Michigan Sales Tax: Cloud Computing
- Nov 4, 2015 | Gail Cole
Cloud computing refers to the use of remote Internet servers to store, manage and process data. Cloud computing transactions typically include both services and tangible personal property, which is delivered to customers either by electronic download or remote access. Whether or not these types of charges should be subject to state and local sales taxes is a source of much debate nationwide.
The Michigan Department of Treasury addresses the taxation of cloud computing in its most recent Tax Policy Newsletter. To start, it explains the crucial distinction between “prewritten computer software” and “custom software:”
- Custom computer software is designed for the exclusive use and special needs of a single purchaser.
- Prewritten computer software is available to all and can be either downloaded or accessed remotely.
Generally, charges for custom computer software are exempt from Michigan sales and use tax and fees for prewritten computer software (such as a subscription or a license) are subject to sales tax.
Just the facts
In Michigan, the taxation of cloud computing depends on “the facts and circumstances of each transaction.” Trouble arises when a single transaction includes both taxable tangible personal property (prewritten software) and an exempt service (a hosting environment). "As a general rule, sales tax applies only to sales of tangible personal property, not sales of services. When a single transaction... involves both the provision of services and the transfer of tangible personal property, it must be categorized as either a service or a tangible property transaction."
To determine whether a transaction should be categorized as an exempt service or a taxable transfer of tangible personal property, the department applies the "‘incidental to service’ test outlined by the Michigan Supreme Court in Catalina Marketing Sales Corp v Department of Treasury, 470 Mich 13 (2004)." It strives to determine the "real object" sought by the purchaser.
As a result, litigation frequently ensues. The Michigan Department of Treasury has prevailed in several cases and is currently appealing several others. It advises taxpayers to “Stay tuned for future updates!”