On January 6, 2016, the Michigan Department of Treasury (the Department) issued a Notice announcing that it will no longer impose sales or use tax on certain prewritten computer software accessed electronically and associated online services. This change in long-standing policy comes after years of litigating the issue in the Michigan courts, most recently with the precedential taxpayer victory in Auto-Owners Ins. Co. v. Dept. of Treasury (Mich. Ct. App. October 27, 2015), in which the Michigan Court of Appeals held that remote access to software did not constitute delivery of tangible personal property. The Department announced it will apply Auto-Owners retroactively and thus allow for refunds for all open tax years. Taxpayers that paid the tax (both customers and providers alike) must act promptly to coordinate and request a refund before the limitation period expires.
Taxpayers who paid sales or use tax on cloud-based services are entitled to receive a refund for all open periods. In Michigan, the period of limitations for filing a refund is four (4) years after the filing deadline of the original return (including extensions). Taxpayers seeking a refund of taxes paid for cloud-based services falling within the Auto-Owners opinion should file a written refund request with the Department. The Notice sets forth the requirements and procedure for filing a refund claim, including the address to send the claim to and return requirements.
Providers who collected the tax from customers will need to review the requirements in Michigan governing customer reimbursement to determine what must be done to satisfy the state refund procedures. Customers who paid tax to providers on these purchases must notify the provider (not the Department) that they are owed a refund. In Michigan, a cause of action against the provider for over-collected sales or use taxes does not accrue until the customer has provided written notice and has given the provider 60 days to respond.
For questions concerning this change and other similar topics, please contact any member of the Tax Law or Information Technology Transactions Practice Groups.