As software has become less tangible, the application of sales and use taxes has become more complicated.
Recently, Michigan’s Department of Treasury released a notice clarifying their policy regarding prewritten computer software delivered electronically after a Court of Appeals ruling on the issue. See Auto-Owners Inc. Co. v. Dept. of Treas., 2015 WL 6473592 (Mich. Ct. App. 10/27/2015).
Previous guidance from the Department of Treasury states that canned software is taxable when it is delivered electronically, leaving little room for further interpretation. Indeed, under Michigan law, prewritten computer software that is delivered by any means is subject to sales and use tax. Mich. Com. Law. sec. 205.92(k) & 205.92b(o). However, in the recent Auto-Owners case, the Court of Appeals ruled that, where only a portion of the software program is delivered to the customer, the Catalina “incidental to service” test applies in order to determine whether the transaction should be taxed as a service or as tangible personal property. See Catalina Marketing Sales Corp. v. Dept. of Treas., 470 Mich. 13 (Mich. 2004). The Department of Treasury is giving the decision full retro-active effect as required by law.