United States

Michigan issues guidance on cloud refund opportunities

Clarifies taxation of SaaS in context of recent developments

INSIGHT ARTICLE  | 

Recently, RSM published an article addressing Arizona’s policy shift to taxing online storage and stressing the importance of staying vigilant to an ongoing trend of rapid change in how states impose sales and use tax on cloud-based transactions. Continuing this trend, a series of taxpayer-friendly Michigan court decisions and Michigan Department of Treasury (Department) guidance have created potential sales and use tax refund opportunities for taxpayers that paid tax on purchases of software and certain cloud services.

Over the last several years, the Department has actively assessed sales and use tax on the purchase of Software as a Service (SaaS) and various cloud computing services. The Department’s interpretation of the taxing statutes and regulations resulted in broad assessments of cloud-related purchases and ultimately spurred several lawsuits that contested whether the state had the legislative authority to impose sales and use tax on cloud transactions. Those decisions included Auto-Owners Insurance Company v. Department of Treasury (finding software on third-party server was not “delivered” and incidental delivery of software was not taxable); GXS Inc. v. Department of Treasury (finding use tax was not due on certain remote transactions); Thomson Reuters Inc. v. Department of Treasury (finding software was incidental to use of nontaxable online research database); Rehmann Robson & Co., P.C. v. Department of Treasury (finding online research tool was service not subject to tax).

Subsequent to Auto-Owners, the most recent decision addressing the taxability of SaaS, the Department issued Notice to Taxpayers Regarding Auto-Owners Insurance Company v. Department of Treasury (Notice). The Notice states that in accordance with case law requiring the Department to give judicial decisions full retroactive effect, even in the presence of contrary guidance previously issued by the Department, the decision in Auto-Owners would be applied for all open tax years. Essentially, the Department is recognizing that taxpayers may have eligible claims for refunds because of the Auto-Owners decision.

The Department also clarified Michigan Revenue Administrative Bulletin No. 1999-5, addressing sales and use tax as it applies to computer software. Specifically, the Department confirmed that the sales and use taxation of access to software over the internet without also the delivery of either “the code that enables the program” to operate or a “desk top client” are inconsistent with Auto-Owners and no longer represent the Department’s policy. The Notice explains that if only a portion of a software program is electronically delivered to a customer, the “incidental to service” test will be applied to determine whether a transaction constitutes the rendition of a nontaxable service rather than the sale of tangible personal property. However, a software program remains taxable if it is downloaded in its entirety.

Refund procedure

According to the Notice, a taxpayer seeking refunds of use tax paid for purchases within the state of limitations should file a written refund request with the Department. The requests require proper documentation and amended returns for the years involved. Sales tax refund claims, where the tax was paid to a vendor, must be requested from the vendor who may later request a refund from the Department. Taxpayers should review whether Michigan sales or use tax was paid on qualifying purchases of SaaS and cloud-computing services within the statute of limitations and speak to their tax advisor about next steps. 

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