video, but also include the
overall package that, among other things, includes the compliance with
additional SCR rules, documentation, ability to ask questions of the
instructor, and other checks and approvals generally not available with a
simple self-study video.
Further,
the Supreme Court has approved the (vast majority of) On-Demand Seminars as CLE
programs beyond being merely self-study. With rules, limits, certifications,
and earned credits, these programs are more than “self-study.” Lawyers are not
purchasing just a “series of related images that, when shown in succession,
impart an impression of motion, along with accompanying sounds, if any, and
that are transferred electronically,” as asserted by the Department. These On-Demand
Seminars are specifically approved by the Supreme Court as continuing legal
education for which credit may be earned, along with accreditation, regulatory
compliance, and record keeping, to accomplish the goals of accrual of credit,
legal competence, and the ability to maintain good standing with his or her law
license.
The
Department’s concern is that any book or DVD, or other type of property or good,
could be claimed to be an educational service if it provides information that
can possibly educate a person on a topic. We agree that merely buying a book or
video (in whatever form) would not, alone, be an educational service. The
petition to the Supreme Court for the adoption of credit for On-Demand Seminars
made a distinction between “self-study” and the On-Demand Seminars. Self-study
is still not eligible for CLE credit in Wisconsin based upon the BBE Petition
as approved by the Supreme Court. The On-Demand Seminars, as approved, are not
self-study.
After
the tax years at issue here, the Department attempted to develop rules or
criteria, that must be met to show that a digital good comes along with the
performance of a service for On-Demand Seminars.[12] Even if these rules were
applicable here, these criteria are very arbitrary and non-inclusive of those
things which might be indicia of an educational service.
As
we stated in Canon & Dunphy, the overall transaction must be considered.
The True Objective Test views the transaction from the perspective of the
purchaser. The Department’s subsequent, arbitrary litmus tests fail to do
either; they focus on a small subset of possible factors and do not consider,
from the perspective of the purchaser, what the buyer is trying to obtain.
The
Department also cites to Wis. Stat. § 227.10(2m) (2017-2018) for the
proposition that the Commission cannot set “standards” or “requirements.”[13] The Commission, however,
has been given a specific grant of authority in Wis. Stat. § 73.01(4)(a) to be
“the final authority for the hearing and determination of all questions of law
and fact“ under the specified tax statutes. Nevertheless, the Commission is not
setting any specific new standard in this matter. The True Objective Test, as
written into the Administrative Code, applies here. It is a doctrine of long
standing. That test should be applied from the perspective of the purchaser and
should consider the overall transaction, essentially the totality of the
circumstances. This has been the standard long before this present case. Viewing
the stipulated and uncontroverted material facts of this matter in relation to
the True Objective Test, we find that the true objective of the purchasers of
the On-Demand Seminars was to obtain an educational service, with the digital
good being incidental to that service.
We
also note that the Department, in a throw-everything-against-the-wall-to-see-what-sticks
method of brief writing, alleges that the Commission might commit a constitutional
violation if the Commission were to find that some digital goods were exempt,
while others were not, based upon content, such as educational content versus
entertainment content. For this proposition, the Department cites Arkansas
Writer’s Project, Inc. v. Ragland, 481 U.S. 221, 230 (1987), which
determined that Arkansas could not tax magazines differently based upon
content, such as a sports magazine being taxed but a religious magazine not
being taxed, favoring one type of content over another.
In
this matter, the Commission does no such thing. We determine that the True
Objective of the purchaser is to obtain a tax-exempt educational service with
the digital good being incidental to the service. As the educational service is
not taxed under the statutes, the On-Demand Seminars are not taxed. We do not
make a determination that the digital good itself is not taxed due to its
content; rather we determine that the digital good is incidental to the
non-taxed service.
Ultimately,
there is no definition in the tax code for “educational service.” We do not
create one. These determinations will continue to be fact based. Here, legitimate
earned credit as determined by a branch of state government, is a strong
indicator that there is an educational service and that obtaining the service
is the true objective of the purchaser.
