Wisconsin Department of Revenue v. Menasha Corp.

N. PATRICK CROOKS, J.

¶ 109. {concurring). While I join the majority opinion, I write separately to emphasize that resolving the issue of deference is key to a correct decision in this case. Rules regarding deference are important limits that respect the different roles of the branches of government. Granting the appropriate level of deference to the Commission's interpretation of Wis. Admin. Code § Tax 11.71(l)(e) and (k)1 *643and Wis. Stat. § 77.51(20),2 I concur that the Commission's decision should be upheld.

¶ 110. The threshold question on the issue of deference is whether it is the DOR's interpretation or the Commission's interpretation of the statute and the rules that is entitled to deference. I concur that it is the Commission's interpretation which is entitled to deference, while recognizing that the DOR's interpretation certainly must be carefully reviewed as well.

¶ 111. In DaimlerChrysler v. LIRC, 2007 WI 15, 299 Wis. 2d 1, 727 N.W.2d 311, we treated a rule promulgated by the DWD and reviewed by LIRC as the *644functional equivalent of LIRC's own rule for purposes of analyzing the level of deference due. Id,., ¶ 11 (citations omitted). ("Here, the LIRC reviewed a rule promulgated by the DWD, not the LIRC's own rule. The LIRC is an adjudicative body charged only with resolving certain disputes. . . . The LIRC does not make rules, except for rules governing its own procedures.") This court reasoned that "[a]n administrative agency that regularly works with the rules and regulations of another agency, whose actions it is authorized by the legislature to review, is in the best position to interpret such rules and regulations because the agency knows the specific purposes of the rules and regulations . .. and has expertise in the area the agency is called upon to review." Id., ¶ 22 (citation omitted). That description applies with equal force to the relationship between the DOR and the Commission.

¶ 112. Further, granting deference to the Commission is consistent with the analysis in Caterpillar, which, like this case, concerned a conflict between the DOR and the Commission. There the court of appeals found that "[bjecause the commission is the final administrative authority that reviews the decisions of the DOR, any deference that might be due to the decision of an administrative agency is due to the commission, not to the DOR." DOR v. Caterpillar, Inc., 2001 WI App 35, ¶ 6, n.3, 241 Wis. 2d 282, 625 N.W.2d 338, review denied, 2001 WI 43, 242 Wis. 2d 545, 629 N.W.2d 784. A fair reading of the DaimlerChrysler and Caterpillar cases leads to the conclusion that the agency whose interpretation is entitled to deference here is the Commission.

¶ 113. The deference afforded to the Commission's interpretation of the administrative rules is significant in this case, since such rules are the *645functional equivalent of the Commission's rules. "An administrative agency's interpretation of its own rules or regulations is controlling unless 'plainly erroneous or inconsistent with the regulations.'" DaimlerChrysler, 299 Wis. 2d 1, ¶ 11 (citations omitted).

¶ 114. I concur with the majority that the Commission's interpretation of the relevant administrative rules — which contain the language crucial to resolving this case — is entitled to controlling weight deference. The Commission applied all seven factors in Wis. Admin. Code § Tax 11.71(l)(e), as well the definition of "prewritten programs" in Wis. Admin. Code § Tax 11.71(l)(k) in determining whether the R/3 system here was a custom program or a prewritten program. I am satisfied that the Commission's decision is neither plainly erroneous nor inconsistent with the rules, and that it is reasonable.

¶ 115. In their dissents, Chief Justice Abraham-son and Justice Bradley decline to defer to the Commission's interpretation on the grounds that the interpretation is inconsistent with the administrative rules. Chief Justice Abrahamson's dissent, ¶ 143; Justice Bradley's dissent, ¶ 214. That conclusion rests on an alternative interpretation that carves just eight words from a single sentence, taken from the definition of custom programs, designates those eight words as the relevant definition, and seemingly ignores the surrounding text. Part of Wis. Admin. Code § Tax 11.71(l)(e) that is excised by such a reading expressly directs that such a determination be based on "all the facts and circumstances" and lays out the seven factors to determine whether a program is a custom program. If a workable and complete definition could be garnered from the last eight words of the sentence, the rest of the definition would then be surplusage. The seven factors *646and the language requiring consideration of "all the facts and circumstances" are there for a reason, and they make a difference here. Ignoring the requirement that the factors shall be considered leaves the definition open to being read many different ways. Ignoring those factors cannot be the correct approach because the rule says the determination "shall be based upon all the facts and circumstances, including [the seven factors] . . . ." Wis. Admin. Code § Tax 11.71(l)(e).3

