Wisconsin Department of Revenue v. Menasha Corp.

Citations: 2008 WI 88; 754 N.W.2d 95; 311 Wis. 2d 579; 2008 Wisc. LEXIS 341Docket: 2004AP3239

Court: Wisconsin Supreme Court; July 11, 2008; Wisconsin; State Supreme Court

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The Supreme Court of Wisconsin reviewed a case involving Menasha Corporation and the Wisconsin Department of Revenue (DOR) concerning the tax status of the R/3 System software purchased by Menasha from SAP. The Wisconsin Tax Appeals Commission determined that the R/3 System qualified as a custom computer program under Wis. Admin. Code. Tax 11.71(1)(e), rendering it exempt from sales and use tax per Wis. Stat. 77.51(20). The DOR appealed to the Dane County Circuit Court, which reversed the Commission’s decision, classifying the software as non-custom and taxable. Menasha appealed to the court of appeals, which reinstated the Commission’s ruling.

The Supreme Court affirmed the court of appeals, addressing two key issues: the level of deference owed to the Commission's decision and whether the Commission's conclusion regarding the custom status of the R/3 System was reasonable. The court concluded that the Commission's interpretation of the statute was entitled to due weight deference and its rule interpretation to controlling weight deference. Importantly, the court found that the Commission is not required to defer to the DOR's interpretation in appeals, ensuring that taxpayers receive a fair hearing. The judgment emphasizes the Commission’s role as the final authority on tax matters, reinforcing the principle that taxpayers should have access to an impartial adjudicator in tax disputes.

Menasha, a Wisconsin corporation with over 5,700 employees and 63 locations across 20 states and 8 countries, engaged an independent accounting firm in 1993 to assess its business and accounting software systems due to identified deficiencies. The consultant recommended that Menasha implement a single, standardized business software environment to serve all its locations and suggested another firm conduct feasibility studies for integrating its subsidiaries under one software system. Menasha determined that a global application software system was feasible, contingent upon finding software that could be customized for its specific needs.

In April 1995, Menasha began discussions with SAP regarding its R/3 System, emphasizing the necessity for customization. The initial R/3 System comprises over 70 software modules, each designed for distinct business functions like accounting and personnel. Clients like Menasha can select which modules to license, receiving CD-ROMs for all modules but access codes only for those licensed. The basic modules require customization to become operational for the client's business. 

Customization utilizes the ABAP/4 programming language within the Development Workbench of the R/3 System, enabling the creation of tailored reports, interfaces, and conversion programs necessary for data compatibility. Menasha's arguments in the Commission highlighted a disagreement over the sophistication of the R/3 System, with Menasha asserting that the system offered only a rudimentary business solution, while the Department of Revenue (DOR) contended that the modules provided a sophisticated system.

The DOR referenced two treatises to support claims about the sophistication of the R/3 System, but the Commission noted that the cited excerpts only describe the overall system without addressing the basic modules specifically. The Commission deemed the sophistication of these modules largely irrelevant, as both parties agreed that the R/3 System modules are only functional after customization. On April 20, 1995, SAP demonstrated the R/3 System and later tailored a demonstration using Menasha's sample data after several days of collecting information about Menasha's operations. SAP took four weeks to prepare for this demonstration. Menasha requested further details on modification tools and the ABAP programming tools essential for system adjustments, understanding that the customization process could take years and cost tens of millions of dollars. Menasha's budget for the R/3 System included expected expenses for SAP and its consultants' configuration, modification, and customization efforts, emphasizing that without customization, the system would hold no operational value. The board approved a licensing cost of approximately $46,575,000, and Menasha purchased the R/3 System for $5.2 million on September 27, 1995. The licensing agreement did not cover customization, but SAP indicated that substantial customization was necessary, requiring Menasha to engage SAP-designated consultants. Menasha selected ICS Deloitte (ICS) as its consultant and worked with them from September 1995 to March 1996 to analyze systems, prepare hardware, and train Menasha's technology team on customization. During the pre-installation phase, SAP provided training, project management support, and issue resolution assistance. The R/3 System was delivered on CD-ROM, with installation beginning on March 25, 1996, and completed on March 27, 1996, facilitated by a former SAP employee who was retained for this specific purpose and had access to SAP’s online support system.

The R/3 System, upon delivery, failed to meet Menasha's processing requirements, prompting each subsidiary to form an implementation team comprising Menasha's information personnel, SAP and ICS representatives, and third-party consultants. These teams, directed by SAP and ICS, assessed each subsidiary's operational needs to customize the R/3 System. If they encountered "functional gaps" that could not be resolved, they referred issues to the ABAP programming team, tasked with writing code to bridge these gaps or integrate additional functionalities.

Menasha contracted an on-site SAP programmer to join the ABAP team, which worked from March 27, 1996, to January 1, 1997, to tailor the R/3 System, resulting in over 3,000 modifications. The ABAP team developed codes for hundreds of user exits and created new subsystems necessary for Menasha's operations. SAP provided technical support and patches to address functional gaps, including custom source code.

Following customization, the R/3 System underwent three to four months of testing to ensure compliance with Menasha's specifications, with ongoing support from SAP and ICS. Training for employees involved two to five-day classes, with comprehensive materials prepared by ICS and Menasha's support staff. After training, Menasha transitioned to the R/3 System, implementing it subsidiary-by-subsidiary over nearly seven years, with assistance from at least 23 SAP consultants throughout the process.

Menasha maintains weekly contact with SAP for support and receives quarterly upgrades, new releases, and patches for the R/3 System. The total cost for the R/3 System's installation and customization exceeded $23 million, with $5.2 million allocated to the core system. Customization expenses included $2.5 million to SAP, approximately $13 million to ICS, and around $775,000 to third-party consultants. Following a 1998 audit by the Department of Revenue (DOR), it was determined that the R/3 System was non-custom software and therefore subject to sales tax, a conclusion SAP did not contest. SAP and Menasha agreed on a sales tax payment of $342,614.45 for the R/3 System, but Menasha intended to dispute this and seek a refund.

The DOR's audit, covering 1991 to 1997, confirmed that SAP's R/3 software sales in Wisconsin were taxable as non-custom software, based on several factors including the standardized nature of the software and the lack of pre-shipment modifications. SAP acknowledged that their transactions with Menasha were similar to other R/3 sales of non-custom software, leading to SAP's payment of over $1.9 million in tax and interest to the DOR for sales to Wisconsin customers, excluding Menasha, who directly paid the sales tax.

Menasha initially paid sales and use tax for the R/3 System but later filed for a refund claim of $342,614.45 on June 30, 1998, which the DOR denied on April 28, 1999. After a petition for redetermination was also denied on March 1, 2001, Menasha sought a review from the Commission. Both parties filed motions for summary judgment, and on December 1, 2003, the Commission granted Menasha's motion and reversed the DOR's denial, allowing Menasha's refund claim.

