Wisconsin Tax Appeals Commission Docket No. 01-S-72

STATE OF WISCONSIN

TAX APPEALS COMMISSION

MENASHA CORPORATION

P.O. Box 0367

Neenah, WI 54957-0367,

Petitioner,

vs.

WISCONSIN DEPARTMENT OF REVENUE

P.O. Box 8907

Madison, WI 53708-8907,

Respondent.

DOCKET NO. 01-S-72

RULING AND ORDER

DON M. MILLIS, COMMISSION CHAIRPERSON:

This matter comes before the Commission on cross-motions for summary judgment. Both parties have submitted supporting papers and briefs with respect to the motions. Petitioner is represented by Foley & Lardner, by Attorneys Leonard S. Sosnowski, Maureen A. McGinnity, and Andrew L. Nelson. Respondent is represented by Attorney Robert C. Stellick, Jr.

Based upon the submissions of the parties and the entire record in this matter, the Commission hereby rules and orders as follows:

SUMMARY OF UNDISPUTED MATERIAL FACTS

Effective Stipulation

This section of the facts--Effective Stipulation--contains the Undisputed Material Facts as agreed to by the parties. Along with its motion for summary judgment, petitioner filed its proposed Undisputed Material Facts and supporting papers. In its initial response brief, respondent addressed each of the Undisputed Material Facts proposed by petitioner. Respondent accepted the overwhelming majority of petitioner's proposed Undisputed Material Facts, noted those particular factual assertions with which respondent disagreed, and offered its own supporting papers in furtherance of its position.

Where the parties agree, there is an effective stipulation of facts. Where there is a material disagreement, the Commission has reviewed the submissions of the parties and has made the alterations it deemed appropriate. The resolution of these disagreements is described in detail in the Ruling.⁽¹⁾ The Commission, however, has been careful not to weigh the competing submissions of the parties. Rather, the Commission has sought to determine whether the submissions of the parties present competing inferences.

Jurisdictional Facts

1. On June 30, 1998, petitioner timely filed a refund claim in the amount of $342,614.45 in use tax paid on its acquisition of the SAP R/3 computer software system ("R/3 System") and payment of maintenance fees to SAP in 1996, 1997, and 1998.

2. On April 28, 1999, respondent denied petitioner's refund claim. On June 24, 1999, petitioner timely filed a petition for redetermination objecting to respondent's denial of its refund claim. On March 1, 2001, respondent denied petitioner's petition for redetermination. On April 27, 2001, petitioner timely filed a petition for review with the Commission.

Petitioner's Business

3. Petitioner is a Wisconsin corporation with its business headquarters located in Neenah, Wisconsin. Petitioner has more than 5,700 employees and maintains 63 business locations in 20 states and eight countries.

4. Through its subsidiaries, petitioner provides products to a variety of industries, including packaging and paperboard, material handling, plastics, promotions, and printing. In 2001, petitioner generated net sales of approximately $1 billion.

R/3 System

5. SAP is a German company founded in 1972 and is one of the world's largest designers of integrated business application computer software.

6. The R/3 System--the software at issue in this case--consists of more than 70 software modules. Each module is designed to provide a rudimentary business and accounting computer software system for a segment of a client's business. For example, there is a module that focuses on accounting and finance, another on personnel, another on materials management and logistics. Licensees of the R/3 System select which modules they wish to use.

7. SAP provides its clients with CD-ROMs containing all the modules of the R/3 System. It supplies access codes to allow its clients to download the modules the client licenses for its particular business operations.

8. As provided, the basic modules of the R/3 System contain a business and accounting system that must be customized to fit a client's business operations. It is only after this customization process is completed that the client has a usable software system that will serve its business and accounting needs.

9. The main tool for customizing the R/3 System is the use of a computer language called ABAP/4. ABAP--an acronym for Advanced Business Application Programming--is the programming language used by SAP developers to build the basic modules that make up the R/3 System, and is also used to customize the R/3 System to fit a particular customer's business.

10. The two most common uses for ABAP are to permit the design of custom reports and to develop custom interfaces for the R/3 System. For example, a report produced by the R/3 System is customized by modifying the ABAP program within the R/3 System that reads specific data from the system's information database and then displays the data using a computer screen which may be printed out.

11. A custom interface, sometimes called a user exit, is an ABAP language program that (1) moves external data into the R/3 System to be included in the system's information database, or (2) reads data from the system, writes it to a computer file, and then transfers that file to an external computer system, where the data can be manipulated before being returned to the R/3 System.

12. Other uses for ABAP programming include the creation of conversion programs that change data into a format usable by the R/3 System, and the creation of custom programs to run parallel to the R/3 System to fulfill business functions not provided by the R/3 System.

13. ABAP programming is part of a larger development environment within the R/3 System called the Development Workbench, which offers many tools for customizing the R/3 System to fit a customer's business needs.

14. Within the Development Workbench, SAPScript is used to create client-specific forms such as invoices, purchase orders, and order acknowledgments. DDIC--an acronym for Data Dictionary Objects--is used for changing and adding fields to tables provided by the basic R/3 System modules to meet a customer's specific business needs. DDIC is also used to create search helps, e.g., table value lookups, and to create indices to make table access times more efficient (e.g., performance related changes).

15. As part of the licensing of the R/3 System, SAP's customers almost always retain either SAP or SAP's designated consultants to assist in the use of the Development Workbench and to perform ABAP programming to customize the basic R/3 System modules to their businesses.

Presale Consultation and Analysis

16. In early 1993, petitioner hired an independent consultant, the accounting firm KPMG, to evaluate petitioner's business and accounting software systems. At that time, each of petitioner's subsidiaries had its own unique software system.

17. Petitioner's goal was to address shortcomings in its systems, including, (1) poor integration between systems within its subsidiaries, making it difficult to analyze data and implement strategic initiatives, (2) a low level of sophistication in functional capabilities, (3) labor-intensive processes to perform day-to-day activities, (4) inconsistent definitions of common data, making it difficult to achieve meaningful comparison, and (5) the requirement to support multiple technologies, which put undue pressure on petitioner's information system staff.

18. Petitioner, therefore, sought a business application software system that would accommodate its special processing needs. Specifically, petitioner needed a software system that would (1) address flexibility and customer support requirements while attempting to maximize process simplification, economies of scale, and uniformity objectives, (2) result in a solution that addressed the diverse ways in which petitioner did business while maintaining a common database, and (3) be easily customized to handle the unique requirements and needs of its subsidiaries.

19. KPMG reviewed all of petitioner's then current software systems and recommended in December 1993 that petitioner standardize its systems by implementing a single business software environment to serve as the foundation information system for all of petitioner's business locations. KPMG also recommended that petitioner conduct a feasibility study to determine if a software system was available that could integrate all of petitioner's subsidiaries.

20. On July 29, 1994, petitioner began its feasibility study. Petitioner hired Andersen Consulting, based in Milwaukee, to assist in reviewing the computer-based business systems that were then available.

