AUTO-OWNERS INSURANCE COMPANY v DEPARTMENT OF TREASURY
Docket No. 321505
Court of Appeals of Michigan
Submitted September 10, 2015. Decided October 27, 2015.
313 Mich. App. 56
The Court of Appeals held:
1. Under
2. The Court of Claims incorrectly determined that all the software involved remained on third-party servers. To the contrary, a desktop agent was installed on plaintiff‘s computers with regard to one contracting party, and in another instance plaintiff used third-party software that ran locally on plaintiff‘s computers. In addition, the Court of Claims improperly narrowed the scope of the term “deliver” to preclude electronic delivery. However, the Court of Claims correctly determined that the mere transfer of information and data that was processed using the software of the third-party businesses did not constitute the delivery of prewritten computer software by any means. In that situation, no prewritten computer software was delivered; instead, only data resulting from third-party use of software was delivered.
3. The majority of the transactions in this case were not taxable under the UTA because they did not involve the delivery of prewritten computer software by any means. Generally, plaintiff accessed the code in such a limited manner that it did not signify ownership or had no access to the code at all. Plaintiff accessed websites that allowed it to submit requests. The code remained on the third-party‘s server, and the third party con-
4. Plaintiff did have prewritten computer software, print materials, and flash and thumb drives delivered to it in connection with several of the transactions. Furthermore, plaintiff exercised an ownership-type right or power over that tangible personal property by taking possession of it, physically installing the software on its computers, and using the software, print materials, and drives as it wished. Those transfers of tangible personal property occurred during the rendering of professional services, however. The test for determining whether a business relationship that involves both the transfer of personal property and the provision of services constitutes a nontaxable service or a taxable property transaction is the incidental-to-service test, which objectively examines the entire transaction to determine whether the transaction was principally a transfer of tangible personal property or the provision of a service. To determine whether the transfer of tangible personal property was incidental to the rendering of professional services for purposes of the UTA, the court should examine (1) what the buyer sought as the object of the transaction, (2) what the seller or service provider was in the business of doing, (3) whether the goods were provided as a retail enterprise with a profit-making motive, (4) whether the tangible goods were available for sale without the service, (5) the extent to which intangible services contributed to the value of the physical item that was transferred, and (6) any other factors relevant to the particular transaction. The first five factors encompassed the main features of each transaction in this case, and no other factors were relevant. Considering all the factors together, the transfer of tangible personal property was incidental to the services that plaintiff received. Therefore, the transactions were not taxable under the UTA, and the trial court did not err by granting plaintiff‘s motion for summary disposition.
Affirmed.
1. TAXATION — USE TAX — TANGIBLE PERSONAL PROPERTY — PREWRITTEN COMPUTER SOFTWARE.
The Use Tax Act,
2. TAXATION — USE TAX — TANGIBLE PERSONAL PROPERTY — PROVISION OF SERVICES — INCIDENTAL-TO-SERVICE TEST.
Under
Bill Schuette, Attorney General, Aaron D. Lindstrom, Solicitor General, and Scott L. Damich, Assistant Attorney General, for the Department of Treasury.
Before: GADOLA, P.J., and JANSEN and BECKERING, JJ.
PER CURIAM. Defendant appeals as of right a final order for the refund of use taxes. We affirm.
I. FACTS
Plaintiff is a Michigan corporation headquartered in Lansing, Michigan. Plaintiff provides insurance services and is represented by more than 35,000 independent agents in 26 states. Plaintiff entered into a variety of contracts between December 1, 2006, and December 31, 2010. Many of these contracts used complex and modern computing arrangements between plaintiff and the third-party companies, which led to the instant controversy regarding whether these contracts were subject to Michigan‘s Use Tax Act (UTA),
A. INSURANCE INDUSTRY SPECIFIC CONTRACTS
Plaintiff entered into six contracts in this category. First, plaintiff entered into a contract to use the
Plaintiff also contracted with the Association for Cooperative Operations Research and Development (ACORD), which is a nonprofit organization that aids in the development of open consensus data standards and standard insurance forms. ACORD provides national insurance standards that create a common coding system for data fields in insurance data transmissions. The ACORD standards create the ability to employ a standard format for the flow of information to and from insurance agencies and to governmental agencies. Plaintiff paid a membership fee to ACORD during the tax years at issue and received ACORD‘s data standards. According to plaintiff, it did not purchase, receive, or license software from ACORD.
