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How to Tax Cloud Computing in Michigan


 There are so many ways to tax cloud computing services.

A recent ruling by the Michigan Court of Appeals provides guidance to the Michigan Department of Treasury on the taxability of certain cloud computing products.

Cloud computing products may be separated into two distinct categories:

  • Products that do not include the delivery of code that enables the vendor’s system to operate.
    • Software is accessed remotely.
    • There is no proof that the consumer “exercised any incidence of ownership over the vendor’s code.”
  • Products that include electronically delivered prewritten computer software.
    • An “ownership-type right” is traceably delivered to the consumer.

In addition, the primary object of the transaction must be considered. In the case in question, Auto-Owners Insurance Co versus Department of Treasury, the court found some electronically delivered prewritten software to be “incidental to service,” meaning the primary object of the transaction was the vendor’s “rendering of professional services.”

Moving forward, Treasury will interpret the taxability of cloud computing products as follows:

  • 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, the “incidental to service” test will be applied to determine whether the transaction constitutes the rendition of a nontaxable service rather than the sale of tangible personal property.

Additional information is available on this Notice to Taxpayers.

All things considered, cloud computing is a relatively new industry, and many states are still figuring out to how sales and use tax applies to it. Michigan delved into the taxability of prewritten v custom software last fall, and it will undoubtedly continue to explore the issue.

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Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.