21. In November 1994, Andersen Consulting concluded that a change from multiple systems to one global application software system was feasible for petitioner. However, this conclusion was predicated on locating a software system which would allow custom modification to meet petitioner's unique business requirements.

22. Over a period of five months, petitioner worked with Andersen Consulting to identify available application software systems that were adaptable to petitioner's business needs. Andersen Consulting provided petitioner with detailed reviews of the software systems available, then compared the advantages and disadvantages of each system. Petitioner and Andersen Consulting evaluated numerous vendors. The field of potential vendors was eventually narrowed to SAP and BAAN--a Dutch company--since the systems provided by these two vendors were the only ones that provided the flexibility and customization required by petitioner.

23. Petitioner paid Andersen Consulting more than $1.2 million for its services.

Licensing the R/3 System

24. In April 1995, petitioner initiated discussions with SAP concerning its R/3 System. Petitioner made it clear to SAP that a critical factor in its selection of a software system was one that could be customized to fit its business needs.

25. On April 20, 1995, SAP conducted a demonstration of its R/3 System for petitioner at SAP's offices in Minneapolis. Consistent with petitioner's requirements, the agenda for the demonstration included as a priority, "Customize with Minimal Retrofitting." SAP was involved in the overall implementation strategy, including training and project planning of the system.

26. Following SAP's initial demonstrations, petitioner requested that SAP demonstrate the R/3 System using sample data from petitioner's operations to allow petitioner to better evaluate its functionality. In May 1995, petitioner provided SAP representatives with sample data representative of some of petitioner's business operations and asked SAP to prepare the demonstration.

27. Prior to preparing the demonstration, SAP representatives spent several days at the company to collect information about petitioner's business operations, and had extended conversations with petitioner's officers and employees concerning petitioner's diverse operations. It took SAP four weeks to prepare a sample demonstration for petitioner. The demonstration was finally presented in mid-June 1995.

28. Following SAP's demonstration using petitioner's sample data, petitioner requested from SAP additional explanations and clarifications on the modification tools and techniques available within the R/3 System. Petitioner also requested a demonstration of the ABAP programming tools used to make modifications to the system. These demonstrations were performed in July and September in 1995.

29. Petitioner understood, prior to licensing the R/3 System, that the customization process could take years to complete and would cost tens of millions of dollars, and petitioner's budget for the purchase of the R/3 System included the amounts it expected to pay to SAP and SAP's designated consultants for the configuration, modification, and customization of the system. Petitioner also understood prior to its licensing of the R/3 System that, without this customization, the system would be of no value to its operations. The customization was necessary to justify any amount spent on the licensing of the basic R/3 System modules.

30. On Sept. 14, 1995, petitioner's Board of Directors approved the license of the R/3 System from SAP. In making its decision, the Board of Directors acknowledged that "the projected cost for implementation of the system would be approximately $46,575,000."

Installation and Customization of the R/3 System

31. During the time SAP was demonstrating its R/3 System to petitioner, it advised petitioner that, due to the inherent complexity of the system and substantial customization that would be required to make the R/3 System usable in petitioner's unique business operations, petitioner would be required to retain either (1) SAP consultants or (2) consultants designated by SAP and included on a list of SAP certified consulting partners or "logo" partners to implement the R/3 System with the custom features required by petitioner. SAP subsequently advised petitioner that it was unable to supply all the consultants necessary for the installation and customization of petitioner's R/3 System, so petitioner would have to work with one of SAP's logo partners.

32. In August and September 1995, petitioner interviewed several of SAP's recommended logo partners. In late September 1995, petitioner selected ICS Deloitte, a division of the accounting firm Deloitte & Touche, as its SAP logo partner.

33. At the time of its selection, ICS Deloitte maintained the largest SAP consulting practice in North America. ICS Deloitte was recognized by SAP as a global logo partner and was a SAP Award of Excellence recipient. In addition, ICS Deloitte's proposals stressed the importance of working in partnership with SAP during the implementation of the system.

34. On Sept. 27, 1995, petitioner entered into an agreement to license the R/3 System. The license agreement contained no provision for customization of the R/3 System by SAP.

35. From September 1995 to March 1996, petitioner worked with SAP and ICS Deloitte to (1) analyze petitioner's systems, (2) prepare petitioner's hardware for the installation of the R/3 System, and (3) begin introducing petitioner's technology team to the intricacies of customizing the R/3 System. During this period, petitioner rented computer hardware similar to the computer hardware it planned to purchase when it installed the R/3 System, and had an outside consultant, Symmetry Systems, download sample R/3 System modules provided by SAP onto this rented hardware so that members of petitioner's technology team could begin familiarizing themselves with the R/3 System.

36. During this pre-installation period, SAP representatives provided training and other support to petitioner's information systems staff as petitioner prepared for the installation of the base modules of the R/3 System. Included in the services provided by SAP were: (1) providing a single point of contact for all questions, concerns, and communications, (2) keeping abreast of the project plans and status, (3) providing SAP issue resolution and escalation, (4) providing input as an implementation consultant, (5) scheduling of professional services from SAP, (6) assisting in the creation of training curriculum for the project team members, (7) assisting project management with planning and execution of the project plans, and (8) communicating SAP product information.

37. The R/3 System was delivered to petitioner on multiple CD- ROM disks. Petitioner began its initial installation of the R/3 System on March 25, 1996, and completed downloading the basic system modules on March 27, 1996.

38. The R/3 System was loaded onto newly purchased computer hardware that was not attached to petitioner's other business systems. The system was loaded by Frank Loiseaux-Purcell, a former employee of SAP whom petitioner retained for the specific purpose of providing support in the initial installation of the system. During the initial installation of the system, Mr. Loiseaux-Purcell had access to SAP's online support system and was able to obtain an immediate response to questions regarding loading the program onto petitioner's hardware.

39. As delivered, the R/3 System provided processing which was not adequate for petitioner's usage. Employees from each of petitioner's subsidiaries were designated as members of an implementation team, which also included petitioner's information support personnel, SAP representatives, ICS Deliotte representatives, and third party consultants. The members of the implementation team worked under the direction of SAP and ICS Deloitte to determine the operational and functional needs of each of petitioner's subsidiaries in order to configure and customize the basic modules of the R/3 System to fit the needs of each subsidiary.

40. The implementation team worked to configure and modify the R/3 System through manipulation of the ABAP code imbedded in the base modules to adapt the system to each subsidiary's identified needs. If the implementation team was unable to achieve its desired results through configuration and manipulation of the basic system modules, it would send the identified functional gap to the ABAP programming team. The programming team's job was to draft ABAP code to fill these functional gaps or to integrate the R/3 System with other systems which could provide the functionality required by the subsidiary.

41. The ABAP programming team was also directed by SAP and ICS Deloitte, and included people from petitioner's information support staff and third-party consultants. Petitioner contracted with SAP to provide an on-site programmer, James Kammerer, who became a member of the Poly Hi Solidur⁽²⁾ ABAP programming team and worked side-by-side with petitioner's employees to provide programming fixes to petitioner's R/3 System.

