On Dec. 9, 2019, the Michigan Department of Treasury issued a private letter ruling providing guidance on the issue of what services offered by a provider of information management services to the health care industry were subject to sales tax in the state. (See Letter Ruling 2019-3).
The Michigan General Sales Tax Act imposes a 6% sales tax on the gross proceeds of all persons engaged in the business of making sales at retail, by which ownership of tangible personal property is transferred for consideration unless an exemption applies. The state takes the position that tangible personal property includes “prewritten computer software.” Gross proceeds (i.e., “sales price”) includes among other things delivery charges incurred or to be incurred before completion of the transfer of ownership of tangible personal property subject to the tax as well as any charges by the seller for any services necessary to complete the sale (unless otherwise exempt). The sales tax generally applies only to sales of tangible personal property, not sales of services.
The ruling addresses whether the numerous information services offered by the taxpayer were prewritten computer software. The department noted that the right to access/use prewritten computer software (e.g., cloud computing) will generally not be subject to sales or use tax if the consumer does not receive either a copy of the software program or any part of the program’s computer code. If a software program is electronically downloaded in its entirety, it will be taxable. If only a portion of a software program is electronically delivered to a customer (such as a “desktop agent” or “local client”), the “incidental to service” test should be applied to determine whether the transaction constitutes a rendition of a nontaxable service rather than the sale of tangible personal property. If a transaction is principally the transfer of taxable tangible personal property or taxable service(s), the entire transaction will be considered subject to sales or use tax. If the transaction is principally the transfer of exempt tangible personal property or exempt services, the entire transaction will be exempt from the sales and use tax.
The department concluded that data abstraction, audit, electronic data storage, electronic photocopy, and record retrieval services were services exempt from sales tax. In addition, labor charges were exempt as well. However, the department concluded that physical data storage, shipping and handling charges, and photocopying and scanning fees were subject to sales tax.
Companies selling information services into Michigan should be aware of the specific rules governing what is and what is not taxable, especially in context of recent cases and letter rulings. Whether a particular transaction is subject to sales tax is fact specific and must be assessed in light of whether the transaction involves both taxable products and services. Businesses should consult their tax advisors for more information.