Auto-Owners Insurance Company v. Department of Treasury
313 Mich. App. 56
| Mich. Ct. App. | 2015Background
- Auto-Owners Insurance (plaintiff), a Michigan corporation, contracted with multiple third-party providers (Dec. 1, 2006–Dec. 31, 2010) for services across six categories: insurance-specific analytics, technology/communications, online research, payment processing, software maintenance/support, and marketing/advertising.
- Michigan Department of Treasury audited plaintiff and assessed $871,625.24 in use tax; plaintiff paid under protest and sued for refund in Court of Claims.
- Disputed transactions involved mixtures of: purely web-hosted services (no code delivered), locally installed desktop agents/support utilities, and separately invoiced maintenance/support fees.
- Core legal question: whether transactions delivered “prewritten computer software” (a taxable tangible personal property under the Use Tax Act) and whether any delivered software was "used" or was merely incidental to services.
- Court of Claims granted summary disposition for plaintiff; Michigan Court of Appeals affirmed, applying statutory definitions and the Catalina "incidental to service" test to distinguish taxable transfers from nontaxable services.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether transactions involved delivery of prewritten computer software under MCL 205.92b(o) | Many transactions only delivered processed data or standards, not software; electronic access ≠ delivery | Accessing hosted software or remote services constitutes delivery of prewritten software | Majority transactions did not deliver prewritten software; download/installation of desktop agents/support did constitute delivery (e.g., LogMeIn, RTL, WebEx support center) |
| Whether plaintiff "used" tangible personal property under the UTA when interacting with hosted software | Plaintiff only submitted data and received processed results; no ownership-type control over third-party code | Remote use of hosted software is use of tangible personal property subject to tax | No use found for hosted-access transactions (no control/possession). Use found where software was installed/possessed locally (desktop agents, thumb drives) |
| Whether transferred software or tangible property was incidental to a nontaxable service (Catalina test) | Even where tangible property was delivered, it was incidental to the services sought (networking, data, processing) | The transfer of software or devices may be the object of the transaction and thus taxable | Applying the six-factor Catalina test, the court held transfers were principally service-based and incidental to services in most instances (including WebEx, RTL, LogMeIn, Wolters Kluwer) so not taxable as property transactions |
| Whether separately billed maintenance/support charges are taxable | Maintenance/support are services and not taxable when separately stated | Defendant treated some maintenance/support as taxable software transfers | Where invoices/contracts separately allocated maintenance/support, those amounts were nontaxable services and refundable to plaintiff |
Key Cases Cited
- Catalina Mktg. Sales Corp. v. Dep’t of Treasury, 470 Mich 13 (2004) (articulates six-factor "incidental to service" test to decide whether a transaction is principally a service or a sale of tangible property)
- WPGP1, Inc. v. Dep’t of Treasury, 240 Mich App 414 (2000) (control/possession is key to determining "use" of tangible personal property under the UTA)
- Ameritech Publishing, Inc. v. Dep’t of Treasury, 281 Mich App 132 (2008) (statutory interpretation principles for UTA; tax statutes construed narrowly)
- Aroma Wines & Equip., Inc. v. Columbian Distrib. Servs., Inc., 303 Mich App 441 (2013) (consult dictionary/plain meaning when statutory term is ambiguous)