42. From March 27, 1996 to January 1, 1997, the implementation and ABAP programming teams worked to customize the R/3 System to meet petitioner's functional needs. As functional gaps were identified, the ABAP programming team determined whether the gap required any custom interface, sometimes called a user exit, or required a whole new subsystem to be created to run parallel with the R/3 System or some other type of fix.

43. During this time, the ABAP programming team created codes for hundreds of user exits to the R/3 System to integrate external programs with the R/3 System. The primary function of these user exits was to transfer data from petitioner's R/3 System to independent programs where data can be manipulated before being returned to the R/3 System. Only through the integration of these independent programs with the R/3 System was petitioner able to realize the functionality that was needed for its unique business while preserving the functional efficiencies of the R/3 System.

44. In addition to the creation of user exits, the ABAP programming team created new subsystems to run parallel to the R/3 System for operations that were not available within the R/3 System, but were critical to petitioner's business. For example, the ABAP programming team created a new source code to provide for the integration of estimating and conversion systems within the R/3 System. This new code was created using the same computer language and format--ABAP--used in the R/3 System, and became an integral part of petitioner's R/3 System.

45. The ABAP programming team also customized fields and reports within the R/3 System to insure it produced output that would be useful to petitioner's business. This customization also required writing of ABAP code.

46. More than 3,000 modifications were made to petitioner's R/3 System by the implementation and programming teams.

47. Throughout the installation and customization of petitioner's R/3 System, SAP representatives provided both off-site and on-site technical and functional support to petitioner directly and through ICS Deloitte. SAP consultants served on the ABAP programming team and performed ABAP programming to customize the R/3 System to petitioner's business.

48. SAP also provided petitioner with patches to its R/3 System to correct functional gaps identified during implementation that could not be handled by the ABAP programming team. Some of these patches included new source code written specifically for petitioner's system, to address the shortfalls of the R/3 System as it applied to petitioner's business. These patches replaced the source code of the original system modules.

Testing the R/3 System

49. Once the customization of the R/3 System for petitioner's business was complete, petitioner worked with SAP and ICS Deloitte to test the R/3 System to insure it met petitioner's operational requirements. This testing lasted for three to four months, ending on January 1, 1997, when the system went online at the first of petitioner's subsidiaries.

50. This preliminary testing of the customized R/3 System focused on running real data through the system to determine whether it was operational in accordance with petitioner's required specifications. During this process, SAP representatives provided off-site and on-site technical support to petitioner's information support staff, both directly and through ICS Delloitte, and assisted in trouble-shooting any problems that arose during the testing.

Training

51. Once petitioner was satisfied the customized R/3 System met its operational specifications, it began training its employees on how to use the system. All employees who worked in subsidiaries that were going to use the R/3 System were required to attend two- to five-day classes provided by ICS Deloitte and petitioner's information support staff. The training focused on teaching employees how to use petitioner's R/3 System in the performance on their day-to-day job duties, in addition to educating them on the increased information that could be accessed from petitioner's R/3 System. Personnel on petitioner's information support staff were required to attend additional training classes focused on the intricacies of maintaining the system and making modifications to trouble-shoot problems that could occur when the system went live.

52. Petitioner's information support staff and ICS Deloitte prepared extensive written materials to assist in the training of petitioner's employees. Because of the significant customization of petitioner's R/3 System, SAP was unable to provide these materials. SAP did provide petitioner and ICS Deloitte with extensive materials focused on the running and maintenance of the R/3 System.

53. Approximately 1,000 employees of petitioner were trained on the R/3 System. Petitioner estimates approximately 4,000 hours of employee time were spent by employees on training for petitioner's R/3 System.

Bringing the R/3 System Online

54. The final step in the implementation of the R/3 System was bringing the system online or live. To make the switch from its old systems to the R/3 System, petitioner was required to select a cut-off date for its old systems and painstakingly convert all its old data to the system. This process took approximately four weeks. During this time, SAP representatives and ICS Deloitte provided support to petitioner's employees and assisted petitioner in solving any operational problems that occurred.

55. Petitioner elected to implement the R/3 System one subsidiary at a time. This subsidiary-by-subsidiary implementation plan reflected the fact that the R/3 System required further customization for each subsidiary's operations. Each subsidiary's version of the R/3 System was uniquely tailored to its needs, but was integrated with the system as a whole to allow global review of information.

56. The implementation team selected Orbis Corporation--one of petitioner's subsidiaries--as the first subsidiary to go live with the R/3 System on January 1, 1997.

57. The implementation and programming teams then worked on going live with the R/3 System at petitioner's other subsidiaries. The implementation of the R/3 System is an ongoing project for petitioner and has spanned nearly seven years.

58. The installation and customization of petitioner's R/3 System has cost petitioner more than $23 million, of which only $5.2 million was for the core R/3 System. Petitioner paid the following amounts to customize the system to petitioner's business: (1) SAP $2.5 million, (2) ICS approximately $13 million, and (3) third-party consultants approximately $775,000.

59. At least 23 different SAP consultants were involved in the on-site installation and implementation of petitioner's R/3 System. SAP consultants provided petitioner with assistance in the following areas: programming, configuration, training, and testing.

60. Approximately 40 to 50 of petitioner's employees have worked full-time on the implementation of the R/3 System.

61. The modifications required to implement the system for Orbis Corporation alone took nine months to complete and cost petitioner $7.7 million in consulting fees.

62. Petitioner pays SAP a continuing maintenance fee for technical support, upgrades, new releases, and patches to its customized R/3 System. This maintenance fee averages $975,000 per year.

63. Due to the inherent complexity of the R/3 System and the significant modifications made to customize petitioner's R/3 System, petitioner is in contact with SAP an average of two to three times each week with questions. The assistance is provided through SAP's online web site or through telephone calls made by petitioner's information support staff directly to SAP representatives.

64. SAP provides petitioner with upgrades, new releases, and patches to the R/3 System on at least a quarterly basis. These upgrades, new releases, and patches are provided through CD-ROM discs sent to petitioner. As each upgrade and new release is implemented, significant reconfiguration may be required because of the unique characteristics of petitioner's system. SAP representatives work with petitioner's information support staff on an ongoing basis to solve any configuration problems that may result from these changes.

Audit of SAP

Respondent offered the following Undisputed Material Facts as they relate to its audit of SAP in 1998.

65. During 1998, respondent audited the American subsidiary of SAP for liability under Wisconsin's sales and use taxes for the period 1991 through 1997.

