On February 12, 2019, the Michigan Court of Appeals upheld the imposition of use tax on phones that were given away for no charge by a company in conjunction with its sale of mobile phone service contracts. The company sold service contracts for a single mobile phone service provider and also purchased phones from the provider. The company did not remit sales or use tax on the phones that it purchased from the provider “for purposes of resale.” On audit, the company was assessed use tax based on the price it paid the provider for the phones. The company argued that its purchase price for the phones was zero, asserting that it had been reimbursed by the provider for the cost of phones. The Court, however, determined that the company was not reimbursed by the provider but instead was paid a commission by the provider for the sale of service contracts. Accordingly, the Court upheld the determination that the company owed use tax on its disposition of the phones. Emery Electronics, Inc. v. Dept. of Treasury, Dkt. No. 342250 (Mich. Ct. App. Feb. 12, 2019) (unpublished).
On February 10, 2017, the US Court of Appeals for the Sixth Circuit held in Wayside Church v. Van Buren County, 847 F.3d 812 (U.S. 6th Cir. 2017) that the Tax Injunction Act (TIA) and the principle of comity barred federal courts from hearing the taxpayers’ arguments that a Michigan county court’s foreclosure sale of their properties constituted an unconstitutional taking in violation of the Fifth Amendment of the US Constitution. On appeal from the US District Court, the Sixth Circuit concluded that the TIA and comity “only allow federal courts to exercise jurisdiction when state courts cannot provide ‘plain, adequate, and complete’ remedies,” and therefore, “only one analysis is required.” Because the taxpayers could bring their suits alleging an unconstitutional taking to state court—a “plain, adequate, and complete remedy”—the federal courts did not have jurisdiction to hear the matter. Wayside Church v. Van Buren County, 847 F. 3d 812 (U.S. 6th Cir. 2017).
Last week, the Michigan Department of Treasury issued a Notice to Taxpayers explaining its approach in administering the now final Michigan Court of Appeals decision in LaBelle Management, Inc. v. Department of Treasury, 888 N.W.2d 260 (Mich. Ct. App. 2016), leave to appeal denied by 889 N.W.2d 250 (Mich. 2017) (mem.). The Court invalidated the Department’s position of indirect ownership rules for purposes of determining whether companies are more than 50% owned and included in a unitary business group. The Notice explains that:
- LaBelle applies retroactively;
- The Department expects taxpayers to make corrective filings for all open tax years for purposes of both the Michigan Business Tax and the Michigan Corporate Income Tax; and
- Corrected filings resulting from LaBelle will not be subject to penalties and the Department will waive interest for returns filed by December 31, 2017.
The Michigan Court of Appeals held that a taxpayer was precluded from recovering sales tax it voluntary paid in response to a preliminary audit determination, even though assessment of the tax may have otherwise been barred under the four-year statute of limitations. The court reasoned that a preliminary audit determination is not an “assessment” and, as a result, the four-year statute of limitations on assessments was not triggered to bar the audit determination. Because the statute of limitations did not apply, the court declined to review whether an amendment to the statute of limitations period applied retroactively to prevent the Department from assessing tax at the time it issued its preliminary determination or to prevent the taxpayer’s resulting claim for refund. W. Soule & Co. v. Dept. of Treasury, No. 329213 (Mich. Ct. App. Jan. 17, 2017) (unpublished).
The Michigan Supreme Court denied an application for leave to appeal a Michigan Court of Appeals decision that sanctioned the Michigan’s Legislature’s retroactive withdrawal from the Multistate Tax Compact. The court summarily denied the appeal—which was filed by Harley Davidson Motor Company, Inc. and 13 other taxpayers—explaining that “we are not persuaded that the questions presented should be revised by this Court.” View a copy of the court’s order.The legislation at issue (2014 P.A. 282) repealed the Compact’s election retroactive to 2008, thereby preventing the taxpayers’ three-factor apportionment election for tax years 2008 to 2010. See Sutherland’s previous coverage: That Was Fast: Michigan Court of Appeals Upholds Retroactive Repeal of Compact and Legal Alert: Court of Appeals Hears Michigan’s Compact Election Cases.
The Michigan Court of Appeals reversed a trial court ruling and held that three companies did not constitute a statutorily defined “unitary business group” for Michigan Business Tax (MBT) purposes. It was undisputed that there was insufficient “direct” ownership among the companies to give rise to a “unitary business group,” so the court examined whether there was sufficient “indirect” ownership, as that term is used in the MBT’s definition of “unitary business group.” The court determined that the trial court erred in using the federal income tax definition of “constructive” ownership when defining the “indirect” ownership requirement. The court reasoned that at the point where the trial court acknowledged that the federal tax laws do not address a “comparable context,” under Michigan law it should have used the ordinary rules of statutory construction. The court concluded that the plain and ordinary meaning of “indirect” ownership is “ownership through an intermediary,” and ultimately held that, when applying the definition of “unitary business group” to the facts, no unitary business group existed because none of the involved companies owned, through an intermediary or otherwise, more than 50% of any other company. LaBelle Mgmt., Inc. v. Mich. Dep’t of Treasury, No. 324062 (Mich. Ct. App. Mar. 31, 2016).
