On October 31, 2019, the Wisconsin Court of Appeals rejected the Wisconsin Department of Revenue’s (DOR) position in Wisconsin Department of Revenue v. Microsoft Corporation, Case No. 2018AP2024 that Microsoft should “look through” its customer for purposes of apportioning its receipts.¹

The court held that royalties Microsoft Corporation received from out-of-state computer manufacturers for the right to install Microsoft software on computers cannot be treated as “Wisconsin receipts” for income tax purposes. The DOR had sought to classify these royalties as “Wisconsin receipts” to the extent that computer manufacturers sold computers (with Microsoft software) to Wisconsin residents.

The court rejected Wisconsin’s look-through apportionment position—that is, apportionment that “looks through” the taxpayer’s customer to source a sale to the location of the customer’s customer.

The DOR argued that look-through apportionment was appropriate under a Wisconsin law applicable to receipts from the “use of computer software,” which sources receipts to Wisconsin if the “licensee uses the computer software at a location in” the State. The court rejected the argument, explaining that purchasers of the computers were not licensees of Microsoft, but instead licensed the software from the computer manufacturer. The court also rejected an argument that the computer manufacturers were agents of Microsoft and that Microsoft should have been deemed to have granted licenses to end-users.

Instead, the court determined that the royalty receipts at issue must be sourced under the statutory provision applicable to receipts from sales, other than sales of tangible personal property, which provided that “sales, other than sales of tangible personal property, are in this state if the income-producing activity is performed in this state.” Because Microsoft had no income-producing activities in the State with respect to the receipts at issue, the court held that no royalties could be sourced to Wisconsin.

The Court of Appeals decision affirmed a Dane County Circuit Court order in favor of Microsoft that had affirmed a Wisconsin Tax Appeals Commission decision also in favor of Microsoft.

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¹Eversheds Sutherland (US) LLP and Michael Best & Friedrich LLP represented Microsoft at trial and on appeal.

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