66. In the course of the audit, SAP and respondent agreed that SAP's sales of R/3 software in Wisconsin were subject to Wisconsin's sales tax as sales of noncustom software. Respondent reached this determination for the following reasons:

1. That the R/3 sales were "off-the-shelf" standardized software, in that the program was written before the time of the sale and intended to be sold to a wide variety of customers;
2. That SAP does not modify the existing software modules before shipment of such modules to customers;
3. That SAP delivered existing R/3 software modules to all customers without regard of the particular modules each customer actually contracted to purchase;
4. That SAP delivered "keys" to the customer that would unlock the particular modules the customer purchased from all the R/3 software modules delivered to the purchaser:
5. That, while the R/3 software had development tools, such as ABAP/4, included with each R/3 System allowing the customer to add enhancements, known as user exits, to the R/3 software system to meet each customer's unique needs, such new software did not change the R/3 source code; instead, enhancements were a layer of software added to the installed programming purchased from SAP;
6. That the process of implementing the original base modules to the customer's unique needs is complex and can be very lengthy;
7. That the implementation process generally includes: (a) selecting available functionality, (b) making decisions regarding potential combination of sets of existing options, (c) creating new functionality with built-in "script" tools, (d) converting data to the new format, (e) populating tables or databases with corrected values, (f) initializing existing array subscripts, (g) project management, (h) training and documentation, (i) writing of new user exits and new interfaces with built-in programming tools, and (j) testing;
8. That it is rare for a customer to implement the system on their own, yet it has been done;
9. That the customer has the option to hire SAP consultants, or SAP approved independent consultants, i.e., logo partners, to assist in the implementation process;
10. That SAP's business practice is to distinguish between the sale of the R/3 core program and its associated maintenance to a given customer, from the sale of consulting services, if any, to the same customer; accordingly, SAP keeps the licensing and maintenance agreement separate for many contracts and/or agreements for consulting services;
11. That SAP's involvement in the sale of R/3 software modules to petitioner was routine in nature and similar to the circumstances of its other R/3 sales; and in each case, SAP agreed that the sale was of noncustom software and SAP agreed to pay the tax;
12. That when SAP releases software upgrades, routine maintenance updates, and patches, the releases are general in nature, intended for all customers, and intended to affect only the original unchanged programs, not the added layer of customer specific, user exit type program code;
13. If any changes to customer-specific functionality and user exit type programs are required, i.e., due to a general SAP update or otherwise, it is the customer's responsibility to make such changes.

67. As a consequence of the agreement by SAP that sales of the R/3 program modules were taxable, SAP paid respondent more than $1.9 million in tax and interest for sales to Wisconsin customers and agreed to collect sales and use tax thereafter. This figure did not include sales to petitioner here at issue, in that petitioner provided SAP with a statement that petitioner would directly pay the sales tax, which petitioner did. Thereafter, petitioner filed a claim for refund for the same, and this litigation ensued.

Partial Settlement

68. During the briefing of these cross-motions, the parties entered into a settlement as to the taxation of maintenance fees, and the Commission entered an Order in accordance with the settlement on June 4, 2003.

APPLICABLE LAW

Wisconsin Statutes

77.51(20) "Tangible personal property" means all tangible personal property of every kind and description and includes electricity, natural gas, steam and water and also leased property affixed to realty if the lessor has the right to remove the property upon breach or termination of the lease agreement, unless the lessor of the property is also the lessor of the realty to which the property is affixed. "Tangible personal property" also includes coins and stamps of the United States sold or traded as collectors' items above their face value and computer programs except custom computer programs.

Wisconsin Administrative Code

TAX 11.71(1)

(e) "Custom programs" mean utility and application software which accommodate the special processing needs of the customer. The determination of whether a program is a custom program shall be based upon all the facts and circumstances, including the following:
1. The extent to which the vendor or independent consultant engages in significant presale consultation and analysis of the user's requirements and system.
2. Whether the program is loaded into the customer's computer by the vendor and the extent to which the installed program must be tested against the program's specifications.
3. The extent to which the use of the software requires substantial training of the customer's personnel and substantial written documentation.
4. The extent to which the enhancement and maintenance support by the vendor is needed for continued usefulness.
5. There is a rebuttable presumption that any program with a cost of $10,000 or less is not a custom program.
6. Custom programs do not include basic operational programs or prewritten programs.
7. If an existing program is selected for modification, there must be a significant modification of that program by the vendor so that it may be used in the customer's specific hardware and software environment.

* * *

(k) "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.

CONCLUSIONS OF LAW

1. There is no genuine issue of material fact, and this matter is appropriate for summary judgment as a matter of law.

2. The R/3 System, as licensed by petitioner, is a custom program because of the significant investment petitioner made in presale consultation and analysis, testing, training, written documentation, enhancement, and maintenance support, and because it is not a prewritten program; therefore, it is exempt from the sales and use tax. Wis. Stat. § 77.51.(20); § TAX 11.71(1)(e) and (k), Wis. Admin. Code.

RULING

Procedural Posture

Burdens

Ordinarily, petitioner bears the burden of showing by clear and competent evidence that the determination of respondent is incorrect. Woller v. Dep't of Taxation, 35 Wis. 2d 227, 232 (1967). However, because this matter is before the Commission on cross-motions for summary judgment, neither party will prevail unless it demonstrates that it is entitled to summary judgment as a matter of law. Grams v. Boss, 97 Wis. 2d 332, 338-39 (1980).

Exemption Statute

Petitioner argues that section 77.51(20) of the Statutes is not an exemption statute. Section 77.51(20) is the definition of "tangible personal property," a crucial definition in Wisconsin's sales and use tax scheme. The last clause of the last sentence of this statute specifies the degree to which computer programs are to be included within the definition of tangible personal property: "computer programs except custom computer programs."

If there were a separately numbered subsection that excluded custom computer programs from the definition of tangible personal property, such a subsection would clearly be an exemption statute. In fact, the drafting instructions from respondent to the Legislative Reference Bureau include the direction to "[c]reate an exemption for custom programs in sec. 77.54, Wis. Stats." Section 77.54 contains the bulk of the exemptions to the sales and use tax. Rather than comply with respondent's instructions, the Legislative Reference Bureau drafted the bill to insert this exemption within the definition of tangible personal property. Whether set off in its own section or included within the definition of tangible personal property, the language at issue has the same effect. To conclude that the provision at issue in this case is not an exemption statute would elevate form over substance. Therefore, the Commission concludes that the portion of the statute at issue is an exemption statute.

Factual Disagreements

Along with its motion for summary judgment, petitioner submitted its proposed Undisputed Material Facts. In its response, respondent agreed with the bulk of petitioner's Undisputed Material Facts, and submitted additional proposed Undisputed Material Facts. With respect to those Undisputed Material Facts where the parties agree, the Commission treats this agreement as a stipulation of facts. Where the parties have material differences, the Commission addresses each difference seriatim.

Characteristics of R/3 Modules

The parties disagree over the best way to characterize the sophistication of the R/3 System modules that are provided to all R/3 System licensees in Undisputed Material Fact 8.⁽³⁾ Petitioner argues that the R/3 System basic models provide "only a very basic" business and accounting system. Respondent argues that these modules provide "a sophisticated" business and accounting system.⁽⁴⁾ Respondent cites excerpts from two treatises on implementing the R/3 System to argue the modules provide a sophisticated business and accounting system.⁽⁵⁾ However, the excerpts cited by respondent appear to describe the overall R/3 System and do not specifically address the R/3 System modules. Nevertheless, the Commission concludes that the degree of sophistication of the modules is largely immaterial because both parties agree that the R/3 System modules are only usable once the software system has been customized.⁽⁶⁾ Therefore, Undisputed Material Fact 8 omits reference to the sophistication of the R/3 System modules.