Plaintiff also used Lexis-Nexis Choicepoint, which provides data on motor vehicle records and sends electronic notices regarding motor vehicle coverage to secured parties. With regard to the data program, an independent agent inputs information over the Internet or uses an electronic form to conduct a search. Plaintiff‘s computer system then sends data to Lexis-
B. TECHNOLOGY AND COMMUNICATIONS
Plaintiff entered into two contracts that fall under this category. The first contract was with Cisco WebEx, LLC (WebEx). WebEx provides videoconferencing services, webinar services, and online-meeting services. The services work through a link to WebEx‘s website. According to plaintiff, there was no licensing involved, and only the meeting organizer was required to have a license. WebEx also provides a support center, which several members of plaintiff‘s Automation Support Unit downloaded. The support center is downloaded through a click box, which opens a session on the user‘s computer and works with WebEx in fixing any problems.
Plaintiff also contracted with LogMeIn, which provides remote access so that an employee can work on a home computer as if the employee were sitting at his or her desk at work. The employee accesses LogMeIn through a website or a portal hosted by LogMeIn and inputs a password. In order for the system to work, an incidental local client, or desktop agent, must be installed locally on each personal computer using the
C. ONLINE RESEARCH
Plaintiff also contracted with West, a Thomson Reuters business, to conduct legal research by using its online database service. West provides its services through the Internet, and plaintiff did not receive any disks or software from West. Plaintiff also contracted with Wolters Kluwer for an online subscription to Insource Services (NILS). The subscription includes insurance-specific laws, filing guidelines, attorneys general opinions, and bulletins. The online services are housed with Wolters Kluwer, and not with plaintiff. Although plaintiff received a portion of the NILS materials (excluding insurance filing guidelines) in book and print materials, it argues that it subscribed with the intention of obtaining online access, not the printed materials.
D. PAYMENT REMITTANCE AND PROCESSING SUPPORT
Plaintiff contracted with RT Lawrence (RTL) for payment-processing services. RTL‘s system uses scanners to capture images of checks and stubs, and software to validate data and compare amounts. RTL‘s software was loaded onto plaintiff‘s computers. The software uses plaintiff‘s scanners to process information. The scanners capture images of both the check and the stub and use plaintiff‘s internal codes to minimize user verification by comparing amounts and validating data. Plaintiff also contracted for support and maintenance of the scanners, training, and cus-
E. EQUIPMENT MAINTENANCE AND SOFTWARE CUSTOMER SUPPORT
Plaintiff also contracted with several companies with regard to software it had already purchased, including with Data Center Management Systems, Duck Creek, GT Software, and Software AG USA. Plaintiff contends that all the transactions that were taxed involved support and maintenance of existing software. The invoice that Data Center sent to plaintiff states that plaintiff was billed for maintenance. The invoice related to Duck Creek provides that plaintiff was billed for maintenance. The invoice at issue with regard to GT Software indicates that plaintiff was billed a “Software Fee” in relation to a software upgrade. However, the contract between plaintiff and GT Software provides that 12% of the software licensing fee is for maintenance and support. Plaintiff sought a refund for the use tax paid on the amount that constituted maintenance and support. Software AG‘s invoices do not clarify whether Software AG billed plaintiff for software or for maintenance. However, the contract between Software AG and plaintiff provides that $73,210 of the software price is for technical services. Plaintiff sought a refund for the taxes paid on this amount.1
F. MARKETING AND ADVERTISING
Plaintiff also entered into several contracts with marketing and advertising companies, including Third Person Creative (TPC), Harvest Music and Sounddesign, and Main Media Marketing (MMM). TPC reviewed plaintiff‘s marketing prices and provided ideas related to branding. TPC also provided marketing strategies, conducted investigations, and provided ideas for advertisements. Harvest wrote and produced commercials for plaintiff. Plaintiff received digital files containing the commercials. MMM established websites and developed search engine optimization queries for plaintiff. MMM also hosted websites and implemented a pilot program on the Internet for plaintiff.
II. PROCEDURAL HISTORY
Defendant conducted a use-tax audit of plaintiff covering December 1, 2006, to December 31, 2010. The auditors determined two bases for use tax liability: (1) fixed-asset purchase and (2) expense items by looking at purchases. The auditors reviewed the fixed-asset purchases for the entire audit period. In regard to expense items, the auditors used a block sampling method with 2010 as the sample year. On March 28, 2012, defendant issued a bill for taxes due and assessed a use-tax deficiency and interest totaling $871,625.24. Plaintiff paid the amount due, as well as additional interest, under protest.
