from an order of the circuit court for Dane County No.
2017CV2214: SHELLEY J. GAYLORD, Judge. Affirmed.
Fitzpatrick, P.J., Blanchard and Kloppenburg, JJ.
The Wisconsin Department of Revenue (DOR) appeals a Dane
County Circuit Court order that affirmed a decision of the
Tax Appeals Commission. The Commission determined that
royalties Microsoft Corporation received from licensing its
software to original equipment manufacturers (OEMs) that are
not located in Wisconsin, but whose products are used in
Wisconsin, should not be considered in calculating
Microsoft's franchise tax liability to the State of
Wisconsin for the tax years 2006 to 2009 under Wis.Stat.
§ 71.25(9)(d) (2005-06). That statutory subpart concerns
the franchise taxation of sales of intangibles if the
income-producing activity occurs in Wisconsin. See
§ 71.25(9)(d). The DOR argues that the Commission erred
in failing to apply a statutory exception to §
71.25(9)(d), under which franchise taxation of computer
software occurs if a "licensee" uses the software
in Wisconsin. See § 71.25(9)(df). According to
the DOR, the § 71.25(9)(df) exception requires that the
royalties Microsoft received from OEMs not located in
Wisconsin must be considered in calculating Microsoft's
franchise tax liability because the persons who use those
OEMs' products in Wisconsin were, in effect,
Microsoft's licensees. We reject the DOR's arguments
and, therefore, affirm the circuit court's order that
affirmed the Commission's decision.
The following facts are not disputed on appeal.
Microsoft is engaged in the business of developing,
distributing, and licensing computer software. In this
context, OEMs are businesses that manufacture, or at least
assemble, computers, which incorporate Microsoft software.
Examples of OEMs that incorporate Microsoft software include
Dell and Hewlett Packard.
Relevant to the tax years in dispute, Microsoft entered into
software copyright license agreements with
OEMs. Some OEMs with which Microsoft entered
into license agreements were based in Wisconsin, but the vast
majority were not based in Wisconsin. Because this appeal
does not concern OEMs based in Wisconsin, for clarity from
this point forward all references to "OEMs" are to
those OEMs that were not based in Wisconsin.
Under the license agreements, the OEMs paid royalties to
Microsoft, in exchange for which Microsoft granted the
following non-exclusive rights to the OEMs: (1) to install
Microsoft's software on computers; and (2) to distribute
Microsoft's software that was installed on the computers
and grant sublicenses for end-users to use the software.
OEMs sold the computers with the installed Microsoft software
to consumers directly or through retailers such as Best Buy.
The Commission referred to the consumers as
"end-users," and we do the same. All that is at
issue here is end use of the Microsoft software that occurred
in Wisconsin, not end use that occurred outside Wisconsin.
Computers sold by the OEMs with Microsoft software installed
came with End-User Licensing Agreements (which we will refer
to as "end-user agreements"). By accessing and
using the Microsoft software on the computers sold by the
OEMs, end-users agreed to be bound by the terms of the
end-user agreements. The terms of the end-user agreements
were dictated by Microsoft. By their terms, the end-user
agreements were contracts between the OEMs and the end-users
which started with this sentence: "IMPORTANT-READ
CAREFULLY: This [end-user agreement] is a legal agreement
between you … and the manufacturer [OEM] of the
computer system or computer system component
('HARDWARE') with which you acquired the Microsoft
software product(s) identified above
('SOFTWARE')." The DOR does not contend that
Microsoft was a party to the end-user agreements.
In calculating its franchise tax liability to the State of
Wisconsin for tax years 2006 to 2009, Microsoft took the
position that the software license royalties it received from
OEMs should not be considered in calculating its franchise
tax. The DOR subsequently conducted an audit and determined
that Microsoft was required to include the royalties that it
received from OEMs in its Wisconsin franchise tax
calculations. Based on that determination, the DOR assessed
against Microsoft additional franchise tax for the tax years
2006 through 2009 that, with statutory interest, totaled
almost $2.9 million.
Microsoft petitioned the Commission for review of the
additional assessed tax. Following a four-day trial, the
Commission reversed the additional franchise tax assessed by
the DOR against Microsoft.
The DOR appealed the Commission's decision to the circuit
court, which affirmed the Commission's decision. The DOR
We will consider other pertinent facts in the Discussion that
The DOR contends that the Commission erred when it determined
that the software license royalties that the OEMS paid to
Microsoft should not be considered in calculating
Microsoft's Wisconsin franchise tax. We now set forth our
standard of review, consider the relevant portions of the
statutory scheme at issue along with the Commission's
application of that scheme and the DOR's challenge to the
Commission's decision, and explain why we reject the
DOR's arguments in support of its challenge.
