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Revenue Administrative Bulletin 2023-10
SALES AND USE TAXATION OF COMPUTER SOFTWARE AND DIGITAL GOODS
(Replaces Revenue Administrative Bulletin 1999-5)
Approved: July 31, 2023
Note: A taxpayer may rely on this Revenue Administrative Bulletin (“RAB”) until it is revoked by Treasury or until a law on which this RAB is based is altered by legislation or by binding judicial precedent. See MCL 205.6a and RAB 2016-20.
RAB 2023-10. This RAB replaces RAB 1999-5 and is retroactive to all tax periods that are open under the statute of limitations provided in section 27a of the Revenue Act, MCL 205.27a, as of the approval date of this RAB. Syntex Laboratories v Dep’t of Treasury, 233 Mich App 286 (1998); Rayovac Corp v Dep’t of Treasury, 264 Mich App 441 (2004); JW Hobbs v Dep’t of Treasury, 268 Mich App 38 (2005); and Int’l Home Foods Inc v Dep’t of Treasury, 477 Mich 983 (2007).
This RAB describes the taxation of computer software and digital products and the applicable sourcing rules under the General Sales Tax Act (“GSTA”) and Use Tax Act (“UTA”). This RAB reflects legislation enacted after the issuance of RAB 1999-5, the most notable being Public Acts 172 and 173 of 2004, which (among other things) defined “tangible personal property” for sales and use tax purposes to include “prewritten computer software” and Public Acts 438 and 439 of 2008, which (among other things) repealed the sales and use tax provisions allowing a consumer to apportion tax for software through a multiple-points-of-use (“MPU”) exemption certificate.
In addition, this RAB incorporates legal principles from binding precedent decided after the issuance of RAB 1999-5 such as Catalina Mktg Sales Corp v Dep’t of Treasury (“Catalina”), 470 Mich 13 (2004), and Auto-Owners Ins Co v Dep’t of Treasury (“Auto-Owners”), 313 Mich App 56 (2015).
Definitions for important terms used in this RAB are set forth below:
- Application: Generally, a computer software program that performs a specific function directly for an end user or, in some cases, for another application. An application can be self-contained or a group of programs.
- Cloud Computing: A generic phrase that refers to a multiplicity of delivery models over the internet. These models range from the mere storage of data to the outsourcing of a customer’s information technology department and may include the delivery of software products to customers, whether by electronic download or remote access. Examples of cloud computing include arrangements commonly referred to as Software-as-a-Service, Platform-as-a-Service, and Infrastructure-as-a-Service.
- Computer: An electronic device that accepts information in digital or similar form and manipulates it for a result based on a sequence of instructions. MCL 205.51a(b); MCL 205.92b(b).
- Computer Software: A set of coded instructions designed to cause a computer or automatic data processing equipment to perform a task. MCL 205.51a(c); MCL 205.92b(c).
Neither the GSTA nor the UTA define what it means to “perform a task.” For purposes of this RAB, it means all functions that the computer software can execute internally, including but not limited to, storing data in a specific folder or location, retrieving stored data, sending specified data, formatting data, searching a database, executing mathematical functions, preparing a tax return, performing electronic bookkeeping, causing electronic funds transfer to occur, and causing electronic connections to be made.
- Custom Computer Software: In general, computer software originally designed for the exclusive use and special needs of the purchaser.
This definition is derived from the exemptions under MCL 205.54d(g); MCL 205.94a(d).
- Data: Information that has been translated into a form that is efficient for movement or processing such as a binary digital form.
- Delivered Electronically: Delivered from the seller to the purchaser by means other than tangible storage media. MCL 205.51a(d); 205.92b(d).
- Digital Good: A consumer good or product existing only in a digital or electronic form and which is transferred electronically.
- Electronic: Relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities. MCL 205.5a(l); MCL 205.92b(l).
- Infrastructure-as-a-Service (“IaaS”): Generally, on-demand access to cloud-hosted computing infrastructure such as servers, storage capacity and networking resources that an end user can provision, configure, and use similar to using on-premises hardware. The difference is that the cloud service provider hosts, manages, and maintains the hardware and computing resources in its own data centers.
- Load and Leave: Delivery to the purchaser by use of a tangible storage media where the tangible storage media is not physically transferred to the purchaser.
Although the term “load and leave” is not defined in the GSTA or UTA, this definition is consistent with the Streamlined Sales and Use Tax Agreement (“SSUTA”).
- Middleware: Generally, software that acts as a bridge between an operating system or database and applications, especially on a network.
- Networking: Generally, refers to interconnected computing devices that communicate with each other and exchange data and share resources.
- Operating System: In general, the software that manages and operates a computing device, including program execution.
- Platform-as-a-Service (“PaaS”): Generally, a cloud-based platform for developing, running, and managing applications where the provider hosts, manages, and maintains all the hardware and software included in the platform such as the servers, operating system, software, storage, networking, databases, backups, etc.
- Prewritten Computer Software: Computer software (commonly referred to as “canned” software), including prewritten upgrades, that is delivered by any means and that is not designed and developed by the author or other creator to the specifications of a specific purchaser. Prewritten computer software includes the following:
(i) Any combination of 2 or more prewritten computer software programs or portions of prewritten computer software programs.
