Recently, Michigan’s Court of Claims issued an opinion in Auto-owners Ins. Co. v. Dept. of Treasury, regarding the taxability of purchases of cloud computing services (“services”). A Michigan taxpayer made a motion for summary disposition to overturn Michigan’s Department of Treasury’s decision that these purchases were taxable. The taxpayer requested that the Court determine whether these transactions are a taxable transfer of tangible personal property under Michigan’s Use Tax Act (“UTA”) or a non-taxable sale of a service.
In this case, the taxpayer is a property and casualty insurance provider that remotely accesses several third parties’ technological infrastructures which include networks, servers, data storage, and software applications. To provide these services, the taxpayer uses third parties to accomplish various business transactions ranging from marketing to billing to risk analysis.
Michigan’s UTA imposes a tax on the use of tangible personal property. Tangible personal property includes prewritten software delivered by any means. The UTA further delineates, that if the underlying transaction was merely incidental to the services rendered by a third party provider, the transaction would not be subject to the use tax.
The court focused on the legislature’s intent at the time the UTA was enacted. The court placed emphasis on the language that prewritten software includes “delivered by any means.” The court rationalized that the legislature could not have envisioned the technology that this taxpayer is using. Accordingly, the court concluded that since these remote access transactions were outside the scope of the legislature’s intent, the transactions are non-taxable services. This conclusion is consistent with Michigan’s tax statute interpretation that laws will not be extended in scope by forced construction of the statute.
The court commented that this type of transaction may be taxable in the future if the legislature expresses its intent to include such transactions. Because states are grappling with budget deficits and looking to raise revenues, it is easy to see how this may come to pass.