Standard of Review and Statutory Interpretation.
In an appeal of a circuit court order affirming or reversing
an agency decision, we review the decision of the agency, not
that of the circuit court. Hilton ex rel. Pages
Homeowners' Ass'n v. DNR, 2006 WI 84, ¶15,
293 Wis.2d 1, 717 N.W.2d 166. When reviewing findings of fact
made by the Commission, we will affirm the findings if those
are supported by substantial evidence. See id.,
¶30. "An agency's findings are supported by
substantial evidence if a reasonable person could arrive at
the same conclusion as the agency, taking into account all
the evidence in the record." Clean Wis., Inc. v.
Public Serv. Comm'n of Wis., 2005 WI 93, ¶46,
282 Wis.2d 250, 700 N.W.2d 768. When reviewing questions of
law decided by an agency, including statutory interpretation,
our review is de novo. See Wis. Stat. §
227.57(11) (2017-18), as amended by 2017 Wis. Act
369, § 80; Tetra Tech EC, Inc. v. DOR, 2018 WI
75, ¶84, 382 Wis.2d 496, 914 N.W.2d 21');">914 N.W.2d 21.
This appeal concerns issues of statutory interpretation.
Statutory interpretation begins with the statute's text.
We give the text its common, ordinary and accepted meaning,
except that we give technical or specially defined words
their technical or special definitions. State v.
Warbelton, 2008 WI.App. 42, ¶13, 308 Wis.2d 459,
747 N.W.2d 717. If the meaning of the statute is clear from
its plain language, we do not look beyond that language to
ascertain its meaning. Lake City Corp. v. City of
Mequon, 207 Wis.2d 155, 163, 558 N.W.2d 100 (1997).
The Software License Royalties Received by Microsoft from
OEMs Were Not Subject to the Wisconsin Franchise Tax.
Wisconsin currently imposes, and during the tax years at
issue imposed, a franchise tax on a corporation based on the
corporation's income derived from, or attributable to,
sources within Wisconsin. See Wis. Stat.
§§ 71.23(2), 71.25 (2005-06) and (2017-18). When a
corporation is engaged in business within Wisconsin and at
least one other state, Wisconsin has adopted a method for
determining the portion of the corporation's income that
is subject to Wisconsin's franchise tax. That process is
known as "apportionment," and we now discuss the
aspects of that process as applied here. See §
71.25 (2005-06) and (2017-18).
The parties agree that Microsoft conducts business within and
without Wisconsin and that Microsoft's business income is
subject to apportionment between Wisconsin and other states.
Wisconsin Stat. § 71.25 divides the income of a
corporation operating both "within and without"
Wisconsin into "apportionable income" and
"nonapportionable income." Sec. 71.25(5) (2005-06)
and (2017-18). This case concerns only apportionable income,
which is income that, for franchise tax purposes, must be
allocated to Wisconsin and at least one other state in which
the taxpayer, such as Microsoft, is carrying on business.
Sec. 71.25(5)(a) (2005-06) and (2017-18).
Wisconsin franchise tax statutes include an
"apportionment formula" that is used to calculate
the portion of a corporation's income that is properly
attributed to business transacted in Wisconsin and
accordingly is taxable by Wisconsin. See Wis. Stat.
§ 71.25(5), (6) and (9) (2005-06) and (2017-18); see
Consolidated Freightways Corp. of Del. v. DOR, 164
Wis.2d 764, 775, 477 N.W.2d 44 (1991); United Parcel
Serv. Co. v. DOR, 204 Wis.2d 63, 65-66, 72-74, 553
N.W.2d 861 (Ct. App. 1996). During the tax years at issue,
that apportionment formula included a percentage of
Microsoft's sales, referred to in § 71.25(6) as the
"sales factor." See §
71.25(6)(a)-(d). The dispute in this appeal centers on the
sales factor segment of the apportionment formula.
The version of Wis.Stat. § 71.25 in effect during the
tax years at issue defined the "sales factor" for a
taxpayer corporation such as Microsoft as "a
fraction," consisting of "[a] numerator …
which is the total sales of the taxpayer in this
state during the tax period, and [a] denominator
… which is the total sales of the taxpayer everywhere
during the tax period." Sec. 71.25(9)(a) (emphasis
added). The resulting quotient represented the percentage of
the sales of ...