Dealers Are Being Charged With Use Tax by Wisconsin DOR on Computer Software Programs
Paul R. Norman , Sarah J. Horner | 03.08.21
Dealer management and other computer software programs are essential to auto and truck dealer operations. Most programs used by Wisconsin dealers are purchased from out-of-state vendors and in many, if not most, instances the vendors are not charging sales tax on the purchase. However, the Wisconsin Department of Revenue (“WDOR”) is starting to claim that the programs are subject to tax under the Wisconsin Sales and Use Tax Law and, when auditing dealers, imposing a use tax on the dealer where no sales tax was paid, plus 12% interest from the time the sales tax would have been due.
Use tax is charged to purchasers of goods or services when no sales tax was collected from them by the vendor on a taxable sale or lease. It is taxed at the same rate as the sales tax, normally 5.5% (5.0% state tax rate plus a 0.5% county rate in most counties). Normally the vendor is the person most likely to know whether a sale or lease is taxable and therefore is the party to the transaction who should bear any penalty, because no tax was paid at the time of the transaction. But in most cases right now it is the dealers, not the vendors, being required to pay the tax and the above-market 12% interest on computer software program transactions.
WDOR’s targeting of dealers, rather than the vendors, for taxes on computer software programs is most likely a carry-over from the days before the US Supreme Court issued its Wayfair decision in 2018, allowing states to require out-of-state vendors to collect sales tax on sales made to residents and businesses in the state. Before Wayfair, WDOR was prohibited from collecting sales tax from vendors with no physical presence in Wisconsin. Now, however, vendors with $100,000 or more in Wisconsin gross sales or more than 200 separate Wisconsin sales transactions can be audited by WDOR and required to pay sales tax on taxable transactions.
The taxation of computer software programs is complex and, in the cases we have seen, WDOR’s position that particular programs are subject to sales or use tax has, in many instances, been questionable. But the amounts involved for an individual dealer are usually not large enough to merit an appeal of the WDOR position. On the other hand, the 12% interest (which is statutory and not negotiable) places dealers in a far worse position than they would have been had the vendor charged them sales tax on the purchase in the first place.
What can a dealer do to avoid having to pay an unexpected amount of tax and interest on transactions that occurred up to four years before a sales and use tax audit by WDOR? One course is to determine why the vendor is not charging sales tax on the payments you make to it. If the vendor appears to have a strong case that its program is not taxable, perhaps it can be persuaded to present that case to WDOR and get it to agree. At least one vendor has already contacted WDOR and asked it to audit its Wisconsin transactions, thereby taking the heat off its Wisconsin dealer customers. Other vendors should be encouraged to do the same, since they are in a far better position than their customers to explain why their programs are not taxable under Wisconsin law.
In some cases, only certain features of the program may be taxable. For these, the vendor should be asked to segregate its price structure and charge tax on the taxable features. While paying tax on payments that were not previously taxed will increase your costs initially, this will be better than having to pay the tax, plus 12% interest, years later.
If nothing else, talking with vendors can help dealers prepare to defend against a claim that a computer program is taxable during an audit. Dealers can challenge audits by disputing tax adjustments for their use of certain services accessed through the internet. Arguing that dealer software programs do not qualify as “digital goods” and that a dealer’s use of pricing technology or other management software is not a taxable service could potentially result in the WDOR removing the adjustment and, in turn, reduce the dealer’s overall tax liability. The likelihood of this favorable result only increases with greater knowledge of the various components that make up the computer software program.
The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.