On June 29, 2012, plaintiff filed a complaint in the Court of Claims, seeking a refund of the use tax paid to
The Court of Claims granted plaintiff‘s motion for summary disposition under MCR 2.116(C)(10). The Court of Claims first determined that the transactions were not subject to use tax because the software involved in the case was not “delivered by any means.” Focusing on the dictionary definition of the word “deliver,” the Court of Claims held that the software was not “handed over, left, or transferred” to plaintiff because any software remained on the third-party‘s server and what was transferred to plaintiff was information that had been processed using the third-party‘s software, hardware, and infrastructure. The Court of Claims also noted that the Legislature could not have contemplated the transactions involved because on the effective date of the relevant statute, September 1, 2004, software was delivered electronically or physically and the court would have to extend the construction of the phrase “delivered by any means” in order to include remote access technology. The Court of Claims next held that even if “prewritten computer software” was “delivered” to plaintiff, defendant‘s assessment would still be invalid because plaintiff did not exercise the requisite “use” to subject the software to Michi-
The court next held that even if “prewritten computer software” was “delivered” to and “used” by plaintiff, that use was merely incidental to the services rendered by the third-party providers and would not subject the overall transactions to use tax. The court did not address plaintiff‘s argument that it cannot be held responsible for use tax simply because the sales took place within Michigan or plaintiff‘s argument challenging defendant‘s audit methods. The Court of Claims also entered a final order for the refund of taxes.
III. STANDARD OF REVIEW
This Court reviews de novo a trial court‘s decision regarding a motion for summary disposition. Williams v Enjoi Transp Solutions, 307 Mich App 182, 185; 858 NW2d 530 (2014). “In reviewing a grant of summary disposition under MCR 2.116(C)(10), this Court considers the pleadings, admissions, and other evidence submitted by the parties in the light most favorable to the nonmoving party.” Id. Summary disposition is appropriate when there is no genuine issue of material fact and the party moving for summary disposition is entitled to judgment as a matter of law. Id.
The UTA is analyzed under the general rules of statutory interpretation. Ameritech Publishing, Inc v Dep‘t of Treasury, 281 Mich App 132, 136; 761 NW2d 470 (2008). We review de novo issues of statutory interpretation. Id. at 135-136. We construe a statute in order to determine and give effect to the Legislature‘s
IV. USE OF PREWRITTEN COMPUTER SOFTWARE
Defendant argues that the Court of Claims erred when it determined that the transactions were not taxable under the UTA. We disagree.
The UTA is designed to cover transactions that are not covered under the General Sales Tax Act (GSTA),
“Tangible personal property” is defined as “personal property that can be seen, weighed, measured, felt, or touched or that is in any other manner perceptible to the senses and includes electricity, water, gas, steam, and prewritten computer software.”
The UTA does not define the term “deliver.” However, this Court may consult a dictionary definition to determine the plain and ordinary meaning of a term. Aroma Wines, 303 Mich App at 447.2 Merriam-Webster‘s Colle-
giate Dictionary (11th ed) defines the term “deliver,” in relevant part, as “to take and hand over to or leave for another : CONVEY[.]” The UTA, therefore, requires that the prewritten computer software be conveyed or handed over by any means. See
We first note that the Court of Claims incorrectly determined that all the software remained on a third-party server. The Court of Claims focused its analysis on the phrase “that is delivered by any means” in the definition of “prewritten computer software,” holding that this phrase created a requirement that the software be “delivered” (i.e., handed over, left, or transferred). The court held that no software was ever delivered because all the software remained on the third-party servers, and what was transferred to plaintiff was information that had been processed using the third-party‘s software, hardware, and infrastructure. However, a desktop agent was installed on each computer with regard to LogMeIn, and RTL used software that ran locally on plaintiff‘s computers. Therefore, the Court of Claims erred to the extent that it found that all the software was located on third-party servers.
In addition, the Court of Claims applied a narrow definition of the term “deliver” without examining how
The majority of the transactions in this case were not taxable under the UTA because they did not involve the delivery of prewritten computer software by any means. With regard to West, plaintiff never exercised an ownership-type right or power over any West computer software. Instead, all the code remained on West‘s server. West controlled the code, maintained it, and updated it as it saw fit. Plaintiff only accessed a website that allowed it to submit
The same is true for the online services provided by Wolters Kluwer. Plaintiff accessed the Wolters Kluwer system via a web browser, and plaintiff never had access to any of the code that enabled the Wolters Kluwer website and its features. Therefore, plaintiff never used prewritten computer software from Wolters Kluwer under the meaning of the UTA. See
In regard to MSB, plaintiff‘s computer system sent data electronically to MSB, MSB processed the data,
Similarly, TPC reviewed plaintiff‘s marketing prices and provided ideas related to branding and advertising. Harvest wrote and produced commercials for plaintiff. MMM established websites and developed search engine optimization queries for plaintiff. MMM also hosted websites and implemented a pilot program on the Internet for plaintiff. None of the three marketing and advertising companies delivered prewritten computer software to plaintiff. Plaintiff never had access to any of the code that enabled the systems of TPC, MMM, or Harvest. Therefore, these transactions were not subject to taxation under the UTA. See
With Lexis-Nexis, plaintiff‘s computer system sent data electronically to Lexis-Nexis, and Lexis-Nexis processed the data and then returned more detailed information to plaintiff. Plaintiff never had access to
Plaintiff never had access to any ACORD code because there is no ACORD code. The “data standards information” that ACORD provides is not “computer software” because it does not “cause a computer . . . to perform a task.”