The Commission determined that the R/3 System was a custom program, thus exempt from sales and use tax. Following this, the Department of Revenue (DOR) sought judicial review in the Dane County Circuit Court under Wis. Stat. 73.015(2), 227.52, and 227.53. Both parties filed for summary judgment, but the circuit court vacated the Commission's ruling and upheld the DOR's stance that the refund should be denied, classifying the R/3 System as non-custom. Menasha appealed, and the court of appeals reversed the circuit court's decision, affirming the Commission’s original finding that the R/3 System was indeed custom, warranting a tax refund.

The Commission, tasked with reviewing the DOR's determination, assessed the R/3 System's custom status based on Wis. Admin. Code. Tax 11.71(1)(e), which outlines various factors to evaluate custom software. It found significant presale consultation was conducted (first factor) and although a former SAP employee loaded the software (second factor), the extensive testing (three to four months) supported its custom classification. The Commission noted substantial training and documentation were required (third factor), and enhancement and maintenance support was necessary (fourth factor). The fifth factor was irrelevant due to the R/3 System's cost exceeding $10,000. The Commission also ruled that the R/3 System did not qualify as a prewritten program, as defined by Wisconsin Admin. Code. Tax 11.71(1)(k), which pertains to software intended for general use beyond a single customer. Ultimately, the Commission concluded that the totality of evidence indicated the R/3 System was custom software, justifying the tax exemption.

The Commission determined that the R/3 System did not qualify as "prewritten" software under the relevant rule, emphasizing that it was not readily available for general use. The Department of Revenue (DOR) argued for a dictionary definition of "prewritten," which the Commission rejected, insisting that the rule's specified definition should prevail. The DOR described the R/3 System as providing standard solutions, but the Commission clarified that "general use" should not be equated with "standard." Instead, the focus should be on the degree of customization required to make the software functional for specific needs.

The Commission highlighted several facts, acknowledged by the DOR, indicating that the R/3 System required significant customization, including: 
1. Basic modules needed customization before being usable.
2. The delivered system was insufficient for the petitioner's requirements.
3. The implementation team assessed the needs of each subsidiary for configuration.
4. Modifications were made to adapt the system to these needs.
5. ABAP programming teams customized the system for functional requirements.
6. Codes were created to integrate external programs.
7. New subsystems were developed to address critical operations not available in R/3.
8. Custom fields and reports were created for business-specific outputs.
9. SAP provided patches and new code to rectify functional gaps.
10. Over 3,000 modifications were made to the R/3 System.

The Commission concluded that the extensive resources, time, and efforts required to make the R/3 System operational for Menasha indicated it could not be classified as prewritten software. The distinction between custom and prewritten software lies in the level of effort necessary for operational readiness; significant investment in planning, testing, and maintenance precludes classification as general use software.

The Commission determined that factor seven, concerning significant modification to an existing program, was not applicable because the R/3 System was classified as a custom program rather than an existing one. It interpreted “existing program” within the context of Wis. Admin. Code section Tax 11.71(1)(e) to mean “existing program for general use,” as defined in section Tax 11.71(1)(k). The Commission also considered the software's cost, concluding that the significant expenditure of $5.2 million supported the classification of the R/3 System as custom, given the presumption that software costing less than $10,000 is not custom.

Following the Commission's decision, the Department of Revenue (DOR) petitioned the Dane County Circuit Court for a review, during which both parties filed cross-motions for summary judgment. The circuit court found errors in the Commission's interpretation and application of the law, vacating the Commission's decision and reinstating the DOR's determination that sales and use tax was owed on the R/3 System. The court applied a due weight deference standard, indicating it would uphold the Commission's reasonable interpretations unless deemed less reasonable than alternative interpretations. It noted that the DOR’s promulgation of the administrative rule warranted controlling weight deference, as an administrative agency's interpretation of its own rule is typically authoritative unless clearly erroneous.

The circuit court found that the R/3 System qualified as an existing and prewritten program upon its sale to Menasha. It pointed to significant presale consultation and testing but emphasized that the installation by a former SAP employee rather than SAP itself suggested R/3 should be considered prewritten. Additionally, the court noted that R/3 was prepared for general consumption prior to its sale, licensed to thousands of customers, and not specifically created for Menasha. Consequently, the court ruled that the seventh factor was applicable, as the Commission's findings did not demonstrate that SAP had made the significant modifications necessary to classify R/3 as custom software.

Menasha appealed a circuit court decision, leading the court of appeals to determine that the program in question was "custom" under Wis. Admin. Code. Tax 11.71(1)(e). The court emphasized that deference is owed to the commission as the final administrative authority reviewing Department of Revenue (DOR) decisions, not the DOR itself, citing precedent from the Caterpillar case. It clarified that both Wis. Stat. 73.01(4) and relevant case law establish the commission's role as the ultimate authority on tax code matters. The court affirmed that the commission's extensive expertise warrants "due weight deference," having applied its knowledge in interpreting tax rules since the enactment of Wis. Stat. 77.51(20).

The court concluded that the commission's interpretation of the rule was reasonable and aligned with its plain language, noting that the DOR's approach disregarded the rule's first five factors, focusing instead on the sixth and seventh factors, which the DOR claimed were mandatory. However, the court, referencing the commission's view, asserted that all factors must be considered when determining if a software program is customized. It agreed that Tax 11.71(1)(e)6 should not be interpreted in isolation, and that a comprehensive reading of the factors indicates that more effort required to utilize the software suggests it is custom.

The standard of review for this case involves de novo interpretation of Wis. Stat. 77.51(20) and Wis. Admin. Code. Tax 11.71(1)(e), applying the same interpretative rules to both statutes and administrative regulations, with the interpretation of code provisions being subject to statutory construction principles.

Ambiguous rules may require the use of extrinsic aids to clarify agency intent, with courts deferring to an agency's established interpretations unless they contradict the regulation's language or are clearly erroneous. When agencies create regulations through legislative delegation, those regulations are interpreted in conjunction with the enabling statute to achieve coherent and sensible legislation. In judicial reviews, the focus is on the agency's decision rather than the circuit court's ruling. While courts are not bound by an agency's legal conclusions, they may choose to defer to them, with the degree of deference varying based on whether the agency interprets a statute or regulation. 

There are three levels of deference for an agency's statutory interpretation: great weight, due weight, and no deference. Great weight deference applies when the agency is tasked with administering the statute, has a long-standing interpretation, has utilized its expertise, and promotes uniform application. Courts should uphold the agency's reasonable interpretation even if alternative interpretations exist. Due weight deference is granted when the agency has relevant experience but lacks the expertise to surpass that of the court; this deference is based on the agency's enforcement role, and interpretations are sustained unless they contradict the statute's plain meaning or a more reasonable interpretation is found. No deference is given if the issue is novel, the agency lacks experience, or its stance is inconsistent.

