936 N.W.2d 160
Wis. Ct. App.2019Background
- Microsoft licensed software to OEMs (mostly out-of-state) who installed software on computers and paid royalties to Microsoft. OEMs sold those computers to end-users, often including Microsoft-drafted end-user licensing agreements (EULAs) between the OEM and the end-user.
- EULAs identified the OEM (manufacturer) as the contracting party with the end-user; Microsoft was not a party to those EULAs.
- DOR audited Microsoft for tax years 2006–2009 and assessed franchise tax on royalties from OEMs, treating receipts as Wisconsin-sourced when end-users used the software in Wisconsin.
- The Tax Appeals Commission reversed the assessment, finding end-users were not Microsoft licensees and OEMs were not Microsoft agents; the circuit court affirmed; DOR appealed.
- Central statutory provision: Wis. Stat. § 71.25(9)(d) (intangibles taxed where income-producing activity occurs) with exception § 71.25(9)(df) (gross receipts from use of computer software taxed if the licensee uses the software in Wisconsin).
Issues
| Issue | Plaintiff's Argument (DOR) | Defendant's Argument (Microsoft) | Held |
|---|---|---|---|
| Whether royalties paid by out-of-state OEMs must be included in Wisconsin sales factor under §71.25(9)(df) because Wisconsin end-users effectively were Microsoft "licensees" | End-users who use the software in Wisconsin are "licensees" (or de facto licensees) for purposes of §71.25(9)(df), so royalties paid by OEMs are Wisconsin-sourced | End-users were not licensees of Microsoft; they had sublicenses from OEMs and no direct contract with Microsoft, so §71.25(9)(df) does not apply | Held: End-users were not Microsoft licensees; royalties not included under §71.25(9)(df) |
| Whether OEMs acted as Microsoft agents (so sublicenses amounted to Microsoft licenses to end-users) | OEMs granted sublicenses on Microsoft’s behalf and were controlled by Microsoft in granting sublicenses, making them agents | OEMs acted independently: set pricing, markets, retained proceeds, owed no accounting to Microsoft; royalties were paid regardless of OEM sales | Held: OEMs were not agents of Microsoft; agency not established |
| Whether "use" in Wisconsin alone suffices to source receipts under §71.25(9)(df) without a direct license relationship | Location of use controls; where end-users used software in Wisconsin, receipts should be taxed regardless of contractual form | Statute requires a licensee to use the software in Wisconsin; use alone cannot convert a sublicensee into a licensee or bypass statutory text | Held: Use alone insufficient; statute requires a licensee, which was absent |
Key Cases Cited
- Hilton ex rel. Pages Homeowners’ Ass’n v. DNR, 293 Wis. 2d 1 (WI 2006) (agency decision review standards)
- Clean Wis., Inc. v. Public Serv. Comm’n of Wis., 282 Wis. 2d 250 (WI 2005) (substantial evidence standard for agency factfinding)
- Lake City Corp. v. City of Mequon, 207 Wis. 2d 155 (WI 1997) (statutory interpretation begins with plain text)
- Consolidated Freightways Corp. of Del. v. DOR, 164 Wis. 2d 764 (WI 1991) (apportionment/sales factor principles)
- United Parcel Serv. Co. v. DOR, 204 Wis. 2d 63 (Ct. App. 1996) (sales factor and apportionment rules)
- Tetra Tech EC, Inc. v. DOR, 382 Wis. 2d 496 (WI 2018) (de novo review for statutory interpretation of agency decisions)
- Noll v. Dimiceli’s, Inc., 115 Wis. 2d 641 (Ct. App. 1983) (existence of agency is a factual question)
- Westmas v. Creekside Tree Serv., Inc., 379 Wis. 2d 471 (WI 2018) (definition and requirements of agency relationship)
- Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp., 284 F.3d 1323 (Fed. Cir. 2002) (discussed but not controlling; relied on for sublicensing treatise language)
- Federal Labs., Inc. v. Commissioner, 8 T.C. 1150 (T.C. 1947) (older Tax Court language on sublicense/agency cited but not followed)