Recently, Michigan’s Court of Appeals issued an opinion concerning the taxability of electronically accessed information services, determining that an online research product was not taxable as tangible property. A Michigan taxpayer filed an appeal to Michigan’s Court of Claim’s assessment of a tax deficiency for use of prewritten software.  The taxpayer sells online tax and accounting research services. Customers subscribe to the taxpayer’s services to search and retrieve current sources, browse compiled information, and access links for their individual needs. The customers access the information via a web browser.

Michigan imposes a use tax on the sale of tangible personal property and tangible personal property includes prewritten software.

Michigan’s Court of Appeals ruled that the taxpayer’s information services are not taxable because the use of any prewritten software was incidental to the transaction as a whole. Here, the taxpayer’s primary purpose of any sale was to provide information to the customer’s needs. The Court determined that any use of prewritten software was incidental to what customers sought in purchasing the taxpayer’s product.  Notably, however, the court commented that but for the application of the incidental to service test, the product may have been taxable. The Court explained its conclusion by pointing out that this specific type of software had not been anticipated by the Legislature. Stay tuned to see if this ruling might prompt the Legislature to further delineate what prewritten software is in light of current technology.