In the current case, the Commission is afforded due weight deference regarding its interpretation of Wis. Stat. 77.51(20), as it is recognized as the final authority on tax law questions, although its decisions remain subject to judicial review. The Commission's experience in interpreting this statute is acknowledged, particularly in determining the classification of property for tax purposes.

The case Menasha, 299 Wis.2d 348, 728 N.W.2d 738 examines the Wisconsin Commission's interpretation of regulations concerning the taxability of tangible personal property, specifically regarding the definition of "custom programs" as outlined in Wis. Admin. Code. Tax 11.71(1)(e). The relevant statute, Wis. Stat. 77.51(20), establishes that tangible personal property includes computer programs, except for custom computer programs, but does not define "custom programs" itself. Consequently, interpretation relies on the regulation.

The court acknowledges that while the Commission's interpretation is afforded due weight deference, the central issue is the interpretation of the regulation rather than the statute itself. It asserts that an administrative agency's interpretation of its own regulations is typically controlling unless it is clearly erroneous or inconsistent. Although the Commission did not promulgate the rule—this was done by the Department of Revenue (DOR)—the Commission is recognized as the final authority on the rule's interpretation. 

The court applies a standard of controlling weight deference, assessing whether the Commission’s interpretation is reasonable and aligns with the regulation's meaning or purpose. If the interpretation is found to be reasonable, the court will uphold the Commission's decision rather than impose its own interpretation, even if other interpretations could also be reasonable. Ultimately, the court indicates that it is the Commission's decision, not the DOR's, that is subject to judicial review and to which the court must grant deference.

Courts grant deference to the Commission over the Department of Revenue (DOR) when disputes regarding rule interpretation arise, as established in cases like Caterpillar and River City Refuse Removal. The DOR acknowledges that courts review the Commission's decisions, not its own, but argues that the Commission should address or defer to the DOR's interpretations. However, the court declines this request, finding that the DOR fails to provide convincing reasons for the Commission to defer to its interpretations. The legislature has designated the Commission as the final authority on tax matters, and requiring it to defer to the DOR would undermine this authority and potentially disadvantage taxpayers in appeals, as the Commission functions in a quasi-judicial capacity. While the Commission may consider the DOR's interpretations, it is not obligated to defer to them or explicitly reference them in its decisions. In this case, the Commission did take into account the DOR's submissions and materials during its deliberation, indicating that the DOR's inputs were considered despite not being specifically named in the ruling.

The Commission is not required to defer to the Department of Revenue's (DOR) interpretation of its own rule, as there is no legislative mandate for such deference. The DOR argues for deference based on its role in promulgating the rule, citing the Hillhaven case, which supports agency interpretations unless clearly erroneous. However, a key distinction exists: in Hillhaven, the decision was directly appealable to the circuit court without an intermediate agency review, while in this case, the Commission reviews DOR decisions and its rulings are what are subject to judicial review. The legislature has designated the Commission as the final authority on tax matters, which impacts the deference analysis.

Moreover, the DOR contends that interpreting a rule should focus on the rule maker's intent, implying that the Commission should defer to the DOR for this purpose. However, the Commission emphasizes that the rule's language itself can convey its meaning, and the DOR had the opportunity to clarify this when drafting the rule. The Commission's interpretation, grounded in the language of the rule, is deemed reasonable.

The DOR also compares the Commission's role to that of courts, arguing that the Commission's lack of required deference grants it excessive power. Yet, the Commission possesses its own expertise in tax law, diminishing the necessity for reliance on DOR's interpretations. Ultimately, the Commission is recognized as the final authority capable of interpreting tax rules independently of the DOR's input.

The Commission has significant expertise in interpreting state tax laws and does not need the Department of Revenue (DOR) for assistance, although it may consider the DOR's publications. Unlike courts, the Commission is better equipped to interpret and apply tax rules. The DOR cites the case of Pfeiffer, claiming it knows the regulatory purposes and is in the best position to interpret its own regulations. However, this view overlooks the Commission's quasi-judicial role, which gives it the authority to review decisions and serve as the final arbiter. Previous rulings, such as DaimlerChrysler, affirm that an agency tasked by the legislature with reviewing another agency's regulations is well-positioned to interpret those regulations due to its expertise. 

The DOR argues that the Commission should not have received deference since it hadn't previously ruled on the DOR's substantive rules. However, the standards for reviewing statutory versus rule interpretation differ, and the DOR's argument misapplies these standards. The current case pertains to rule interpretation, where the Commission holds relevant experience, as evidenced by past cases like IBM Corp. v. DOR.

In Health Micro Data Sys. Inc. v. DOR, the court addressed the Wisconsin Department of Revenue's (DOR) critique of the Commission's experience in applying tax statutes and rules, arguing that the Commission had adequately considered the relevant factors outlined in the Wisconsin Administrative Code, even if not explicitly applied in previous cases. The court referenced prior decisions emphasizing that the Commission's experience with the statutory framework warrants deference, regardless of whether identical factual scenarios had been adjudicated before. 

The DOR contended that its acquiescence or nonacquiescence regarding the Commission's decisions impacts the standard of review, suggesting that a failure to appeal or file a notice indicates agreement with the Commission's interpretations, while an appeal signals disagreement. However, the court sided with Menasha's argument that these provisions do not apply in the current review context. The court clarified that the acquiescence rules serve to bind the DOR in future disputes only if no appeal is filed, thus ensuring stability in tax interpretations.

Ultimately, the court determined that since it was reviewing the Commission's decision, the acquiescence principles were irrelevant to the standard of review. The court affirmed that the Commission's statutory interpretation warrants due weight deference, and its rule interpretation receives controlling weight deference. The key inquiry under this standard is whether the agency's interpretation aligns reasonably with the regulation's meaning or purpose.

The Commission's decision is upheld based on the reasonableness and consistency of its interpretation of the applicable Wisconsin administrative code regarding sales and use tax for tangible personal property, particularly in relation to the R/3 System. The code defines "custom programs" and outlines criteria for determining whether a program qualifies as custom, emphasizing that various factors should be considered collectively rather than as strict requirements. The Commission found that the R/3 System was a custom program due to Menasha's significant investment in presale consultation, testing, training, documentation, and ongoing support, and because it was not a prewritten program.

In contrast, the Department of Revenue (DOR) contends that the R/3 System consisted of prewritten modules widely used in 1995 and argues that it should not be classified as custom under the mandatory language of the code. The DOR asserts that since the program was existing and not modified for Menasha, it does not meet the criteria for being a custom program. Menasha defends the Commission's approach, stating that the DOR's interpretation overlooks important factors. Ultimately, the court concludes that the Commission's interpretation aligns with the regulatory language and intent, thereby affirming its decision.

