In DOR v. Microsoft Corp. (2018AP2024), the Court of Appeals District IV held that Microsoft’s royalties from software sales to manufacturers outside of Wisconsin, whose products are used in Wisconsin, should not be used in calculating Microsoft’s Wisconsin tax liability.

Microsoft sells its software to manufacturers like Dell and HP, who manufacture computers containing the Microsoft software. Microsoft enters into license agreements with these manufacturers. When the manufacturers sell the computers with Microsoft software to end-use consumers, the consumer using the computer must enter into an end-user agreement with the manufacturer. Though Microsoft dictates the end-use agreement, it is not a party to the end-use agreement between the manufacturer and consumer.

Microsoft contended that its royalties from selling software to manufacturers not located in Wisconsin should not be included in its Wisconsin tax liability. The Wisconsin Department of Revenue argued those royalties should be included in Microsoft’s tax liability because the end-use consumers of the software on the computers were located in Wisconsin.

Wis. Stat. § 71.25(9)(df) states that software sales are included in a corporation’s Wisconsin tax liability if the “licensee uses the computer software at a location in this state.” The issue before the court was whether the Wisconsin end-use consumers were “licensees” for the purposes of that statute.

The court found that Wisconsin end-use consumers are not “licensees” of Microsoft, so Microsoft’s sales to out-of-state manufacturers whose consumers were located in Wisconsin should not be used to calculate Microsoft’s Wisconsin tax liability. According to the court, the manufacturers were licensees of Microsoft, and by entering into the end-use agreements consumers were sublicensees of Microsoft. However, the court distinguished “licensees” from “sublicensees” for the purposes of § 71.25(9)(df). The court found no direct relationship between Microsoft and the Wisconsin end users. Furthermore, the manufacturers were not agents of Microsoft in entering into the end-use agreements with consumers. Finally, consumers’ use of the software in Wisconsin does not satisfy the § 71.25(9)(df) requirement that there be a “licensee” in the state for the software sales to count toward Microsoft’s tax liability.