Finally, plaintiff entered into a number of contracts with software companies to provide maintenance and support services. The transactions with Data Center and Duck Creek involved software maintenance. Defendant failed to present evidence in the Court of Claims showing that prewritten computer software was delivered to plaintiff in connection with the transactions with Data Center and Duck Creek. Instead,
However, plaintiff received prewritten computer software that was delivered to it with regard to several of the transactions at issue in this case. With regard to WebEx, plaintiff purchased access to a network that is designed and used for web-conferencing. Plaintiff accessed the WebEx system via the WebEx website and never had access to any code that enabled the WebEx system. See
Plaintiff also used prewritten computer software provided by RTL. The software was delivered since plaintiff had actual possession of the software. Plaintiff ran the software on its own computers and used the software at its own will. Under these circumstances, plaintiff exercised an ownership-type right or power over the software from RTL by taking possession of the software, physically installing the software on its computers, and using the software as it wished. See
With regard to LogMeIn, plaintiff used a remote access agent that LogMeIn supplied and that was necessary to run locally on plaintiff‘s machines in order to access the network and its features. The local client, or desktop agent, was installed on each computer. The desktop agent constituted prewritten computer software because it included a set of coded instructions designed to cause the computer to perform a task. See
V. INCIDENTAL-TO-SERVICE TEST
Although plaintiff exercised a right or power over tangible personal property, the transfer of tangible personal property occurred during the rendering of professional services. The test for determining whether a business relationship that involves both the transfer of personal property and the provision of
In determining whether the transfer of tangible property was incidental to the rendering of personal or professional services, a court should examine what the buyer sought as the object of the transaction, what the seller or service provider is in the business of doing, whether the goods were provided as a retail enterprise with a profit-making motive, whether the tangible goods were available for sale without the service, the extent to which intangible services have contributed to the value of the physical item that is transferred, and any other factors relevant to the particular transaction. [Id. at 26.]4
The software and other tangible personal property provided to plaintiff were incidental to the services that the companies provided to plaintiff. The first factor concerns what plaintiff sought as the object of the transactions. From WebEx, plaintiff primarily sought access to networking infrastructure. With re-
The second factor concerns what the seller or service provider is in the business of doing. WebEx provides access to networking infrastructure that it maintains. RTL is in the business of streamlining remittance processing, reconciliation, and research. LogMeIn is in the business of providing a system that is designed to allow remote computer access. Wolters Kluwer is in the business of providing information services. Thus, all of the businesses provide services. Therefore, this factor weighs in favor of plaintiff. See Catalina, 470 Mich at 26.
The third factor is whether the tangible personal property was provided as part of a retail enterprise with a profit-making motive. All the transactions that involved the transfer of personal property occurred with for-profit retail enterprises. However, each business had a motive to profit from providing a service to plaintiff, rather than from providing tangible personal property to plaintiff. With regard to RTL, the motive of the company is to provide payment and remittances services. The software that was downloaded on plaintiff‘s computers was only an insignificant part of the overall transaction. WebEx has a motive to provide
The fourth factor is whether the tangible goods were available for sale without the service. For all the transactions, there is no indication that plaintiff could purchase any underlying tangible personal property without purchasing the services. Instead, plaintiff obtained the tangible personal property only when it contracted for services. There is no indication that any of the companies provided software or other tangible personal property apart from the services it provided. Thus, this factor weighs in favor of plaintiff. See Catalina, 470 Mich at 26. The fifth factor is the extent to which intangible services contributed to the value of the physical item that was transferred. The prewritten computer software and other tangible personal property provided had no value without the associated services. The only tangible personal property that may have had some value apart from the services was the print materials provided by Wolters Kluwer. Therefore, this factor weighs in favor of plaintiff for each transaction except the transaction with Wolters Kluwer. See id.5
Considering all the factors together, the transfer of tangible personal property was incidental to the services that plaintiff received. With regard to Wolters Kluwer, RTL, LogMeIn, and WebEx, plaintiff contracted with the businesses in order to receive services, and the transfer of the tangible personal property was merely incidental to the provision of services. There is no indication that plaintiff could purchase the software or other tangible personal property independently of the services, and the services gave value to the software and other tangible personal property. Therefore, the transactions were not taxable under the UTA. See id. Accordingly, the Court of Claims did not err by granting plaintiff‘s motion for summary disposition. We need not address the other issues raised in defendant‘s brief on appeal since we conclude that the Court of Claims properly determined that the transactions were not subject to taxation under the UTA.
Affirmed. No costs, a public question being involved. See MCR 7.219(A).
GADOLA, P.J., and JANSEN and BECKERING, JJ., concurred.