The Michigan Department of Treasury (Department) issued a Notice announcing that it will no longer impose sales or use tax on certain prewritten computer software accessed electronically and associated online services. The Notice comes on the heels of the Michigan Court of Appeals decision in Auto-Owners Insurance Company v. Department of Treasury1 and the Michigan Supreme Court’s dismissal of the application for leave to appeal in Thomson Reuters Inc. v. Department of Treasury.2 The Department is departing from its long-standing policy on the taxation of electronically accessed prewritten software and associated online services, which paves the way for taxpayer refund claims.
Background – Auto-Owners and Thomson Reuters
Michigan imposes a sales and use tax “for the privilege of using, storing, or consuming tangible personal property” in the state.3 “Tangible personal property” includes, among other things, “prewritten computer software” which, in turn, includes “computer software, including prewritten upgrades, that is delivered by any means ….”4
Auto-Owners Insurance Company (Auto-Owners) purchased various data processing and online services from third parties to conduct credit checks, obtain property records, support videoconferencing, and access research databases. Following a use-tax audit, the Department issued a deficiency on these purchases claiming they constituted taxable prewritten computer software.
Last October, the Michigan Court of Appeals held that online transactions involving access to computer programs and associated services are taxable prewritten computer software only if the taxpayer “exercised control over a set of coded instructions that was conveyed or handed over by any means.”5 Because Auto-Owners did not exercise such control, its access and use of computer programs via a web browser, or submission of data for analysis to third-party computer programs, constituted nontaxable services rather than taxable prewritten computer software.
The court further held that certain written materials provided to, or computer software downloaded by, Auto-Owners were likewise nontaxable because they were incidental to the nontaxable services.
The Court of Appeals decision in Auto-Owners is consistent with its unpublished holding in Thomson Reuters Inc. v. Department of Treasury. In that case, Thomson Reuters’ sale of Checkpoint service, an online tax and accounting research program, was the sale of a nontaxable information service, and not tangible personal property.6
Sutherland Observation
The Department’s deadline to appeal Auto-Owners to the Michigan Supreme Court has expired, and the Michigan Supreme Court dismissed of the application for leave to appeal, per stipulation by the parties, in Thomson Reuters on December 30, 2015.7 As a result, the Court of Appeals decision in Auto-Owners is final and because it is a published decision (while Thomson Reuters is not), it has a binding effect. |
Refund Claims
As a result of Auto-Owners, the Department announced it will acquiesce to the ruling in Auto-Owners for all open tax years and provide taxpayers refunds for taxes paid on “products falling within the Auto-Owners opinion.” The Notice is consistent with Michigan court decisions requiring the Department to give judicial decisions full retroactive effect, “even in the presence of contrary guidance issued by the Department prior to the date of the decision.”
The Department had previously issued guidance – which has been superseded by the Notice – that explained that the taxability of remote access software, software-as-a-service (SaaS), and other related products “depends on the facts and circumstances of each transaction.”8
Accordingly, Michigan taxpayers that paid Michigan sales or use tax on remotely accessed software and related services that fall within the holding of Auto-Owners should consider filing refund claims with the Department within four years from the due date of the original sales and use tax return.9 According to the Department’s Notice, “[t]he request should include any necessary documentation to support the refund” and amended returns if the claim(s) relate to prior periods.10
Sutherland Observation
Taxpayers may be entitled to refunds if they paid the Michigan sales or use tax on transactions involving remote access software, cloud-based services such as SaaS, or other digital services. Taxpayers that have paid Michigan sales or use tax on similar products and services also should consider filing a refund claim with the Department.
If the tax was paid to a vendor, the taxpayer (purchaser) must request a refund from the vendor. |
1 Auto-Owners Ins. Co. v. Dep’t of Treasury, No. 321505 (Mich. Ct. App. Oct. 27, 2015).
2 Thomson Reuters Inc. v. Dep’t of Treasury, No. 313825, LC No. 11-000091-MT (Mich. Ct. App. May 13, 2014) (unpublished opinion), appeal dismissed, No. 149902, 2015 WL 9590518 (Mich. Dec. 30, 2015). See Sutherland’s coverage of the Thomson Reuters decision: Michigan Court of Appeals Holds that Checkpoint Is an Information Service. If Only the Department of Treasury Had a Subscription...
3 M.C.L. §§ 205.52(1), 205.93(1).
4 Id. § 205.92b(o).
5 Auto-Owners, No. 321505 at 7.
6 Thomson Reuters, No. 313825, LC No. 11-000091-MT (Mich. Ct. App. May 13, 2014) (unpublished opinion).
7 See Thomson Reuters, No. 149902, 2015 WL 9590518 (Mich. Dec. 30, 2015).
8 Treasury Update, “Cloud Computing: A Clearer Horizon,” Mich. Dep’t of Treasury (Nov. 2015); see also Mich. Rev. Admin. Bulletin 1999-5 (Sept. 28, 1999).
9 M.C.L. § 205.27a(2).
10 See Id. § 205.30(2).
