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SALT Update

December 2, 2015

Honigman attorneys and their clients have recently prevailed in three state tax cases at the Michigan Court of Appeals. The following is a summary of each case with some thoughts on how at least two of these decisions may help taxpayers going forward.

SAAS and Electronic Services are Not Subject to Michigan Sales/Use Tax

On October 27, 2015, the Court of Appeals issued its decision in Auto-Owner’s v. Dep’t of Treasury and held that a variety of services provided via the internet are not subject to sales or use tax. The Department had asserted that such services involved the “use” of prewritten canned software on the basis that the taxpayer was accessing the functionality of the software on the third party service provider’s network through computers and the internet and that such use was taxable. The services included, among other things, data analysis services, information services, secure data transmission, electronic research services, hardware and software maintenance, and web conferencing.

The Court of Appeals found that the majority of services at issue did not involve the delivery of any prewritten canned software. For many transactions the taxpayer merely electronically transmitted data and received back analyzed data. In others, the taxpayer electronically transmitted data to be securely transmitted to a third party. In each of these cases, the Court held that the Plaintiff never had access to any of the third party vendor’s computer code and thus, there was no use of prewritten computer software.

The Court also rejected the Department’s argument that “accessing the functionality” of software constitutes delivery of prewritten software and a taxable use. Hence, accessing a website is not a taxable use of software.

The Court of Appeals also held that when the taxpayer purchased hardware or software and separately purchased hardware or software maintenance agreements in transactions where the cost for the maintenance and support were separately stated, the maintenance fees were nontaxable fees for services.

Taxpayers may have a refund opportunity for sales/use tax paid on SAAS, electronic services or hardware and software maintenance agreements. Contact your Honigman counsel for more information.

Unused SBT Credit Carryforwards are MBT Credits

On November 10, 2015, the Michigan Court of Appeals rendered a decision in the taxpayer’s favor in Ashley Capital v. Dep’t of Treasury. In Ashley Capital, the taxpayer argued that an SBT Brownfield Rehabilitation Carryforward Credit and the Unused Carryforward Credit constituted credits under the MBT for the purposes of the credit ordering provision MCL 208.1403 so that the MBT investment tax and compensation credits are taken before the Brownfield and Unused Carryforward Credits. The Department’s MBT forms put the credits in a different order. On appeal, the Department argued that the Brownfield and Unused Carryforward Credits were SBT credits, not MBT credits. The Department also argued that a “carryforward” is not the same as a “credit” and the two terms must be interpreted differently, and that the Court should defer to the Department’s interpretation of the law as set forth in its forms.

The Court of Appeals held that the Brownfield and Unused Carryforward Credits are MBT credits, despite the fact that both credits originated under the SBT. The fact that they are called a “Carryforward” is not relevant because they are a carryforward of a credit. The carryforward is just the mechanism for providing the credit. The Court held that the phrase “credit under this act” in the MBT Act refers to any credit that can be taken under the MBT irrespective of whether it originated under the SBT or the MBT. Second, the court rejected the Department’s argument that a “carryforward” and a “credit“ should be interpreted differently stating “this argument from the treasury department draws a distinction without a difference” because the carryforwards are credits that may be used under the MBTA. This case presents a refund opportunity for any taxpayers who still have open MBT years and who followed the Department’s erroneous credit ordering under MCL 208.1403.

Patent and Trademark License is Not a Taxable Lease of Software

On October 27, 2015, the Court of Appeals issued an opinion in Alticor Investments Inc v. Dep’t of Treasury affirming that a license of patents, trademarks and trade names for use on internet stores does not constitute a sale or license of software where the written agreements do not mention software. As such the royalty income was excluded from the taxpayer’s Single Business Tax base. The Court looked to the four corners of the licensing agreement to interpret the contract. The Court then looked at the extrinsic evidence presented by both the Department and the taxpayer to determine if there was a latent ambiguity in the agreement. The Court looked at the Department’s reliance on an ex-employee’s statement and compared it to the testimony presented by the taxpayer of a patent expert, a software licensing expert and a current employee stating that there was no software licensed under the agreement. The Court concluded that the extrinsic evidence did not support the argument that the contract language is susceptible to more than one interpretation. Thus, the Court held that there is no latent ambiguity in the contract and the trial court did not err in concluding that the contract was unambiguous and not a license of software.

If you have any questions about the topics in this alert or any other SALT matter, please contact one of our State and Local Tax attorneys or professionals.

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