In Thomson Reuters, Inc. v. Department of Treasury, No. 313825 (Mich. Ct. App. May 13, 2014) (unpublished), the Michigan Court of Appeals, reversing the ruling of the Court of Claims, held that a taxpayer’s sale of online research products was not subject to Michigan use tax. The court held that the transaction was not taxable because it was the sale of a nontaxable service and not the sale of taxable tangible personal property.
The taxpayer sold numerous information products, including subscriptions to its research platform Checkpoint. Checkpoint is a product of particular interest to state tax practitioners as many of us use it for research. For the uninitiated, Checkpoint is an online tax and accounting research program that provides subscribers with access, via a web browser, to court cases, rulings and other information that is compiled, synthesized and organized by Checkpoint’s content creators from multiple up-to-date sources.
The Michigan Department of Treasury determined that the taxpayer’s sales of Checkpoint subscriptions constituted the taxable sale of “prewritten computer software” and were therefore taxable. The taxpayer argued that the sale of subscriptions to Checkpoint constituted the nontaxable sale of an information service and, alternatively, even if tangible personal property was transferred, the sale was nonetheless “primarily” the sale of a service. The Court of Claims granted the Department’s motion for summary judgment and held that the sales were taxable.
The taxpayer appealed and the Court of Appeals overturned the Court of Claims decision. The Court of Appeals found that the taxpayer’s transfer of tangible personal property was incidental to the service that the taxpayer provided, and thus the transaction as a whole was not taxable. The Court of Appeals applied the test established by the Michigan Supreme Court in Catalina Marketing Sales Corp. v. Dept. of Treasury. 678 N.W.2d 619 (Mich. 2004). Under the Catalina test, a court must objectively analyze the entire transaction and determine whether the transaction is “principally” the transfer of tangible personal property or the transfer of services with a transfer of tangible personal property that is incidental to the service. Applying the test in this case, the Court of Appeals found that Checkpoint subscribers were not seeking the software underlying the product, but rather were primarily seeking access to up-to-date information relevant to their research needs and benefited from the expert knowledge of Checkpoint’s content creators which rendered the customers’ research more efficient.
This is the second decision out of Michigan regarding the Catalina test. In Auto-Owners Insurance Company v. Dept. of Treasury, Case No. 12-000082-MT (Mich.Ct.Claims Mar. 20, 2014), the Michigan Court of Claims held that certain remote software access transactions were not subject to use tax because they were nontaxable services, not the transfer of software. The Court of Claims held that under the statute, which applied use tax to software “delivered by any means,” the taxpayer’s products were not taxable because the software was not delivered. Although the transactions were not taxable under this interpretation, the Court of Claims went on to hold that even if the software were delivered, under the Catalina test the software was incidental to the nontaxable services sought by the taxpayer’s customers and still not taxable.
These two cases from Michigan should be encouraging to taxpayers who are primarily providing services to customers. Hopefully other states are watching.