A program's classification as custom is determined by evaluating all relevant facts and circumstances, including seven specific factors. The Commission assessed these factors in relation to the R/3 System. 

1. **Presale Consultation**: Significant presale consultation occurred between Menasha and SAP from 1993 to 1995, including SAP's analysis of Menasha's software and demonstrations, leading the Commission to conclude this factor supports the R/3 System being custom.

2. **Loading and Testing**: Although the vendor did not load the software, a former SAP employee did so under Menasha's employment, which the Commission deemed reasonable to consider. Additionally, the R/3 System underwent three to four months of testing following installation, leading to a conclusion that this factor supports the custom classification.

3. **Training and Documentation**: The Commission noted that substantial training and extensive documentation were required, with employees participating in multi-day training sessions and support staff receiving further specialized training. This led to a conclusion that this factor also weighs in favor of the R/3 System being custom.

4. **Vendor Support**: The R/3 System required ongoing enhancement and maintenance support, with Menasha regularly contacting SAP for assistance and receiving updates quarterly. The Commission concluded this factor supports the custom designation.

5. **Cost Consideration**: The presumption that a program is not custom if it costs $10,000 or less was found not applicable, as the R/3 System's cost significantly exceeded that amount.

Overall, the Commission reasonably determined that factors one through four support the classification of the R/3 System as a custom program.

The Commission evaluated the cost of the R/3 System as part of its overall assessment of whether it qualifies as a custom program, despite the court of appeals expressing concerns about the lack of explicit mention of cost in the relevant rule. The Commission acknowledged that while cost is a factor, it is not determinative and did not apply factor five because the R/3 System's cost exceeded the $10,000 threshold. The Department of Revenue (DOR) argued that factors six and seven should classify the program as non-custom, asserting that their language is mandatory.

Under factor six, which distinguishes between custom and prewritten programs, the Commission determined that the R/3 System was not prewritten. The definition of "prewritten programs" includes those intended for general use and requiring minimal effort for operational readiness. The Commission found that substantial resources and effort were necessary to customize the R/3 System for specific customer needs, thus establishing it as custom software. The Commission’s reasoning aligns with the regulatory definitions, focusing on the degree of effort required to adapt the software for use.

The DOR contended that the mandatory language in factor six should classify the R/3 System as prewritten regardless of customization efforts. However, the conclusion that the R/3 System was not prewritten was deemed reasonable since a prewritten program should be generally available for immediate use without significant modifications. The DOR acknowledged that the R/3 System required a degree of customization, including efforts from implementation teams to meet specific subsidiary needs before it could be operational.

Members of the petitioner's implementation team, alongside SAP and ICS Deloitte, assessed the operational and functional requirements of each subsidiary to configure and customize the R/3 System. The teams worked collaboratively to adapt the system, including extensive ABAP programming that involved creating codes for numerous user exits to facilitate integration with external programs, thereby allowing the petitioner to achieve necessary functionality while maintaining the R/3 System's efficiencies. Additionally, new subsystems were developed to handle operations not supported by the R/3 System, which was critical for the petitioner's business.

The Department of Revenue (DOR) acknowledged that over 3,000 modifications were made to the R/3 System. Although the R/3 System can be sold in a general format with available modules, it requires customization before it can be effectively utilized. The DOR contended that the basic R/3 System was prewritten and partially encoded, suggesting its $5.2 million cost should be taxable. However, the analysis concluded that this initial system is ineffective without modifications and that customization is both time-consuming and costly, indicating that it is not a prewritten program.

In contrast to software like Microsoft Excel, which can be used immediately upon purchase, the R/3 System necessitates modifications for any practical application. The DOR's argument regarding the mandatory nature of factor six was found inconsistent with the overall rule, which emphasizes the importance of considering all facts and circumstances in conjunction with the seven factors. The Commission's decision to evaluate all relevant factors was deemed reasonable, and the court is not positioned to challenge that determination.

Under subsection (k) of factor six, the program in question is not classified as prewritten or canned, but this factor alone does not dominate the analysis. Despite factors one through four suggesting the program is custom, the current wording complicates such a conclusion if the program is evidently prewritten or canned according to factor six. Factor seven may then play a critical role, although this situation is not currently addressed. The Department of Revenue (DOR) challenges the Commission's interpretation, arguing that it overlooks the rule-making process. A rejected definition of "prewritten" was one that categorized it as intended for broad use and mass distribution. The DOR disputes the Commission's assertion that the differentiation between prewritten and custom programs relies on the effort required to implement the software for a specific customer. If a program is designed for general use, it typically requires minimal effort to deploy. Conversely, a program like the R/3 System necessitates substantial investment in planning and maintenance, thus disqualifying it as prewritten. The DOR's interpretation exaggerates the Commission's stance, which maintains that increased implementation effort correlates with a lower likelihood of a program being prewritten, but does not imply that prewritten software must be mass-produced. The Commission's conclusion that the R/3 System is not prewritten because it is not generally available for use is deemed reasonable despite some confusion in its reasoning regarding factor six. In relation to factor seven, the Commission determined it did not apply since the R/3 System was classified as custom. While the language could have been clearer, the Commission's rationale was still reasonable. Instead of concluding that factor seven does not apply due to the program being custom, it might have been more accurate to state that it does not apply because the program is not prewritten and therefore not an existing program for general use.

"Existing program" under factor seven refers specifically to prewritten or canned programs, not custom programs. The Department of Revenue (DOR) asserts that the sale of an "existing" program constitutes a sale of tangible personal property, thus indicating it is not custom. Prewritten programs are defined as those available for general use. Therefore, "existing program" is interpreted as a program meant for general use. Factor seven should not be dismissed entirely due to indications of custom programming; rather, it must be evaluated in conjunction with other factors to assess whether a program is custom. Although the Commission's language may differ from the court's preference, its reasoning is sound.

The Commission concluded that factor seven does not apply to the R/3 System, as it was not available for general use. The DOR contends that factor seven does apply because the R/3 System was prewritten and unmodified prior to delivery to Menasha. However, the Commission's determination that the R/3 System did not exist for general use is upheld, as factor seven only applies to programs that are prewritten and generally available. 

The DOR's arguments regarding mandatory language in factor seven and the claim that the Commission's interpretation makes the factor surplusage are rejected, aligning with previous discussions on factor six. The Commission also considered the cost of the R/3 System, which weighed in favor of it being classified as a custom program, although cost alone is not determinative. The Commission's assessment of cost—despite the R/3 System exceeding $10,000, making it irrelevant under factor five—was reasonable and part of a broader consideration of all relevant facts and circumstances.