Characteristics of ABAP

The parties also disagree about the precise characterization of ABAP in Undisputed Material Fact 9. Petitioner described ABAP as: "The heart of the R/3 System is convenient 'customizing' methods, primarily a computer language called 'ABAP.'" Respondent describes ABAP as: "The primary tailoring school in the R/3 System is a computer language called ABAP." Respondent relies upon one of the treatises referred to in the previous paragraph above, as well as a CD-ROM provided by petitioner in discovery, to support its characterization. However, the excerpts cited by respondent do not support the wording it champions. On the other hand, the language at issue offered by petitioner is not supported by the affidavit cited by petitioner. Therefore, the Commission has employed the precise language from the affidavit offered by petitioner for Undisputed Material Fact 9.

Modifying vs. Using the ABAP Program

The parties disagree about the characterization of the way the ABAP program is used within the R/3 System as described in Undisputed Material Fact 10. Petitioner argues that the R/3 System is customized "by modifying" the ABAP program. Respondent argues that the R/3 System is customized "by using" the ABAP program. Respondent relies upon the same treatise and documentation provided by petitioner that was at issue in Undisputed Material Fact 8. However, none of the excerpts offered by respondent support its assertion that the ABAP program is used, not modified, in the customization process. Therefore, petitioner's wording is used.

General Requirement to Use SAP or SAP's Designated Consultants

The parties also disagree whether SAP requires its customers to retain SAP or one of its designated consultants to assist in the use of the Development Workbench and to perform ABAP programming to customize the basic R/3 System modules to their businesses. See, Undisputed Material Fact 15. Petitioner asserts that SAP requires its customers to retain either SAP or its designated consultants. In doing so, petitioner relies upon the affidavit of the lead business analyst employed by one of its subsidiaries. Respondent, however, asserts that SAP's customers have the option to hire SAP or its consultants, and that while it is rare for a customer to implement the R/3 System on its own, it has been done. Respondent relies upon its findings in the audit of SAP to support its assertion.

It is immaterial in this case how SAP treats other customers. This case does not concern an audit of all of SAP's sales, but only the sale to petitioner. The affidavit offered by petitioner does not demonstrate that affiant has the necessary personal knowledge to determine what SAP requires of all of its customers. One inference may be that SAP imposed this requirement upon petitioner. Since we are ultimately finding for petitioner on summary judgment, all inferences must be made against the prevailing party. Kraemer Bros., Inc. v. U.S. Fire Ins. Co., 89 Wis. 2d 555, 566 (1979). However, it is undisputed that the standard practice is for the R/3 System to be customized by SAP or one of its designated consultants.

SAP's Involvement in the Installation

Petitioner asserts that, "[d]uring the demonstration, SAP informed petitioner that it would oversee and take responsibility for all phases of the implementation of the system." See, Undisputed Material Fact 25. Respondent argues that petitioner has not verified this assertion. While it is true that the affidavit cited by petitioner in its initial brief did not support this assertion, petitioner, in other supporting papers initially filed and filed subsequently, demonstrated that SAP was intimately involved in the installation of the system. It is undisputed from petitioner's supporting papers that SAP was involved in the overall implementation strategy, including training and project planning, of the system. See, Head Aff. Ex. 10; Head Supp. Aff. Ex. B. Therefore, petitioner's language will be used.

Purpose of Payments to SAP

Respondent argues that Undisputed Material Fact 29 should be amended to specify that SAP was compensated for training and consultation on implementation, and that it was SAP's designated consultants who were paid to configure, modify, and customize the system: petitioner "expected to pay to SAP for training and consultation on implementation and to SAP's designated consultants for the configuration, modification and customization of the system." [Underscoring indicating respondent's proposed amendment.] Respondent offers the affidavit of its expert witness, Abba Nof, and asserts that the expert examined invoices and contracts from SAP and determined that "SAP invoices and contracts were overwhelmingly for training and information sharing, not for performing implementation, configuration or integration of the system." Nof Aff. ¶10 d. The problem with respondent's argument is that Undisputed Material Fact 29 applies only to petitioner's understanding and budgets, not to what was actually paid to SAP. Therefore, at least with respect to Undisputed Material Fact 29, respondent's argument fails.

SAP's Mandate on Implementation

In Undisputed Material Fact 31, respondent argues that SAP did not impose on petitioner the requirement that either SAP consultants or consultants designated by SAP implement the system. The first sentence of petitioner's proposed Undisputed Material Fact 31, as respondent would amend it (with stricken language to be deleted and underscored language to be added), reads:

During the time SAP was demonstrating its R/3 System to petitioner, it advised petitioner that, due to the inherent complexity of the system and the substantial customization that would be required to make the R/3 System usable in petitioner's unique business operations, ~~as part of the licensing arrangement petitioner would be required to~~ petitioner should retain either (1) SAP consultants, or (2) consultants designated by SAP and included on a list of SAP certified consulting partners or logo partners to implement the R/3 System with the custom features required by petitioner.

Respondent's argument fails because its expert relies upon the findings of an audit of SAP and nothing else. He has not demonstrated that he has any personal knowledge of the specifics of the arrangement between petitioner and SAP. However, the phrase to which respondent objects that refers to the licensing agreement is not supported by the cited affidavit. Therefore, the Commission omits the reference to the license agreement and uses the precise language from the affidavit in Undisputed Material Fact 31.

Licensing Agreement Provisions

The second sentence of Undisputed Material Fact 34, as offered by petitioner and as respondent would amend it, reads:

Petitioner ~~never would have~~ licensed the R/3 System without ~~the~~ customization to be provided as part of the licensing agreement.

Respondent asserts that the license agreement does not include any provision with respect to customization. Petitioner does not point to any such provision, and the Commission can find no such provision. Therefore, Undisputed Material Fact 34 is altered, making it clear that the license agreement contains no provision with respect to customization.

SAP's Involvement in Initial Installation

The second sentence of Undisputed Material Fact 37, as offered by petitioner and as respondent would amend it, reads:

~~Working with SAP and ICS Deloitte,~~ petitioner began its initial installation of the R/3 System on March 25, 1996, and completed downloading the basic system modules on March 27, 1996.

Respondent correctly points out that the affidavit relied upon by petitioner does not indicate that either SAP or ICS Deloitte were involved with the initial installation of the system during the three days indicated. Therefore, Undisputed Material Fact 37 will not contain references to SAP and ICS Deloitte.