The Michigan Court of Appeals held that the mandatory apportionment provision of the Michigan Single Business Tax Act did not impliedly repeal Michigan’s enactment of the Multistate Tax Compact’s alternative apportionment election provision. In addition, the court held that the Single Business Tax (SBT) was an income tax under the Compact’s definition, and the state’s retroactive repeal of the Compact by PA 282 (2014) did not extend to the SBT for tax years prior to 2008. Thus, taxpayers are allowed to make the Compact’s apportionment election for periods prior to the enactment of the Michigan Business Tax. AK Steel Holding Corp. v. Dep’t of Treasury, Nos. 327175, 2016 WL 744071 (Mich. Ct. App. Feb. 25, 2016).
Purchases of “data center equipment for assembly, use, or consumption in the operations of a qualified data center” on or after January 1, 2016, are exempt from Michigan sales and use tax. M.C.L. §§ 205.54ee, 205.94cc; see generally Notice Regarding Data Center Exemption, Feb. 5, 2016. The data center exemption will sunset on January 1, 2036 or, as discussed below, two earlier dates if certain job creation benchmarks are not met.
For purposes of Michigan’s new data center exemption, a “qualified data center” is “a facility composed of 1 or more buildings located in [Michigan that is] owned or operated by an entity engaged at that facility in operating, managing, or maintaining a group of networked computers or networked facilities for the purpose of centralizing . . . the storage, processing, management, or dissemination of [one or more persons’] data.” To qualify for the exemption, a qualified data center must also generate 75% or more of its revenue from one or more “colocated businesses” that are not “affiliates” of the qualified data center. A “colocated business” is a “person that has entered into a contract with the . . . qualified data center to use or deploy data center equipment physically located within the qualified data center for a period of 1 or more years.” The new law defines “affiliate” to mean a person that controls or is controlled by the qualified data center, or a person that is under common control with the qualified data center; however, the exemption statute does not specify a specific ownership threshold required for “control.” Importantly, the Michigan data center exemption provides that exempt “data center equipment,” includes “only computers, servers, routers, switches, peripheral computer devices, racks, shelving, cabling, wiring, storage batteries, back-up generators, uninterrupted power supply units, environmental control equipment, other redundant power supply equipment, and prewritten computer software used in operating, managing, or maintaining the qualified data center or the business of the qualified data center or a colocated business.”
The exemption is set to expire December 31, 2035, but two provisions in the new law could cause the exemption to expire at an earlier date unless the Michigan Department of Talent and Economic Development (TED) determines that certain benchmarks are met. Under the first benchmark date for the exemption to continue to apply, colocated businesses and qualified data center contractors must have created a sufficient number of at least 400 data center industry jobs or related jobs by January 1, 2022, or the exemption will be repealed as of that date. Under the second benchmark date, at least 1,000 such jobs must be created by January 1, 2026, or the exemption will be repealed as of that date.
The Michigan Department of Treasury 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. The Notice comes on the heels of the Michigan Court of Appeals decision in Auto-Owners Insurance Company v. Department of Treasury and the Michigan Supreme Court’s refusal to review Thomson Reuters Inc. v. Department of Treasury. The Department is departing from its long-standing policy on the taxation of electronically accessed prewritten software and associated online services, which paves the way for taxpayer refund claims.
View the full Legal Alert.
On October 27, the Michigan Court of Appeals affirmed the trial court’s decision in favor of the taxpayer and held that several contracts for data processing services, access to computer programs and databases, and other online services did not include the use of taxable prewritten computer software. After considering the definitions of key statutory terms such as “prewritten computer software,” “computer software,” “delivery” and “use,” the court developed a test to determine when online transactions involving access to computer programs and associated services can be considered taxable prewritten computer software: “if plaintiff exercised control over a set of coded instructions that was conveyed or handed over by any means and was not designed and developed by the author or other creator to the specifications of a specific purchaser.” Applying this test to each of the transactions at issue, the court generally found that accessing and using computer programs via a web browser, or submitting data for analysis to third-party computer programs, did not constitute delivery of prewritten computer software because the plaintiff did not control the software’s code. In those contracts where the vendor provided written materials or the plaintiff had to download computer software onto its computers, the court applied the six-factor “incidental to service” test from Catalina Mktg Sales Corp v. Dep’t of Treasury, 470 Mich. 13 (2004) and found that in each case the tangible personal property was incidental to the service that the plaintiff contracted for. Specifically, the court reasoned, “[t]here is no indication that plaintiff could purchase the software or other tangible personal property independent of the services, and the services gave value to the software and other tangible personal property.” Auto-Owners Ins. Co. v. Dep’t of Treasury, No. 321505 (Mich. Ct. App. Oct. 27, 2015).