By Jessica Kerner and Pilar Mata

The Michigan Court of Claims held that cloud computing, or software as a service (SaaS), is a nontaxable service rather than a taxable use of prewritten software. The taxpayer, an insurance company, entered into various transactions that provided the taxpayer with remote access to third parties’ software. The Michigan Department of Treasury asserted that the insurance company was liable for use tax because the transactions at issue involved the “use” of prewritten computer software “delivered by any means.” The court disagreed, reasoning the software was not “delivered” because the third-party providers did not surrender possession or control of the software to the taxpayer, nor did the third parties actually transfer to the taxpayer the software needed to process and produce the outcomes. Moreover, the court found that the legislature could not have intended the term “delivered” to include remotely accessing a third-party provider’s technology infrastructure because such remote access was unheard of at the time the statute was enacted. The court further determined that even if the software was deemed to be “delivered,” the taxpayer had not made the requisite “use” of the software because there was no evidence that the taxpayer exercised a right or power incident to ownership in the underlying software. The court’s decision acknowledged the “complexity associated with the computer environment” and the “changing nature of computer-based technology and business models.” There are currently two bills pending in Michigan, Senate Bill 142 and Senate Bill 143, which would codify the decision in this case. These bills would make it clear that for both sales and use tax purposes, the right to access prewritten computer software on another person’s server is a nontaxable sale of service. Auto-Owners Insurance Company v. Department of Treasury, Case No. 12-000082-MT (Mich. Ct. Cl. 2014).