ICS Deloitte's Status

Respondent concedes that ICS Deloitte is a division of Deloitte and Touche and is one of SAP's logo partners. In several instances in its proposed Undisputed Material Facts, petitioner referred to ICS Deloitte as a partner of SAP. Respondent objects to this characterization, suggesting that the reference indicates some sort of legal partnership between SAP and ICS Deloitte, above and beyond the arrangement described in Undisputed Material Fact 33, and indicates that the actions of one entity can be attributed to the other. The relationship between SAP and ICS Deloitte is described in Undisputed Material Fact 33. The Commission does not infer from the references made by petitioner that there is more to the relationship between these two entities. Nevertheless, for purposes of clarity and style, the Commission has deleted any description of ICS Deloitte as a partner of SAP other than its initial description in Undisputed Material Fact 33.

Customizing Basic Modules of the R/3 System

The last sentence of Undisputed Material Fact 39, as proposed by petitioner and as respondent would amend it, reads, in part:

The members of the implementation team worked in order to configure and customize the ~~basic modules of the~~ R/3 System .

Relying upon excerpts from two publications and a slide from a presentation by Andersen Consulting, respondent argues that what is configured and customized are not the basic modules of the R/3 System but, rather, the R/3 System itself. However, none of the authorities cited by respondent contradict the facts offered by petitioner. Moreover, in Undisputed Material Fact 8, respondent accepted petitioner's assertion that "the basic modules of the R/3 System must be customized to fit a client's business operations." Therefore, respondent's argument fails.

Manner in which ABAP is Employed

The first two sentences of Undisputed Material Fact 40, as offered by petitioner and as respondent would amend it, read:

The implementation team worked to configure and modify the R/3 System through ~~manipulation~~ use of the ABAP ~~code~~ tools imbedded in the base modules to adapt the system to each subsidiary's identified needs. If the implementation team was unable to achieve its desired results through configuration ~~and manipulation~~ of the basic system modules, it would send the identified functional gap to the ABAP programming team.

Respondent offers excerpts from two treatises, as well as excerpts from a CD-ROM provided by petitioner, to justify the alterations shown above. However, we find nothing in these authorities that support the changes suggested by respondent. Therefore, no change is made to the language offered by petitioner.

Involvement of James Kammerer

The last sentence of Undisputed Material Fact 41, as offered by petitioner and as respondent would amend it, reads:

Petitioner contracted with SAP to provide an on-site programmer, James Kammerer, who became a member of the Poly Hi Solidur ABAP programming team ~~and worked side-by-side with petitioner's employees to provide programming fixes to petitioner's R/3 System~~.

Respondent offered evidence that Mr. Kammerer became a member of the Poly Hi Solidur⁽⁷⁾ ABAP programming team. That change will be made.

Respondent has offered four sub-paragraphs from its expert's affidavit to support its contention that the stricken language shown above should be removed from Undisputed Material Fact 41. Paragraph 10c. of the Nof affidavit contains the expert's conclusion that no evidence had been provided to respondent that SAP was to oversee or take responsibility for implementation of the R/3 System. That respondent's expert has not seen evidence of petitioner's involvement does not support deleting the language at issue.

Respondent's expert also notes that he examined invoices and other documentation provided by petitioner, and concludes that he found no indication that SAP or anyone else modified the original base software and no indication that SAP created user exits and other SAP software code enhancements to be integrated with the existing R/3 System software. Nof Aff. ¶10d. These "findings" by respondent's expert do not lead to an inference that would negate the stricken language quoted above.

Respondent's expert notes that Mr. Kammerer did not join the implementation team until the last month of the testing period. Nof Aff. ¶10f. Again, this assertion does not negate the stricken language quoted above.

Respondent's expert further notes that he reviewed a disk provided by petitioner's counsel and found that Mr. Kammerer's name does not appear once as having written a program, user exit, or fix. Nof Aff. ¶10g. Respondent's expert, however, provides no information that would allow the Commission to infer that the failure of Mr. Kammerer's name to appear on the disk would tend to make the stricken language false.

Finally, respondent's expert notes that Mr. Kammerer's arrangement letter specifies his involvement as "a consultant, not as a programmer per se." Nof Aff. ¶10g. Again, this does not lead to an inference that the stricken language quoted above should be omitted. Therefore, the stricken language remains in Undisputed Material Fact 41.

SAP's Involvement in ABAP Programming

The last sentence of Undisputed Material Fact 47, as proposed by petitioner and as respondent would amend it, reads:

SAP consultants served on the ABAP programming team, but there is no evidence that any SAP consultant ~~and~~ performed ABAP programming to customize the R/3 System to petitioner's business.

Respondent relies upon three of the four subparagraphs from its expert witness's affidavit it cited with respect to Undisputed Material Fact 41. These averments are based only on documentation provided by petitioner to respondent. Moreover, they are not directly on point with respect to the specific fact offered by petitioner. That is, even assuming respondent's expert is correct, it does not lead to an inference that the stricken language above is incorrect.

Nature of Patches

Undisputed Material Fact 48, as offered by petitioner and as respondent would amend it, reads:

SAP also provided petitioner with patches to its R/3 System, to correct functional gaps identified during implementation that could not be handled by the ABAP programming team. Some of these patches included new source code written ~~specifically for petitioner's system,~~ to address the shortfalls of the R/3 System ~~as it applied to petitioner's business~~. These patches replaced the source code of the original system modules.

Respondent relies upon three subparagraphs from its expert witness's affidavit to support its contention that the patches at issue were not specifically designed for petitioner's business.

Respondent first relies upon one of the findings from its audit of SAP with respect to the sale of SAP's R/3 System in general. Nof Aff. ¶4l. (This assertion was also repeated in paragraph 10e. of the expert's affidavit.) As indicated above, respondent's findings in an audit of another taxpayer is hardly authoritative, even if the subject of the audit conceded the findings. We cannot agree that respondent's finding in the audit of another taxpayer has any probative value here.

Respondent also relies upon its expert's review of a CD-ROM provided by petitioner in which the expert found no reference to any SAP personnel performing with a user exit, fix or modification. As we have discussed above, we cannot infer from the expert's review of this documentation that none of the patches performed were made specifically with petitioner's business in mind. Therefore, we cannot accept the changes proposed by respondent.

SAP's Involvement in Testing

As proposed by petitioner, Undisputed Material Fact 49 includes the assertion that petitioner worked with both SAP and ICS Deloitte to test the R/3 System. Moreover, the last sentence of Undisputed Material Fact 50, as proposed by petitioner and as respondent would amend it, reads:

During this process, SAP representatives provided off-site and on-site technical support to petitioner's information support staff, ~~both directly~~ and ~~through~~ ICS Deloitte, and assisted in trouble-shooting any problems that arose during the testing.⁽⁸⁾

Respondent argues that Undisputed Material Fact 49 should be amended to eliminate the reference to SAP and, similarly, proposes the changes to Undisputed Material Fact 50 shown above.