The Commission's interpretation of the rule is afforded deference, and a court will uphold the agency’s conclusions if they are reasonable, even if alternative interpretations exist. The inquiry focuses on whether the Commission's decision aligns with the regulation's purpose and whether its conclusions are reasonable.

The Commission's interpretation of the rule regarding the classification of the R/3 System as a custom program is afforded controlling weight deference, as it aligns with the rule's intent. The Commission determined that the significant investment made by Menasha in various aspects such as presale consultation, testing, training, and maintenance, alongside the necessity for extensive modifications (approximately 3,000), justified the classification of the R/3 System as custom. The classification remains valid regardless of whether modifications were made by the vendor or an independent consultant, as the rule does not specify such factors as relevant. The Commission concluded that all circumstances and the seven specified factors must be considered in determining if a program is custom. Responses to dissenting opinions highlight fundamental flaws, including attempts to introduce a two-prong test not supported by the rule's language. The dissenting justices' interpretations conflict with the rule's clear directive that the classification of a custom program relies on a comprehensive evaluation of all relevant facts and circumstances.

The court affirms the court of appeals' decision regarding the interpretation of Wis. Stat. 77.51(20) and Wis. Admin. Code. Tax 11.71(1)(e). It grants due weight deference to the Commission's statutory interpretation and controlling weight deference to its rule interpretation. The Commission is not required to defer to the Department of Revenue's (DOR) interpretation when a taxpayer appeals a DOR decision. The Commission reasonably concluded that the R/3 System was custom. Justice Crooks emphasizes the importance of appropriately granting deference to the Commission's interpretation, distinguishing it from the DOR's. He references past cases to support that the Commission, as the final authority reviewing DOR decisions, is best positioned to interpret the relevant regulations. The conclusion supports that the Commission’s interpretation should be upheld over the DOR's.

Deference is given to the Commission's interpretation of its administrative rules, which are equivalent to its own rules, and this interpretation is controlling unless it is plainly erroneous or inconsistent with the regulations. The Commission's interpretation of the relevant rules, crucial for the case, is deemed to deserve controlling weight deference. It applied all seven factors outlined in Wis. Admin. Code. Tax 11.71(1)(e) and the definition of "prewritten programs" in Wis. Admin. Code. Tax 11.71(1)(k) to determine whether the R/3 system was a custom or prewritten program. The decision is found to be reasonable and not plainly erroneous or inconsistent with the rules.

Dissenting opinions from Chief Justice Abrahamson and Justice Bradley argue against deferring to the Commission's interpretation, claiming it contradicts the administrative rules. They base their dissent on a selective reading of eight words from the definition of custom programs, disregarding the broader context that requires considering "all facts and circumstances" and applying the seven specified factors. This approach is criticized as it oversimplifies the definition, making the remaining text seemingly unnecessary. The dissenters' interpretations are deemed erroneous for misinterpreting the sentence structure and overlooking the comprehensive nature of the definition, which is supported by the requirement to consider all relevant factors. The Commission's adherence to the full text and its application of the factors to the case is confirmed to be consistent with the regulations, as noted by the court of appeals.

The Department of Revenue (DOR) fails to provide justification for disregarding the Commission's comprehensive interpretation of the tax rule regarding the customization of computer programs. The case of DOR v. Menasha Corp. establishes that controlling weight deference is suitable in this context, as the Commission's interpretation aligns with the rule's language and is not clearly erroneous. The legislature has tasked the Commission with reviewing DOR decisions, reinforcing this deference. 

Under controlling weight deference, alternative reasonable interpretations of the administrative rules do not invalidate the Commission's position unless proven plainly erroneous. The DOR has not demonstrated that the Commission's decisions are unreasonable or irrational. The statutory language regarding tax exemption for custom computer programs is acknowledged, but it does not directly resolve the core dispute of tax liability, which hinges on the application of an administrative rule by the DOR regarding software sales. 

The interpretation of the administrative rules is central to the case, rendering the level of deference to the Commission's statutory interpretation less critical. The majority opinion outlines three levels of deference—great weight, due weight, and no deference—applicable to agency interpretations of statutes, emphasizing the circumstances under which each applies.

The majority opinion applies due weight deference to the Commission's interpretation of tax statutes, concluding that the Commission's decision to exempt custom computer programs from tax is reasonable and aligns with the statute's purpose. The dissent, led by Chief Justice Abrahamson, argues that the majority's ruling effectively rewrites tax law and creates an unwarranted exemption, potentially resulting in significant revenue losses for the state—over $277.6 million before the end of the 2007-09 biennium and $28.3 million annually thereafter. The dissent emphasizes that all taxpayers should only pay the taxes owed according to existing laws, and it critiques the majority for imposing judicial interpretations of economic policy over statutory language. The legal framework stipulates that Wisconsin taxes tangible personal property, which includes computer programs unless they are classified as custom, as defined by specific administrative rules. The Commission's interpretation of Menasha's computer program as a custom program, therefore, exempted it from taxation, a conclusion the dissent disputes as contrary to legislative intent.

The term "custom computer program" is defined in the administrative rule as utility and application software tailored to meet a customer's specific processing needs, explicitly excluding "prewritten programs" or "canned programs," which are designed for general use by multiple customers. A program cannot be classified as both taxable (prewritten) and tax-exempt (custom). In 1995, SAP leased its R/3 System, comprising approximately 70 software modules that serve as a basic business and accounting framework, to Menasha Corporation. The R/3 System is not customer-specific; it is a standardized product leased to many clients, requiring each customer to modify it for their unique needs. By 1998, SAP had licensed this software to over 20,000 customers globally, with the R/3 System being integral to operations for major companies. The lease to Menasha Corporation for $5.3 million did not include customization services. The Department of Revenue is not taxing the subsequent $16 million Menasha spent on customizing the software. The legal question centers on whether the R/3 System leased to Menasha constitutes a taxable "computer program" or a tax-exempt "custom computer program" as per the administrative rule. The majority opinion asserts that it is the court's duty to independently interpret the statute or rule without deferring to the Tax Appeals Commission's decision.

The court is tasked with determining legal questions and assessing the appropriate level of deference to be granted to an agency's interpretation of a statute. Deference is warranted only when the agency’s interpretation aligns with the statute's language, meaning, and purpose, and is deemed reasonable. In this case, the Tax Appeals Commission's interpretation of the statute and rule concerning computer software is inconsistent with the statute's language and purpose, thus it should not receive deference from the court. The majority opinion fails to adequately address its obligation to independently interpret the administrative rule and evaluate the reasonableness of the Commission's interpretation. It acknowledges flaws in the Commission's ruling but ultimately concludes incorrectly that the Commission's decision aligns with the administrative rule. The Commission makes critical errors, notably disregarding the definition of nontaxable "custom programs" as software tailored to a customer's specific needs. The R/3 System leased to Menasha does not meet this definition, as it is provided in an unmodified form and does not cater to Menasha's unique processing requirements.

