Insights Blog

14 Jan, 2016

Michigan Department of Treasury Concedes Cloud Computing Use Tax Audit Dispute

Posted by David Mikulka on Jan 14, 2016 4:37:46 PM

State and Use Tax, Income Tax

Michigan tax liability for cloud based software

Auto-Owners Ins. Co. v. Dep’t of Treasury  – The Michigan Department of Treasury has chosen not to appeal a Court of Appeals decision holding that a taxpayer's use of cloud-based software from third parties does not give rise to use tax liability where: (1) the cloud-based software code was only remotely accessed and thus never "delivered" or (2) the use was incidental to the rendering of professional services.



The holding in Auto-Owners is consistent with Michigan courts’ treatment of other attempts by the DOT to tax the remote use of cloud-based information services (both of which are currently being appealed by the DOT).[2]  Importantly, however, Auto-Owners is the first in this line of cloud-computing software cases decided by the Michigan Court of Appeals and carries greater precedential weight going forward.


The DOT’s concession of Auto-Owners may lead to a renewed push for this issue to be addressed legislatively. Previous bills in the Michigan Senate were considered that would specifically exclude cloud-based software transactions from taxation, but were ultimately rejected. Following Auto-Owners, it is possible the Michigan legislature will attempt to specifically provide for the taxation of cloud-based software transactions, effectively side-stepping what have so far been taxpayer-friendly Michigan courts.


It will be important for corporate tax departments to monitor developments both in the courts and the legislature, as Michigan continues to be a test case for how states may attempt to tax the burgeoning cloud-based software computing industry.

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[1] Auto-Owners Ins. Co . v. Dep't of Treasury, 2015 BL 353597, Mich. Ct. App., No. 321505, (October 27, 2015).

[2] See GXS, Inc. v. Dep't of Treasury, Mich. Ct. Cl., No. 13-000181-MT, (September 23, 2015); Rehmann Robson & Co., P.C. v. Dep't of Treasury, Mich. Ct. Cl., No. 12-000098-MT, (November 26, 2014).