Respondent relies upon three subparagraphs from the affidavit of its expert witness. Respondent's expert testified that he examined the license agreement between SAP and petitioner and found that the agreement is silent with respect to testing by SAP of the purchased software. Nof Aff. ¶ 9e. (The Commission could find no such language, and petitioner does not assert that the license agreement contains any such language.) However, the lack of such language in the license agreement does not lead to the inference that SAP was not, in fact, involved in testing of the R/3 software.

Respondent's expert also testified that, based upon his review of the sales agreement and other documentation, there was no evidence that SAP was obligated or paid to be involved with implementing and modifying the base software. Nof Aff. ¶ 10d. and 10e. Neither of the subparagraphs mention testing. But even if they did, the fact that the documentation does not mention testing does not lead to the inference that SAP was not, in fact, involved in testing software. Therefore, we cannot accept the modifications proposed by respondent.

Why SAP Did Not Prepare Written Materials

The first two sentences of Undisputed Material Fact 52, as proposed by petitioner and as respondent would amend it, read:

Petitioner's information support staff and ICS Deloitte prepared extensive written materials to assist in the training of petitioner's employees. Because of the significant customization of petitioner's R/3 System was not done by SAP, SAP was unable to provide these materials.

Respondent relies upon five subparagraphs from the affidavit of its expert witness to support its proposed changes. Each of these subparagraphs consists of the expert's review of the documentation of the sale and his conclusion that this documentation does not prove the involvement of SAP in the various aspects of the implementation and customization of the software. As indicated above, the expert's review of this documentation does not necessarily lead to the inference that SAP was not involved in the implementation and customization of the software. But more important, with respect to Undisputed Material Fact 52, petitioner is not claiming that the reason for SAP's non-involvement in preparing extensive training materials had anything to do with SAP's customization of the software. Rather, petitioner is merely asserting that because of the significant customization, without specifying who was involved in the customization, SAP was not able to provided these written materials. Therefore, the Commission will not include the language proposed by respondent.

Training vs. Programming and Testing

Undisputed Material Fact 59, as proposed by petitioner and as respondent would amend it, reads:

At least 23 different SAP consultants were involved in the ~~on-site installation and~~ implementation of petitioner's R/3 System, with these consultants being primarily involved in training. ~~SAP consultants provided petitioner with assistance in the following areas: programming, configuration, training, and testing.~~

Respondent again relies upon the review of certain contract documents by its expert to assert that SAP was not required by these contracts to provide programming and testing. As the Commission found above, the fact that certain contract documents don't require or compensate SAP for an activity does not lead to the inference that SAP did not perform the activity. Therefore, the changes proposed by respondent will not be made.

SAP's Admission

Respondent notes that SAP admitted that the R/3 software is prewritten and subject to the sales and use tax. Respondent also notes that SAP backed up this admission with a payment of more than $1.9 million in sales tax and interest on the sales of all of its R/3 software in Wisconsin, and that SAP agreed to collect sales and use tax on the sale of its R/3 software thereafter. As interesting as this admission may be, it has no value in this case, and the Commission affords this admission no persuasive authority. SAP is not a party to this proceeding, and, therefore, its admission is neither binding nor probative in this case. There may be any number of possible reasons why SAP elected to pay sales and use tax on its sale of the R/3 software, including reasons that may not reflect the merits of the issues raised in this case.

Application of Section TAX 11.71(1)

The parties agree that the test for determining whether a computer program is a custom computer program is the definition of "custom programs" found in section TAX 11.71(1)(e) of the Wisconsin Administrative Code at the time the statutory amendment to section 77.51(20) distinguishing custom programs from other computer programs was enacted.⁽⁹⁾

Section TAX 11.71(1)(e)(intro) defines custom programs as "utility and application software which accommodate the special processing needs of the customer." In determining whether a program meets the definition of a custom program, we are to consider "all the facts and circumstances," including seven factors listed in the rule. The factors set forth in the rule are not elements, each of which must be met for a program to be considered custom. Rather, the factors in the rule are to be weighed along with any other facts and circumstances. The Commission will address these factors in order.

Significant Presale Consultation

The first factor is the "extent to which the vendor or independent consultant engages in significant presale consultation and analysis" of petitioner's requirements and system. § TAX 11.71(1)(e)1. Respondent concedes that significant presale consultation and analysis under this factor occurred.

Loading and Testing

The second factor contains two parts: (1) whether "the program is loaded into the customer's computer by the vendor," and (2) "the extent to which the installed program must be tested against the program's specifications." § TAX 11.71(1)(e)2.

The first part of this factor is whether a vendor loads a program. Here, the program was loaded by a former employee of SAP. Arguably, this part of the factor is a draw: The software was not loaded by petitioner or SAP. However, the fact that a former SAP employee loaded the software weighs in favor of a finding that the software at issue is custom software.

Respondent notes that petitioner did not provide documentation that SAP tested the R/3 System against program specifications. However, this portion of the rule is not concerned with who tests the software against program specifications, but the degree to which the installed program must be tested. Respondent concedes that, once customization of the R/3 System for petitioner's business was complete, the system was tested for three to four months to insure it met petitioner's operational requirements. Resp. Initial Brief at 14. Therefore, it is clear that the testing prong of the second factor is met. On the whole, as applied to the facts of this case, the second factor supports the conclusion that the software at issue was custom software.

Training and Written Documentation

The third factor is the extent to which "use of the software requires substantial training of the customer's personnel and substantial written documentation." § TAX 11.71(1)(e)3. Respondent concedes that there was substantial training and written documentation required with the R/3 System.

Enhancement and Maintenance Support

The fourth factor is the "extent to which the enhancement and maintenance support by the vendor is needed for continued usefulness." § Tax 11.71(1)(e)4. Respondent concedes that the R/3 System needs enhancement and maintenance support.

Rebuttable Presumption

The fifth factor states that a "rebuttable presumption that any program with a cost of $10,000 or less is not a custom program." § TAX 11.71(1)(e)5. This factor does not come into play because it is undisputed that the cost of the R/3 System greatly exceeded this threshold. The Commission addresses the issue of the cost of the R/3 System below.

Prewritten Programs

The sixth factor is as much a veto as a factor: custom programs "do not include basic operational programs or prewritten programs." § TAX 11.71(1)(e)6. Respondent does not claim that the R/3 System is a basic operational program. Rather, respondent argues that this software is a prewritten program. The rule states that prewritten programs are sometimes called "canned programs," and defines them as "programs prepared, held or existing for general use normally for more than one customer." § TAX 11.71(1)(k).

This case hinges on whether the R/3 System is 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.

Respondent cites the "plain English" meaning of the word "prewritten." However, the Commission may not consider any definition of "prewritten" other than that provided by the rule. Notwithstanding any connotation that the word "prewritten" might imply, the only definition at issue is that provided by section TAX 11.71(1)(k). Therefore, whether the basic modules of the R/3 System were written in advance of the sale is immaterial, except so far as it is germane to the definition set forth in section TAX 11.71(1)(k).

Respondent invests heavily in the numerous descriptions of the R/3 System as providing standard solutions or being a standard package. Respondent appears to equate the rule's phrase "general use" with standard. This misses the point.