The Tax Appeals Commission misinterpreted the administrative rule's definitions of "custom programs" and "prewritten programs." The commission incorrectly added language to the rule, suggesting that prewritten programs must be "ready for use off the shelf" without modification, which is not supported by the rule's text. The commission's determination that the R/3 System is a custom program stems from the need for customization after acquisition, contradicting the rule's definition that simply requires a prewritten program to be "existing for general use." The administrative rule does not stipulate that a prewritten program must require no further investment to be operational. The R/3 System, as leased by SAP to Menasha Corporation, qualifies as a prewritten program because it is used in its unmodified form by various customers, making it suitable for general use. The commission's reasoning overlooks the plain language of the administrative rule, resulting in an erroneous classification of the R/3 System.

The majority opinion incorrectly aligns with the Commission's interpretation, which contradicts the rule's language, meaning, and purpose. The court should adopt Judge Steven Ebert's memorandum decision from the Dane County Circuit Court that overturned the Tax Appeals Commission's flawed ruling. SAP leased its R/3 software to Menasha Corporation for approximately $5.3 million, a standard practice similar to its other sales. The R/3 System, an off-the-shelf ERP software, is sold in unmodified form, requiring customers to implement it independently or through consultants. SAP's lease agreement did not allow for customization of the software. During a Wisconsin Department of Revenue audit, SAP acknowledged the R/3 System is subject to Wisconsin sales tax as standardized software. SAP paid over $1.9 million in taxes for sales to Wisconsin customers and agreed to collect sales and use taxes subsequently. Menasha Corporation, after leasing the software, spent about $16.3 million over seven years on customization, involving multiple consulting groups. The Department of Revenue assessed $265,093 in sales or use taxes on the $5.3 million lease, which is the focus of the current case. Menasha Corporation's refund claim specifically concerns this tax, not the consulting fees for customization. The document will next address the law and its application to these undisputed facts.

The Department of Revenue established Wis. Admin. Code. Tax 11.71, which interprets Wis. Stat. 77.51(20) to state that receipts from retail leases of computer programs, excluding custom programs, are taxable. Section 11.71 provides definitions critical to the taxation of the computer industry, particularly regarding "custom programs." A "custom program" is defined as utility and application software tailored to meet a customer's specific processing needs, evaluated based on several factors, including vendor consultation, program installation, necessary training, ongoing support, pricing presumptions, and the nature of modifications made to existing programs. Conversely, "prewritten programs" are defined as general-use software not tailored to individual customer requirements.

The R/3 System acquired by Menasha Corporation from SAP does not qualify as a custom program, as it does not meet the definition outlined in the first sentence of Wis. Admin. Code. Tax 11.71(1)(e), which emphasizes the accommodation of a customer's special processing needs. The Tax Appeals Commission concurs that the rule's first sentence defines "custom programs," reinforcing this interpretation. However, there is a noted disagreement regarding the concurrence's failure to align with the Commission's interpretation, particularly regarding the definition's implications.

Leased software that is unmodified and does not meet specific customer processing needs is not considered "custom software." Menasha Corporation incurred over $16 million over seven years to customize the R/3 System for its specific requirements. The Tax Appeals Commission failed to apply the administrative rule's definition of "custom programs," which is critical in this case. This oversight appears to be inadvertent rather than a deliberate choice to ignore the definition. The Department of Revenue insists that the court must adhere to this definition, asserting that the R/3 System does not qualify as "custom" because it does not accommodate Menasha's specific needs without further customization. During oral arguments, the Department reiterated that the definition of "custom software" requires accommodation of special processing needs, which the purchased R/3 modules did not provide. Despite the Department's emphasis on the definition from the administrative rule, the majority opinion neglects to apply this definition, instead relying on a broader interpretation based on "all facts and circumstances" without acknowledging the rule's specific guidance. The majority's approach reduces the definition of "custom programs" to a vague balancing test, ignoring the clear criteria established by the administrative code.

The majority opinion concludes that the R/3 System leased by SAP to Menasha Corporation qualifies as a custom program based on the surrounding facts and circumstances. However, it fails to explicitly assess whether the system meets the administrative rule's definition of "custom programs," which encompasses utility and application software tailored to a customer's specific processing needs. The Tax Appeals Commission and the majority erred by overlooking the rule's initial definition of "custom programs" and focusing solely on the second sentence, which outlines how to evaluate whether a program meets the definition. This second sentence serves to guide the analysis of factors relevant to the "special processing needs" of the customer rather than replace the first sentence's definition.

For example, if a vendor offers a standardized software package and modifies it for the customer, it can initially be considered a custom program. Consequently, the factors specified in the second sentence must then be reviewed to determine if the program qualifies as tax-exempt. The second sentence should not be invoked if the program is clearly not a custom program as defined in the first sentence. 

The dissent appropriately examines both sentences of the rule, while the majority neglects the first, leading to a flawed decision. The dissent emphasizes that the straightforward wording of the first sentence of the administrative code dictates a resolution favoring the Department of Revenue. Further analysis of the rule's second sentence and its enumerated factors supports the conclusion that the R/3 System cannot be classified as a custom program. Specifically, the sixth factor clarifies that custom programs do not include basic operational or prewritten programs. The R/3 System does not qualify as a basic operational program, and the dispute centers on whether it is a prewritten program, defined as software prepared for general use across multiple customers. Consequently, if the R/3 System is deemed a prewritten program, it cannot be classified as a custom program, as outlined in the administrative code. The Tax Appeals Commission acknowledged that this sixth factor acts as a definitive criterion.

The central issue in the case is whether the R/3 System qualifies as a prewritten program under Wis. Admin. Code Tax 11.71. The Tax Appeals Commission interprets the rule to distinguish between prewritten and custom programs, asserting that the R/3 System is not available for general use due to its requirement for extensive post-sale modifications for Menasha Corporation's specific needs. Despite acknowledging that the software is prewritten and leased to multiple customers, the Commission claims it is "useless" until modified. This interpretation diverges from the administrative rule, which defines a prewritten program as one that exists for general use, not necessarily ready for immediate deployment without modification. The Commission's reasoning suggests that significant customization negates the software's prewritten status, which is contested as unreasonable, given that Menasha paid a substantial amount for software it intended to use effectively. Furthermore, the Commission disregards SAP's acknowledgment that the R/3 System is prewritten and subject to sales tax, deeming this admission as lacking probative value, a position seen as illogical. Overall, the Tax Appeals Commission's application of the rule is critiqued as flawed and unconvincing.

