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Michigan Backs Off Cloud Tax, Refund Opportunities Available

After refusing to back down on the issue for years, the Michigan Department of Treasury (Department) issued guidance last week to taxpayers announcing a change in its policy on the sales and use taxation of remotely accessed prewritten computer software.  This comes after years of litigating the issue in the Michigan courts, most recently with the precedential taxpayer victory in Auto-Owners Ins. Co. v. Dep't of Treasury, No. 321505 (Mich. Ct. App. Oct. 27, 2015), in which the Michigan Court of Appeals held that remote access to software did not constitute delivery of tangible personal property.  See our prior coverage here.  The Department has announced it will apply Auto-Owners (and the numerous other favorable decisions) retroactively and thus allow for refunds for all open tax years.  This is a huge victory for taxpayers; however, those that paid the tax (both purchasers and providers alike) must act promptly to coordinate and request a refund prior to...

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Precedential Cloud Victory in Michigan Court of Appeals

On Tuesday, a three-judge panel sitting for the Michigan Court of Appeals unanimously affirmed a lower court decision finding that the use of cloud-based services in Michigan is not subject to use tax in Auto-Owners Ins. Co. v. Dep’t of Treasury, No. 321505 (Mich. Ct. App. Oct. 27, 2015). While there have been a number of cloud-based use tax victories in the Michigan courts over the past year and a half, this decision marks the first published Court of Appeals opinion (i.e., it has precedential effect under the rule of stare decisis). See Mich. Ct. R. 7.215(C)(2). Therefore, the trial courts and Michigan Court of Appeals are obligated to follow the holdings in this case when presented with similar facts, until the Michigan Supreme Court or Court of Appeals say otherwise. While the ultimate outcome (i.e., not taxable) of the lower court decision was affirmed, the analysis used by the Court of Appeals to get there was slightly different and the court took the...

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Three Strikes…Tax on Cloud Computing Out in Michigan?

If the Department of Treasury (Treasury) was hoping that the Michigan courts would simply overlook the previous two cloud computing losses this year in Thomson Reuters (previously covered here) and Auto-Owners (discussed here), they appear to have been mistaken.  Last Wednesday’s Court of Claims opinion in Rehmann Robson & Co. v. Department of Treasury marked the third Michigan decision this year to rule that cloud-based services are not subject to use tax in the state.  In Rehmann Robson, the Court of Claims found that the use of Checkpoint (a web-based tax and accounting research tool) by a large accounting firm was properly characterized as a non-taxable information service, despite Treasury’s continued effort to impose use tax and litigate similar cloud-based transactions.  This taxpayer victory comes just six months after the Michigan Court of Appeals in Thomson Reuters found that a subscription to Checkpoint was primarily the sale of a service under...

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Tennessee SaaS Ruling Highlights Telecommunications Concerns for SaaS Providers

The Tennessee Department of Revenue recently released Letter Ruling No. 14-05, in which it considered whether certain cloud collaboration services are subject to the state’s sales tax.  At a high level, the provider’s services are provided in a typical Software as a Service (SaaS) form:  (1) the provider owns the hardware and software used to provide the services; (2) the software is installed on the provider’s servers; (3) the provider’s employees monitor and maintain the hardware and software; (4) the provider charges a customer a monthly user fee; and (5) customers remotely access the software (i.e., no software is ever downloaded by a customer).  Of additional note, the provider does not license any of its software to the customers. As the Tennessee Department has done in the past, it correctly determined that the SaaS arrangement does not constitute a retail sale of computer software because the provider “does not transfer title, possession, or control...

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The Vermont Department of Taxes Begins to Take a Close Look at Cloud Computing

On June 30, 2013, the Vermont sales tax moratorium on remote access to software expired.  At that time, the Vermont Department of Taxes (Department) reverted to its prior position that interpreted, without any analysis, the Vermont sales tax to apply to prewritten software that was “licensed for use and available from a remote server.”  Recently, the Department released draft regulatory language relating to the taxation of remotely accessed software and is currently seeking comments on the draft (due by October 1, 2014). The draft regulations provide a great deal of guidance, some good and some bad.  On the positive side, the regulations recognize that a sale cannot occur unless “use or control [is] given [to] the purchaser with respect to the software” such that “the purchaser is able to use the software to independently perform tasks.”  This language comports with established legal authorities in the state regarding when sales occur, rather than simply...

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Does the Massachusetts Department of Revenue Still Believe SaaS is Subject to Sales Tax?

As noted in an earlier blog post, “[a] trend is developing in response to aggressive Department of Revenue/Treasury policy-making regarding cloud computing.”  This trend has not been friendly to aggressive Departments, and it appears that the Massachusetts Department of Revenue (Massachusetts Department) may be subtly moving away from its own aggressive position regarding one type of cloud computing transaction, software as a service (SaaS). Following in the footsteps of the New York Department of Taxation and Finance, the Massachusetts Department has been one of the more aggressive departments in the current debate over the taxability of SaaS (see, e.g., Mass. Regs. Code 64H.1.3(3)(a); Mass. Letter Ruling 13-5 (June 4, 2013); Mass. Letter Ruling 12-13 (Nov. 09, 2012); Mass. Letter Ruling 12-10 (Sept. 25, 2012); Mass. Letter Ruling 12-6 (May 21, 2012)).  In its various letter rulings on the subject, the Massachusetts Department has routinely stated its...

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Revise Your Tax Matrix: Remote Access of Software Exempt in Michigan and Idaho

A trend is developing in response to aggressive Department of Revenue/Treasury policymaking regarding cloud computing.  The courts and legislatures are addressing the issue and concluding that the remote access to software should not be taxed.  Here are two recent developments that illustrate the trend: Michigan – Auto-Owners Insurance Company v. Department of Treasury On March 20, 2014, the Michigan Court of Claims held in Auto-Owners Insurance Company v. Department of Treasury that certain cloud transactions were not subject to use tax because the transactions were nontaxable services.  The State has appealed this decision. Auto-Owners engaged in transactions with numerous vendors to provide services and products that Auto-Owners used to conduct its business.  The court grouped Auto-Owners’ transactions into transactions with six categories of providers: (1) Insurance industry providers; (2) Marketing and advertising providers; (3) Technology and...

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