Purchases Determined NOT to be a Purchase of Prewritten Computer Software
Web-Conferencing, Web-Hosting, Payment Processing, Online Legal Research and Information such as Risk Analyses and Property Valuations Deemed to be Services
In Auto-owners Insurance Company v. Department of Treasury, State of Michigan Court of Claims, March 20, 2014, the Michigan Court of Claims has held that a taxpayer’s purchases of cloud computing services were not subject to the use tax.
The transactions involving the remote access to a third-party provider’s technology infrastructure were properly characterized as nontaxable services and not the sale of prewritten software. The taxpayer, a property and casualty insurance provider, engaged third parties to provide services, including web-conferencing, web-hosting, payment processing, and online legal research, and information such as risk analyses and property valuations.
The Court of Claims determined that these transactions did not qualify as the sale of prewritten software because the third-party providers did not surrender possession and control of the software to the taxpayer. In 2004, when the relevant statute was amended to add "prewritten software ... delivered by any means" as tangible personal property, the Legislature likely did not contemplate the nature of these transactions because the remote access of a third party’s technological infrastructure was not commonly in use by consumers.
Even if it was assumed that prewritten software was delivered to the taxpayer, the requisite "use" of the software was not made. Under the Use Tax Act, the taxpayer must "exercise a right or power over the property incident to ownership...."
In this case, the taxpayer imposed no such control over the software; the only evidence of control involved the ability to control outcomes by inputting data. If prewritten software was delivered to and used by the taxpayer, the use was merely incidental to the services rendered by the third-party providers. For these transactions, the taxpayer sought out services and not software, and the third-party providers were in the business of providing services as opposed to selling or licensing software. Furthermore, the value of the software was incidental to the services accompanying it.
This decision of the Court of Claims is in conflict with an earlier decision involving research services where the customer uses the vendor's software to access information in a data base. That case is pending before the Court of Appeals. Also, there are two bills pending before the legislature which would exempt software residing on the vendor's servers. This is a very unsettled area of law, but a significant area because of the prevalence of services delivered by the internet and the significant dollars involved.