The administrative rule in question does not support the Tax Appeals Commission's interpretation of Wis. Admin. Code. Tax 11.71(1)(e)6, which substitutes "general use" with "ready for use off-the-shelf" without modification. The text of Wis. Admin. Code. Tax 11.71(1)(k) does not mandate that a "prewritten program" must be usable off-the-shelf and without modification. Furthermore, this interpretation contradicts both the wording and the historical context of the rule. The history indicates that while the computer industry lobbied for a definition that included "ready for use off-the-shelf," the Department of Revenue rejected this request, maintaining that prewritten programs do not need to be immediately usable without modification. Previous technical memoranda from the Department clarified that prewritten programs can be modified for customer needs and are not required to be ready for immediate use. 

Additionally, the Tax Appeals Commission's ruling leads to unreasonable outcomes, as it deemed the R/3 System not a prewritten program due to the significant investment required by the Menasha Corporation for customization, despite the fact that at the time of the agreement, the future customization efforts were unknown. Lastly, the Commission's interpretation of factor six reduces it to surplusage, relying heavily on the other four factors outlined in the rule.

The determination of whether software qualifies as a "custom program" hinges on its readiness for off-the-shelf use. Factor six explicitly states that a "custom program" does not include prewritten software, and it should be interpreted independently from the other enumerated factors. The Tax Appeals Commission misinterpreted factor six by conflating it with the meanings of the first four factors, which diminishes its significance. The dissent argues that the R/3 System does not qualify as a custom program based on the definitions provided in the administrative rules.

The Commission also erred in interpreting factor two, which examines whether the software is loaded by the vendor and the extent of necessary testing. The finding that a former SAP employee loading the software indicates it is custom software is incorrect, as the rule specifies it must be loaded by the vendor directly. The Commission's interpretation fails to adhere strictly to the language of the rule.

Additionally, the Commission did not properly consider factor seven, which requires significant modification of an existing program by the vendor for specific environments. The Commission's conclusion that factor seven only applies to prewritten programs is flawed and suggests that this factor is unnecessary. The dissent supports the circuit court's application of the relevant administrative code, emphasizing that the Tax Appeals Commission's reasoning is inconsistent with the rule's plain language.

The R/3 System leased by SAP to Menasha Corporation is classified as a "prewritten program" rather than a "custom program" as defined in Wis. Admin. Code Tax 11.71. The R/3 software, consisting of 70 identical modules, was sold to numerous customers without customization for individual processing needs. Menasha had to procure additional service contracts to adapt the software for its specific requirements. The dissenting opinion argues that the Tax Appeals Commission and majority opinion misinterpret the plain language of the rule, ignoring the definition of "custom programs." The dissent emphasizes that none of the opinions addressed whether the R/3 program met Menasha's special needs, thereby failing to engage with the foundational question posed by the rule. The dissent asserts that reasonable interpretations must align with the rule's language, and that deference cannot be granted to interpretations that disregard the rule's clear text. The dissent concludes by highlighting the failure of the Commission and majority to analyze the rule's first sentence, which undermines their conclusions.

"Custom programs" are defined as utility and application software tailored to meet specific processing needs of a customer. The determination of whether software qualifies as a custom program should consider all relevant facts and circumstances. In this case, the Commission failed to analyze the definition provided in the Wisconsin Administrative Code, neglecting to interpret what constitutes a "custom program." Deference is typically granted to agencies interpreting their own rules; however, this principle cannot apply when no interpretation is offered. The concurrence attempts to assert that the Commission's interpretation is valid, yet this contradicts the Commission's own definition that explicitly states the nature of custom programs. The Commission misinterpreted the factors outlined in the rule, treating them as the sole criteria for determining if software is custom, rather than as additional considerations to be evaluated against the definition. The factors should support the premise that the software meets the customer's special needs, rather than undermine it. The R/3 system acquired, consisting of prewritten software, did not meet the customer's specific needs until modifications were implemented.

The Commission interpreted section 11.71(1)(e) to classify software that does not meet a customer's specific needs as "custom programs," suggesting that "does not accommodate" is synonymous with "does accommodate." This interpretation contradicts the clear language of the rule, which defines custom programs as those that do meet the special processing needs of the customer. Consequently, the dissent argues that the Commission's interpretation should not receive deference due to its inconsistency with the rule's wording. The dissent emphasizes that the majority's analysis neglects the rule's initial requirement, which is critical to understanding custom programs. Justice Louis B. Butler, Jr. joins in this dissent. The excerpt also references relevant legal precedents and definitions from the Wisconsin Statutes and Administrative Code concerning tangible personal property and custom software.

A vendor must significantly modify an existing program for compatibility with a customer's specific hardware and software if selected for modification. In the case of Menasha Corp. v. DOR, Menasha presented proposed Undisputed Material Facts, which the Department of Revenue (DOR) largely accepted while adding its own. The Wisconsin Tax Appeals Commission treated agreed facts as stipulated but resolved disputes between the parties. The DOR later contended at the court of appeals that genuine material facts remained, challenging two specific undisputed facts. However, the court affirmed the Commission's decision, stating the DOR's arguments lacked evidentiary support and did not create genuine disputes. The DOR did not pursue this argument with the higher court, leading to the Commission’s findings being treated as undisputed.

Additionally, although SAP admitted during an audit that its R/3 System was non-custom and thus taxable, the Commission deemed this admission non-binding as SAP was not a party to the proceeding. The Commission reasoned that SAP's decision to pay sales tax could be based on various factors unrelated to the merits of Menasha's case, concluding that the Commission's conclusions were reasonable. Menasha's refund claim was based on the $5.2 million tax it paid for the R/3 System. The circuit court’s decision, while noted for completeness, applied due weight deference to the Commission's rule interpretation, which should have been either controlling weight deference or a de novo review. The court of appeals, despite stating it applied due weight deference, effectively applied controlling weight deference, as the proper deference for rule interpretation differs from that for statutes.

The court of appeals correctly applied the appropriate standard, affirming that the Commission's interpretation of the rule was reasonable and aligned with its plain language. The court maintains its authority to interpret statutes and decides on questions of law, including the level of deference owed to an agency's interpretation. Factors influencing this deference include the agency's expertise, long-standing interpretations, legislative assignments, and the need for uniformity. While cases like Caterpillar and River City Refuse Removal focus on statute interpretation rather than rule interpretation, the Commission retains final authority on tax matters in Wisconsin. Under Wis. Stat. 73.01(4), the Commission's decisions become final unless appealed, and if the Commission interprets a statute against the Department of Revenue's position, the department is deemed to acquiesce unless it seeks review.

