By Derek Takehara and Andrew Appleby

The Minnesota Supreme Court upheld the Minnesota Department of Revenue’s imposition of sales tax on a software company’s sale of partially customized software because the taxpayer failed to separately state customization charges on customer invoices. The taxpayer licensed software that analyzed information on retailers’ cash registers. The taxpayer always customized the software to fit the retailers’ needs, but never separately stated customization charges on its invoices. By statute, Minnesota law provides that sales of prewritten computer software are subject to sales tax. Partially prewritten and partially customized software is considered entirely prewritten software, but customized portions of software are exempt from sales tax to the extent they are reasonable and separately stated. Applying the plain meaning rule to interpret the unambiguous statute, the court held that the taxpayer’s failure to separately state customization charges subjected the entire transaction to sales tax. The court rejected the taxpayer’s alternative substance-over-form argument because the taxpayer presented inadequate evidence that, in substance, it was selling purely customized software. Finally, the court upheld penalties because the taxpayer failed to show it reasonably relied on the advice of its accountant. LumiData, Inc. v. Comm’r of Revenue, No. A14-0254 (Minn. Sept. 10, 2014).