¶ 116. The error in both dissents comes in taking the last eight words of a sentence from the definition and saying it is the definition. See Chief Justice Abrahamson's dissent, ¶ 148; Justice Bradley's dissent, ¶ 214. The punctuation denotes the end of the sentence, not the end of the definition. Even within Wis. Admin. Code § Tax 11.71(1), a section setting forth the *647"Definitions of Terms," six of the subsections define terms with definitions that have more than one sentence. See § Tax 11.71(l)(b), (c), (e), (i), (L), and (m).

¶ 117. It was hardly "plainly erroneous or inconsistent with the regulations" — the standard we apply here concerning interpretation of these administrative rules — for the Commission to interpret the rules by reading the full text of the subsection and examining and applying each factor to the facts of this case. The court of appeals rightly noted in its opinion,

As the commission pointed out, Wis. Admin. Code § Tax 11.71(l)(e) requires that the commission consider "all facts and circumstances" in determining whether a computer program comports with the definition of a custom program, including factors 1. — 7. of the tax rule. We observe that the plain language of § Tax 11.71(l)(e) imposes this requirement. .. . Aside from its narrow and unreasonable interpretation of § Tax 11.71(l)(e), the DOR offers no reason for why we should ignore the commission's determination that the tax rule shall be considered in its entirety in determining whether a computer program is customized.

DOR v. Menasha Corp., 2007 WI App 20, ¶ 49, 299 Wis. 2d 348, 728 N.W.2d 738.

¶ 118. Controlling weight deference (similar to great weight deference applied to statutory interpretation (DaimlerChrysler, 299 Wis. 2d 1, ¶ 15)) is appropriate here, because the Commission reasonably interpreted a rule adopted by the DOR, the Commission's interpretation was not inconsistent with the rule's language or clearly erroneous, and the Commission was charged by the legislature with the responsibility of reviewing decisions of the DOR. Id., ¶ 13; see also Wis. *648Stat. § 73.01 (4)(a). The Commission regularly works with the rules and regulations of the DOR.

¶ 119. Finally, under controlling weight deference, proposing an equally reasonable alternative interpretation of the administrative rules, or even an alternative interpretation that is more reasonable 0Caterpillar, 241 Wis. 2d 282, ¶ 6), does not render the interpretation of the Commission plainly erroneous or inconsistent with the administrative rules. Multiple interpretations may well be consistent with the rules and regulations. That is why it is so important to get the deference analysis right here. By applying controlling weight deference to the Commission's decision on the interpretation of the administrative rules involved, I am satisfied that its decision must be upheld. The DOR has not established that the Commission's determinations are unreasonable, irrational, or plainly erroneous.

¶ 120. The statutory interpretation necessary in this case is at best perfunctory. The relevant statutory language merely establishes that an exemption from tax exists for "custom computer programs." Under the statute, " '[tjangible personal property,'" i.e., taxable property, "includes . . . computer programs except custom computer programs." Wis. Stat. § 77.51(20) (emphasis added). Tax liability or lack thereof is certainly the heart of this case, but the dispute here is not centered on whether custom computer programs are exempted from tax under the statute. The parties agree on that. Thus, while it is necessary to acknowledge the statutory framework, the statute does not contain any language that is helpful to the resolution of the disputed matter. As counsel for the DOR said in oral argument before this court, "The outcome of this case depends entirely upon the application of an administrative rule promul*649gated by the department. That rule determines whether or not a software sale by a software vendor is subject to sales and use tax."