The Department of Revenue (DOR) must adhere to the construction of statutes as interpreted by the circuit court, unless it appeals to the court of appeals; this acquiescence affects how the DOR operates moving forward. Wisconsin Statute 73.015(2) allows for the review of adverse determinations by the tax appeals commission under Chapter 227. The court's March 21, 2008 order prompted a discussion on how acquiescence provisions influence the standard of review and deference toward the DOR and Tax Appeals Commission. 

The commission's reasoning on software classification is that the more effort required to make a program usable indicates it is more likely custom-built rather than off-the-shelf, despite the software's readiness. The DOR's references to the relevant rules are consistent, analyzing custom programs based on several factors, including the extent of presale consultation, installation requirements, necessary training, and ongoing support needed. A presumption exists that programs costing $10,000 or less are not custom, and basic operational or prewritten programs do not qualify as custom. Significant modification is required for existing programs to qualify as custom for specific customer environments.

Prewritten programs, commonly known as "canned programs," are defined as software created for general use, available for multiple customers, including those originally intended for in-house or custom use that are later offered for sale or lease. According to Wisconsin Statute 77.52(1), a tax is levied on the sale, lease, or rental of tangible personal property. Tangible personal property encompasses a wide range of items, including electricity, natural gas, steam, water, and certain leased property, as well as coins, stamps, and computer programs, excluding custom programs. 

The Commission's analysis, which includes a detailed consideration of the administrative rule, has been misunderstood by focusing narrowly on a specific phrase. The Commission's initial reference to the "intro" of the definition was intended as an introduction to a more comprehensive analysis, which included seven factors for interpretation. This approach indicates a coherent interpretation of the rule and justifies deference to the Commission's findings. Justice Bradley's dissent critiques this analysis but fails to recognize the significance of the introductory designation. The Wisconsin retail sales tax imposes a 5% tax on gross receipts from the sale, lease, or rental of tangible personal property, while a 5% use tax applies to the consumption of such property purchased from retailers. All references to statutes pertain to the 2003-04 version unless indicated otherwise.

A program can be categorized as either prewritten or custom. In *Racine Harley-Davidson, Inc. v. Wis. Div. of Hearings & Appeals*, the court established that when facts are undisputed, it may override the Department of Revenue or the Tax Appeals Commission in interpreting statutes. However, subsequent cases have diverged from this precedent without providing justification. The court's majority opinion erroneously asserts that a lower deference is owed to the Tax Appeals Commission's interpretation of Wis. Stat. 77.51 compared to its interpretation of the Department of Revenue's administrative rule. Additionally, the majority incorrectly claims that the Department's acceptance or rejection of the Commission's interpretation is irrelevant to determining the level of deference owed to the Commission. The court has previously noted that an agency's interpretation may receive different levels of deference based on whether it has been embraced by the relevant line agency, as outlined in Wis. Stat. 73.01(4)(e). These statutes clarify that the Tax Appeals Commission's interpretations are not binding on the Department in future cases unless the Department chooses to acquiesce. The Internal Revenue Service also has a similar practice regarding decisions of the United States Tax Court.

Federal courts do not defer to the United States Tax Court's interpretations of the Internal Revenue Code or general law. In a case involving Menasha Corporation and the Department of Revenue (DOR), it was noted that the Tax Appeals Commission's interpretation of Wisconsin administrative code raised questions due to conflicting language. Menasha Corporation paid approximately $5.3 million to SAP for leasing R/3 software, which included an initial payment of $5.2 million and an additional licensing fee of $100,000. There is ambiguity regarding what Menasha received for this additional payment, as the parties did not differentiate between the two payments. Although the agreement with SAP is labeled a "license," for the purposes of Wisconsin law, "lease" includes rental, hire, and license terms. Therefore, no distinction is made between leasing and licensing. The software license agreements are commonly referred to as "sales." The history of SAP's transition from custom programming to a software products firm is acknowledged, with a reference to authoritative texts on the software industry. SAP maintains a practice of separating software sales from consulting services.

SAP maintains a distinct separation between its licensing agreement and consulting services. The licensing agreement from 1995 did not require SAP to tailor its software for Menasha Corporation's specific operational needs. Menasha Corporation's tax liability issue involves various interpretations of taxes as either "sales" or "use" taxes by both Menasha and the Tax Appeals Commission. The retail sales tax is generally the retailer's responsibility, but Menasha Corporation agreed to pay any sales tax related to its lease of R/3 software from SAP. Initially, Menasha sought a refund of $342,614.45, which included $265,093 in taxes on the lease and an additional $77,521 on maintenance payments, the latter of which has since been settled. Menasha received a partial refund of $38,760 as part of this settlement. The Wisconsin Department of Revenue is authorized to create rules to interpret statutes it administers, relevant to the state's sales and use taxes. The Tax Appeals Commission's references to specific sections of the Wisconsin Administrative Code pertain to comprehensive interpretations of tax regulations.

The use of "includes" permits courts or agencies to expand the meanings of terms, while "means" limits interpretations to reasonable constructions of the specified wording. The majority opinion recognizes that the R/3 System was inadequate for Menasha, and there is a noted inconsistency in the majority's stance on factor 6, which they argue cannot solely determine if a computer program is custom, contrary to the Tax Appeals Commission's conclusion that factor 6 acts as a veto. The Commission emphasized that the focus should not be solely on whether the software is a standard business application, but rather on the challenges faced in applying the software. 

The Department of Revenue established Wis. Admin. Code. Tax 11.71 in 1986, amended in 1993 to clarify that custom programs are not to be categorized with prewritten programs, which are taxable. Legislative amendments in 1992 to Wis. Stat. 77.51(20) defined "tangible personal property" to include computer programs, excluding custom programs. A Department memo indicated this amendment aimed to align with the Department's interpretation of computer programs. Although the Department's technical information memoranda are not legally binding, a precedent exists where the Department was estopped from enforcing tax collection inconsistent with its memoranda due to reliance by taxpayers. The Department maintained consistency regarding its position after the promulgation of Wis. Admin. Code. Tax 11.71, as demonstrated in a 1992 tax release.

Customizations made after the sale or license of a program do not influence the taxability of that sale, as established by the Wisconsin Department of Revenue (DOR). This position has been consistently upheld in various tax bulletins and private letter rulings, indicating that the differentiation between "custom" and "prewritten" software does not rely on whether the software is ready for immediate use. Modifications by customers or third parties following the initial licensing are irrelevant to taxability determinations. The DOR has the authority to issue private letter rulings, which do not bind the requestor or allow for appeals. The document references various statutory provisions and case law to support these interpretations, emphasizing that the definition of "custom programs" is not merely prefatory but substantive. Factors such as the extent of presale consultation, whether the software meets special customer needs, and aspects like vendor support and system modifications are pertinent to classifying software as custom.