The 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. Respondent's approach is inconsistent with the first four factors listed above. Each of these factors hinges on the degree to which the software is ready for use off-the-shelf. The more pre-sale planning, the more testing, the more training, the more written documentation, the more enhancement, and the more maintenance, then the more likely the software is custom software. These factors are not concerned with whether the resulting software in use provides standard business applications or whether the software was written before sale. What matters is the process by which the application is accomplished, regardless of whether the application is standard or not.

Under respondent's analysis, a vendor could develop a software program completely from scratch (forget the basic modules in this case), and if the resulting program provided standard business applications, the software would not be custom software. This approach simply does not make sense.

Even respondent 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.

Resp. Initial Brief at 12-13.

Clearly, it took a significant amount of resources, time, and effort to get the R/3 System to where it was usable by petitioner and its subsidiaries. Respondent argues that if the issue is whether software is usable "right out of the box", then any software--even a $50 Microsoft Excel program--would be considered a custom program because it requires some effort, albeit limited effort, to get the program up and running. This argument misses the point. It is not whether the program requires any effort to get it up and running; it is the amount of effort required. Each of the first four factors contain the phrase "the extent to which." These four factors are quantitative measures, not qualitative measures. The distinction between custom and prewritten programs hinges on the amount of effort necessary to get the software operational for a particular customer's needs. Given the substantial amount of resources, time, and effort needed to bring the R/3 System online, we cannot conclude that the software at issue is prewritten.

Our conclusion that the distinction between "prewritten programs" and "custom programs" hinges on the amount of effort needed to bring software online for a particular customer is consistent with the first four factors and consistent with the definition of "prewritten programs."⁽¹⁰⁾ With respect to the latter, if a program is prepared, held or existing for general use normally for more than one customer, then the program will require relatively little effort to be put in place for any user. If, on the other hand, a program like the R/3 System is useful only after a significant investment of resources in planning, testing, training, enhancement, and maintenance, then the software cannot be said to be prepared, held or existing for general use.⁽¹¹⁾

Significant Modification

The rule's seventh factor provides that "[i]f an existing program is selected for modification, there must be a significant modification of that program by the vendor so that it may be used in the customer's specific hardware and software environment." § TAX 11.71(1)(e)7. This factor does not apply in this case, given the Commission's conclusion that the R/3 System is a custom program. This factor only makes sense in the overall scheme presented by section TAX 11.71(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 section TAX 11.71(1)(k). Because the Commission concludes that the software at issue is not a prewritten program, then this factor does not come into play.⁽¹²⁾

Cost of the Software

The analysis under section TAX 11.71(1)(e) must consider all of the facts and circumstances of the transaction. While this rule lists seven factors, the explicit language of the rule makes clear that other factors may be considered. One factor that is implied by the rebuttable presumption in section TAX 11.71(1)(e)5 is the cost of the program. If there is a rebuttable presumption that a program costing less than $10,000 is not a custom program, then since the cost of the R/3 System to petitioner was $5.2 million, the significant price tag must argue in favor of a conclusion that the R/3 System is a custom program.

Respondent argues that if one divides the total cost of the software license by the total number of users, the "true project cost" is about $3,150 per user. This analysis is inconsistent with the approach of the rebuttable presumption, which is not cast in terms of cost per user but cost of the program. Moreover, the fact that the R/3 System is used by 1,650 authorized users in a number of different subsidiaries is a fact that argues in favor of a conclusion that the R/3 System is custom software.

ORDER

Except with respect to the stipulation of the parties concerning the sales and use tax on maintenance fees, petitioner's motion for summary judgment is granted, and respondent's action on the petition for redetermination is reversed.

Dated at Madison, Wisconsin, this 1^st day of December, 2003.

WISCONSIN TAX APPEALS COMMISSION

Don M. Millis, Commission Chairperson

Thomas M. Boykoff, Commissioner

ATTACHMENT: "NOTICE OF APPEAL INFORMATION"

January 2, 2004 Appealed to Dane County Circuit Court(03CV3922)

January 25, 2007 Appealed to Dane County Circuit Court(03CV3922)-Reversed

July 11, 2008 REVIEW of a decision of the Court of Appeals. Affirmed.

¹ The Commission has made nonmaterial changes to the proposed Undisputed Material Facts for consistency, form, and style.

² Poly Hi Solidur is one of petitioner's subsidiaries.

³ The references to Undisputed Material Facts employ the numbering used in the Commission's Summary of Undisputed Material Facts, not the numbering employed by the parties.

⁴ Both parties agree, however, that the R/3 System modules must be customized to fit a client's business operations.

⁵ Petitioner objects to the admissibility of the two treatises relied upon by respondent because respondent has not qualified these as learned treatises. Respondent counters by pointing out that the Commission is not bound by the rules of evidence. Wis. Stat. § 227.45(1); TA 1.53, Wis. Admin. Code. Because the Commission determines that the excerpts cited do not stand for the proposition asserted by respondent, the Commission declines to rule upon petitioner's objection.

⁶ Similarly, petitioner's proposed reference to the R/3 System processing in Undisputed Material Fact 39 as "very rudimentary" is omitted, as well. The Commission notes, however, that respondent did not object to the description of the R/3 System modules as "rudimentary" in Undisputed Material Fact 6.

⁷ Poly Hi Solidur is one of petitioner's subsidiaries.

⁸ This sentence originally referred to ICS Deloitte as SAP's partner. As indicated above, all references to ICS Deloitte as SAP's partner subsequent to Undisputed Material Fact 33 have been deleted.

⁹ Even though section TAX 11.71(1) has been amended since the amendment to section 77.51(20), these changes did not result in any material change to our analysis. Therefore, this case will be analyzed under the provisions of the current version of this rule.

¹⁰ This conclusion is also consistent with the factor set forth in section TAX 11.71(1)(e)7. See, infra note 12.

¹¹ Arguably, the term "general use" it susceptible to more than one meaning and, therefore, ambiguous. While, in such a case the term "general use" should be narrowly construed, any such construction need not be unreasonable or the most narrow. Department of Revenue v. Greiling, 112 Wis. 2d 602, 605 (1983). Construing "general use" as respondent argues would be unreasonable because it would be inconsistent with the first four factors set forth in the rule. Moreover, respondent's construction might not always be the narrowest construction depending on the particular circumstances.

¹² Even if respondent is correct in its assertion that the software at issue is a prewritten program, there is abundant evidence in the record that there was a significant modification of the software so that it could be used by petitioner. The parties argue at length about whether these modifications were undertaken by SAP, i.e., the vendor, or petitioner and third-party consultants. While this factor refers to modifications by the vendor, the rule does not prohibit an examination of modifications by persons other than the vendor. The test under section TAX 11.71(1)(e) is to be based on all the facts and circumstances of the transaction. The amount of modification required to tailor the software to petitioner's business needs is relevant to the inquiry even if it was not undertaken by the vendor.