¶ 121. To the extent that statutory interpretation comes into play it does so because "[w]hen an administrative agency promulgates regulations pursuant to a power delegated by the legislature, we construe those regulations 'together with the statute to make, if possible, an effectual piece of legislation in harmony with common sense and sound reason.'" Daimler Chrysler, 299 Wis. 2d 1, ¶ 10 (citation omitted). While it is necessary to consult the statute involved (Wis. Stat. § 77.51(20)) before moving on to parse the administrative rule involved, it seems to me to be unnecessary to determine the level of deference due to the Commission's interpretation of the statute. This case turns on the interpretation of administrative rules rather than on the statute.

¶ 122. The majority discusses the three levels of deference — great weight, due weight, and no deference —accorded an agency's interpretation of a statute, as well as the circumstances under which each is appropriate. Majority op., ¶¶ 47-50.1 note that the majority applies due weight deference to the Commission's statutory interpretation, and I see no reason to take issue with that holding, since I believe such a determination is not required to resolve this case. I recognize, however, that "[w]hen applying due weight deference, we will not overturn a reasonable agency interpretation that is consistent with the purpose of the statute, unless there is a more reasonable interpretation." DaimlerChrysler, 299 Wis. 2d 1, ¶ 17 (citation omitted).

¶ 123. Because the Commission's decision was consistent with the purpose of the statute — to exempt custom computer programs from tax — and because I do *650not think a more reasonable interpretation was set forth by the DOR, there certainly is no reason to overturn the decision based on the Commission's interpretation of the statute.

¶ 124. As Chief Justice Abrahamson's dissent notes, the tax code is designed to ensure that taxpayers pay what they owe and no more. Chief Justice Abrahamson's dissent, ¶ 127. What is owed is determined by Wisconsin statutes and administrative rules and regulations. The dispute as to the application of the relevant statute, and especially the interpretation of the rules, was adjudicated by the Commission. Its interpretation is entitled to controlling weight deference. Here, the tax rules and regulations were reasonably interpreted by the appropriate adjudicative body, authorized to do so by the legislature. It was the Commission's considered and reasonable opinion, taking into account all the facts and circumstances as required by Wis. Admin. Code § Tax 11.71(l)(e), that Menasha's computer program was a custom computer program, not a prewritten program. Since it was, therefore, not tangible personal property, it was not subject to the tax that the DOR attempted to impose. Like all taxpayers, Menasha is required to pay the taxes on taxable purchases only — no more, no less.

¶ 125. For these reasons, I respectfully concur.

¶ 126. I am authorized to state that Justices DAVID T. PROSSER and PATIENCE DRAKE ROGGENSACK join this concurrence.

Wisconsin Stat. § 77.52(1) imposes a tax on "the sale, lease or rental of tangible personal property. .. ." Wisconsin Stat. § 77.51(20) defines tangible property as follows:

"Tangible personal property" means all tangible personal property of every kind and description and includes electricity, natural gas, steam and water and also leased property affixed to realty if the lessor has the right to remove the property upon breach or termination of the lease agreement, unless the lessor of the property is also the lessor of the realty to which the property is affixed. "Tangible personal property" also includes coins and stamps of the United States sold or traded as collectors' items above their face value and computer programs except custom computer programs.

An inappropriately narrow focus on eight words in a single sentence in the Commission's extensive analysis (see Chief Justice Abrahamson's dissent, ¶ 168) ignores the Commission's analysis in the same way that the inappropriately narrow focus on those words in the administrative rule ignores the rest of the definition. The record clearly shows that the Commission started its analysis with the administrative rule's first sentence, designating it parenthetically as the definition's "intro." "Intro" clearly meant "introduction," which in turn clearly meant that it was prefatory material, indicative that something else follows. The Commission then proceeded to construe and apply the remainder of the definition section — in other words, the seven factors. The Commission clearly indicated, by calling that portion the "intro," how it was proceeding. There is therefore no inconsistency in either the Commission's interpretation of the rule or my deference to it. (Justice Bradley cites to this paragraph and includes the Commission's parenthetical designation of the first sentence in Wis. Admin. Code § Tax 11.71(e) as the "intro," but she does so without acknowledging its significance. Justice Bradley's dissent, ¶ 221.)