Based
upon the facts, we find that the On-Demand Seminars were an educational service,
and the true objective of the purchasers of On-Demand Seminars was to obtain an
educational service. The digital good was incidental to the purchase of that service.
The root and essence of the transaction, considering the big picture from the
perspective of the purchaser, is the purchase of an exempt educational service
rather than merely the purchase of a digital good. The digital good is
incidental to the performance of an exempt service.
CONCLUSIONS OF LAW
1.
No
issues of material fact exist, so this matter is ripe for summary judgment.
2.
The
Live Seminars are not tangible forms of the On-Demand Seminars; on that basis, the
On-Demand Seminars are not exempt under Wis. Stat. § 77.54(50).
3.
The
true objective of the purchasers of the On-Demand Seminars is to obtain the
educational service provided, not merely to obtain a digital good.
4.
The
sale of the On-Demand seminars is the sale of a service, with the digital good
being incidental to the performed service.
5.
The
sales of the On-Demand Seminars are exempt under the True Objective Test.
ORDER
The Petitioner’s
Motion for Summary Judgment is granted, and the Department’s Motion for Summary
judgment is denied.
Dated at Madison,
Wisconsin, this 20th day of September, 2019.
Elizabeth
Kessler, Chair
Lorna
Hemp Boll, Commissioner
__________________________________________
David
L. Coon, Commissioner
ATTACHMENT: NOTICE OF APPEAL INFORMATION
[1] Attorneys John T. Barry and Gregory
Lohmeyer, Quarles & Brady, LLP, also previously represented Petitioner.
[2] Attorney Julie A. Zimmer also
previously represented Respondent.
[3] Petitioner did pay sales tax on some
transactions unrelated to the various CLE formats in this matter. Those
payments are not relevant to the issues here.
[4] Unless otherwise noted, all statutory citations are to Wisconsin Statutes (2011-2012).
[5] Petitioner also pointed out that,
with a possible exception or two, there are no DVD versions of the On-Demand
Seminars produced.
[6] Respondent’s Supplemental Brief, p.
8.
[7] The Department agrees that these
transactions were not bundled transactions and were not transactions to which
Wis. Stat. § 77.52(2m)(b)
applied. (Respondent Brief, p. 6, fn 14).
[8] In Janesville, the issue was
the true objective between taxable tangible property represented by computer
punch cards, tapes, or printouts versus the intangible, and the, at the time
non-taxable, data contained on the punch cards. With the adoption of the
digital goods statute, there may well be a different result in Janesville.
The True Objective Test, though, is, as seen in the Administrative Code above,
applicable where a non-taxable service is the true objective and the digital
good is incidental to that service.
[9] Affidavit of Julie Zimmer, Attorney
for Wisconsin Department of Revenue, ¶ 3, Ex. 2.
[10] Affidavit of Timothy A. Clark, State
Bar of Wisconsin Seminars Division Manager, ¶ 11.
[11] Nothing in this decision should be construed to say that merely having some sort of “credit” attached means that there is automatically a service involved. It is possible that the “credit” offered may be a sham, for example. Where there is accreditation and credit or credit eligibility, especially from a organizations such as the Supreme Court of Wisconsin and the Board of Bar Examiners, that should be a good indicator, though, that the essence and root of the transaction may be something more than just the purchase of personal property or digital good, that the transaction is for a service instead.
[12] Sales Tax Treatment of Educational
Products, Goods, and Services – Updated, https://www.revenue.wi.gov/Pages/TaxPro/2016/news-2016-160407.aspx.
Last visited September 17, 2019.
[13] “No agency may implement or enforce
any standard, requirement, or threshold, including as a term or condition of
any license issued by the agency, unless that standard, requirement, or
threshold is explicitly required or explicitly permitted by statute or by a
rule that has been promulgated in compliance with this subchapter.” Wis. Stat.
§ 227.10(2m).