On January 6, 2016, the Michigan Department of Treasury (Department) issued a notice indicating a significant change in its policy regarding the use tax treatment of remote accessed computer software transactions resulting from the Michigan Court of Appeals' (Court) decision in Auto-Owners Insurance Co.¹. The Notice communicates the Department's intention to give the Court's decision full retroactive effect and outlines the procedures by which taxpayers may file refund claims.

In the Auto Owners Insurance decision, the Court held that prewritten computer software programs that did not include the delivery of "code that enabled the vendor's system to operate" were exempt from Michigan's use tax. The Court concluded that this category of software did not satisfy Michigan's criteria that prewritten computer software must be delivered, in any manner, because there was no proof that software code was electronically delivered to the taxpayer or that the taxpayer had exercised any incidence of ownership over the vendor's code.

Additionally, the Court held that a certain category of remotely accessed prewritten software programs did involve the electronic delivery of a "local client" or "desktop agent" and were sufficient to constitute an "ownership-type right" over the software; when applying Michigan's "incidental-to-service" test outlined in the Catalina Marketing Sales Corp.² decision by the Michigan Supreme Court, however, the downloaded software was determined to be only incidental to the vendor providing or "rendering a professional service" and was therefore found to be excluded from Michigan's use tax. The Notice indicates that the "incidental-to-service" test will apply to determine whether a transaction constitutes the rendition of a non-taxable service rather than the sale of tangible personal property "if only a portion of a remotely accessed software program is electronically delivered to a customer." If, however, a software program is electronically downloaded in its entirety, it will be taxable.

Portions of Michigan's Revenue Administrative Bulletin (RAB) 1999-5 suggesting that access to software over the internet without the delivery of either "the code that enables the program" to operate or a "desk top client" no longer represent the Department's policy as they are inconsistent with the ruling in Auto-Owners Insurance.

Implications

Taxpayers seeking refunds of self-accrued use tax under the Auto-Owners Insurance ruling must file a written refund request with the Department within the appropriate statute of limitations, which is four years after the date set for filing the original return.³ Refund requests for prior years must include amended annual returns for the years involved with the refund request. Taxpayers requesting a refund of tax collected by a vendor must request a refund directly from the vendor.

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ENDNOTES

¹ Auto-Owners Insurance Co. v. Dept. of Treas., No. 321505 (Mich. Ct. App. Oct. 27, 2015).

² Catalina Marketing Sales Corp. v. Dept. of Treas., 470 Mich. 13 (2004).

³ MCL 205.27a.