Why It's Important For Politicians To Plan For Rainy Days
I'm planning on taking a trip to Las Vegas this Fall. I guess it's possible that I'll get lucky and come back with $5000 more than I left with. To plan my family finances on the assumption that I'm going to win money in Vegas however would be irresponsible and - well - stupid!
Yet this kind of wishful thinking is precisely what the Governor and State Legislature engaged in the last time they supposedly "balanced" the State budget. Unfortunately (and predictably), their efforts have now come undone.
What's that old adage about not counting your chickens before they are hatched?
Friday, the Wisconsin Supreme Court ruled that the State had improperly collected sales taxes on computer software purchased by the Menasha Corporation. The ruling means that the State will have to rebate almost $600,000 to Menasha Corp. and perhaps as much as $265 million to various other companies who had similar taxes improperly collected from them.
The case involved a rather significant interpretation of Wisconsin tax law.
As a general rule, in Wisconsin, people pay a state sales tax on goods - but not on services. This means that when you see a doctor or hire a lawyer or an accountant, you do not have to pay a sales tax on their fees. In contrast, while you don't have to pay sales tax on the cost of your haircut (because it's a service), you do have to pay sales tax if you buy shampoo from your barber (because the shampoo is a good).
The question decided by the court was whether customized computer software is more like a good (which would make it taxable) or a service (which would be tax-exempt)?
Back in the mid-90's, the Menasha Corp ordered a customized software system designed to fit its specific needs. The software provider started with some basic business software and subsequently made over 3000 modifications to the various programs in order to customize it to meet Menasha's needs. The Court held that what Menasha was really purchasing was the services of the software company in developing a unique system as opposed to a "good" that would have been readily available to everyone (like when you buy a copy of "TurboTax" at the store).
When the Department of Revenue tried to collect sales tax on the cost of the system, Menasha appealed to the Tax Appeals Commission (which decided in favor of Menasha). Unhappy with the ruling, the Department of Revenue appealed to Dane County Circuit Judge Steven Ebert (the same judge who was recently overruled in the the Scott Jensen case). Judge Ebert decided in favor of the Department of Revenue.
Menasha appealed to the Wisconsin Court of Appeals (which subsequently overruled Ebert and held for Menasha). The Supreme Court's decision affirmed the appellate court ruling. For what it's worth, I think the Supreme Court got it right.
Since Menasha was required to pay the tax while the case was being litigated through the court system, it is now entitled to a full return of all monies paid, plus interest.
The real outrage here though is that in creating the last budget "fix", the Legislature and the Governor completely ignored the fact that the Department of Revenue might lose this case. As a result, they set aside no money to pay tax refunds to businesses that had improperly paid taxes on customized software systems. Even more aggravating is the fact that the politicians took this reckless course even though the Court of Appeals had already held the taxes were improperly collected.
If I've borrowed money from someone, it's possible that they might either forget about collecting on the debt or possibly agree to settle for less than the full amount owed. However, sound fiscal policy dictates that I'd better have a "rainy day" fund established in case I have to pay the full amount back. While the State of Wisconsin does have some money in reserve, it's nowhere near enough to cover what it's going to have to pay back to businesses that improperly paid taxes.
As a result of this, a very sticky budget situation has just gotten a lot worse.
A little bit of "irrational exuberance" is fine if you're playing the slots in Vegas. It's not very good though if you're trying to realistically balance the budget of a State.
I guess this is why rainy days and State Supreme Court decisions often get legislators down.