COA: Transfer of personal property solely for the purpose of providing a service is nontaxable under Michigan’s Use Tax Act

In Auto-Owners Insurance Co. v. Department of Treasury, No. 321505, the Court of Appeals held that contracts between the plaintiff and a third-party were not subject to Michigan’s Use Tax Act (UTA) because the plaintiff did not exercise the requisite “use” to subject the software to the tax. The plaintiff, a Michigan corporation, entered into several contracts with third-parties that used complex and modern computing arrangements. The contracts consisted of six main categories: (1) insurance industry specific contracts, (2) technology and communications contracts, (3) online research contracts, (4) payment remittance and processing support contracts, (5) equipment maintenance and software customer support contracts, and (6) marketing and advertising contracts.

The defendant conducted a use-tax audit of the plaintiff and determined two bases for use tax liability: (1) fixed asset purchase, and (2) expense items. The defendant issued a bill for taxes due and assessed a use-tax deficiency and interest for a total of $871,625.24. Under protest, the plaintiff paid the amount due and then filed a complaint in the Court of Claims, seeking a refund of the use tax paid to the defendant. The plaintiff moved for summary disposition under MCR 2.116(C)(10) alleging that the software involved was incidental to the services the products provided so the assessed use tax was unlawful. The Court of Claims granted the motion and entered a final order for a refund of the taxes.

The Court of Appeals applied the “incidental to service” test that determines whether a business relationship that involves both the transfer of personal property and the provision of services constitutes a nontaxable service or taxable property transaction. The Court held that almost all of the software and other tangible personal property provided to the plaintiff were incidental to the services provided, and therefore, the transactions were not taxable under the UTA. The Court concluded that the trial court did not err in granting plaintiff’s motion for summary disposition.