Prompt action may be required.
Michigan taxpayers may have an opportunity for a use-tax refund for tax paid on cloud-based products. The opportunity stems from the October 27, 2015, decision by the Michigan Court of Appeals in Auto-Owners Insurance Company v Department of Treasury (Auto-Owners). The decision held that:
- The use of any cloud-based products, i.e., not electronically downloaded, without receiving access to the programming code is not subject to use tax.
- The installation of a “local client” or “desktop agent” for granting the ability to use a cloud-based product does not, per se, trigger Michigan use taxes; it must be analyzed under the six-factor “incidental-to-service” test.
Importantly, the Michigan Department of Treasury subsequently announced in its Notice dated January 6, 2016, that it will give this decision full retroactive effect — even in the presence of contrary guidance issued by the Department prior to the decision. As a result, Auto-Owners will be applied to all open tax years.
The decision combined with the Department’s support create a potential refund opportunity for taxpayers who paid Michigan use tax on cloud-based products within the past four years (or longer, depending on the tax return’s deadline. According to the requirements outlined in the Notice, refund-seekers must:
- File a written refund request with the Department within four years from either the due date of the use tax return OR the date it was filed — whichever is later.
- Include any necessary documentation to support the refund request.
- Include amended annual returns if the refund is for a prior year.
A special note was made that taxpayers who paid tax to a vendor must request a refund directly from that vendor.
Contact a member of your service team if you think you may be entitled to a refund of Michigan use taxes in light of these changes.