(ii) Computer software designed and developed by the author or other creator to the specifications of a specific purchaser if it is sold to a person other than that specific purchaser.
(iii) The modification or enhancement of prewritten computer software or portions of prewritten computer software if the modification or enhancement is designed and developed to the specifications of a specific purchaser unless there is a reasonable, separately stated charge or an invoice or other statement of the price is given to the purchaser for the modification or enhancement. If a person other than the original author or creator modifies or enhances prewritten computer software, that person is considered to be the author or creator of only that person's modifications or enhancements. MCL 205.51a(p); MCL 205.92b(p).
- Runtime System: In general, a collection of hardware resources and software that are needed for program execution and operation.
- Servers: Generally, a computing device or program that is dedicated to managing (serving) network resources by providing data or functionality for other machines or programs (commonly referred to as “clients”).
- Software-as-a-Service (“SaaS”): Generally, a cloud-hosted application software where users access via a web browser, desktop client, or mobile app and all infrastructure such as servers, data storage, networking, middleware, application software, etc. are hosted and managed by the SaaS vendor.
- Storage: In general, the method, process, or mechanism by which data is preserved within various storage devices or media (e.g., flash drives, hard disks, and electronic data storage devices) either temporarily or permanently.
- Virtualization: A simulated, or virtual, computing environment as opposed to a physical environment. Virtualization often includes computer-generated versions of hardware, operating systems, storage devices, and more.
A general comparison of IaaS, PaaS, SaaS, and “In-House” models, in terms of whether the customer or vendor manages, and/or hosts the solution, hardware, etc., is illustrated below:
Iaas PaaS SaaS In-House Data Customer Customer Vendor Customer Applications Customer Customer Vendor Customer Operating System Customer Vendor Vendor Customer Middleware Customer Vendor Vendor Customer Runtime System Customer Vendor Vendor Customer Networking Vendor Vendor Vendor Customer Virtualization Vendor Vendor Vendor Customer
Servers Vendor Vendor Vendor Customer
Storage Vendor Vendor Vendor Customer
LAW AND ANALYSIS
A. General Overview of Sales and Use Tax Impositions
The GSTA imposes a 6% sales tax on the gross proceeds of “all persons engaged in the business of making sales at retail, by which ownership of tangible personal property is transferred for consideration…” unless an exemption applies. MCL 205.52(1). For example, if the software is to be used for “industrial processing” as provided in MCL 205.54t, then it will be exempt (subject to apportionment) from sales tax. Similarly, software used to access (e.g., through an application) a newspaper or periodical described in MCL 205.54a(1)(i) is exempt from sales tax.
Generally, sales tax applies only to sales of tangible personal property, not sales of services. Catalina, 470 Mich at 19. Among the limited services generally subject to sales tax as part of the “sales price” are “services necessary to complete the sale” of tangible personal property. MCL 205.51(1)(d)(iii).
The UTA levies a use tax upon (and to be collected from) “every person in this state … for the privilege of using, storing, or consuming tangible personal property in this state at a total combined rate equal to 6% of the price of the property or services specified in section 3a or 3b…” unless otherwise exempt. MCL 205.93(1). The UTA defines “use” as the “exercise of a right or power over tangible personal property incident to the ownership of that property including transfer of the property in a transaction where possession is given. Converting tangible personal property acquired for a use exempt from the tax levied under this act to a use not exempt from the tax levied under this act is a taxable use.” MCL 205.92(b). The UTA defines “storage” to mean “a keeping or retention of property in this state for any purpose after the property loses its interstate character.” MCL 205.92(c). Because the UTA does not define the terms “consumption” or “consuming,” they are to be interpreted in accordance with their plain and ordinary meaning. It is proper to consult a dictionary to ascertain their plain and ordinary meaning. See MCL 8.3a and ADVO-Sys, Inc v Dep’t of Treasury, 186 Mich App 419, 424 (1990).
Under MCL 205.93a and 205.93b, the consumption of certain services is taxed in the same manner as tangible personal property is taxed under the UTA. An example of an exempt use (subject to apportionment between exempt and taxable use) includes the use of software for “industrial processing” as provided in MCL 205.94o. Similarly, software used to access (e.g., through an application) a newspaper or periodical described in MCL 205.94a(1)(l) is exempt from use tax.
Accordingly, unless specifically referenced in the statute, services are not taxable under the UTA. Among the limited services generally subject to use tax as part of the “purchase price” are “services necessary to complete the sale” of tangible personal property. MCL 205.92(f)(iii).
The use tax and sales tax are “complementary” and “supplementary” such that absent an exemption, tangible personal property sold and used in Michigan “is subject to both use and sales tax” even though the imposition of the sales tax is on the retailer and the imposition of the use tax is on the consumer. Andrie Inc v Dep’t of Treasury, 496 Mich 161, 167-168 (2014). Of particular importance to computer software, both the GSTA and the UTA include “prewritten computer software” within their respective definitions for the term “tangible personal property,” MCL 205.51a(r); MCL 205.92(k), thus making it subject to sales and use tax.
B. Taxability of Computer Software and the Implications of Auto-Owners
Computer software must constitute “prewritten computer software” to be taxable under the GSTA and UTA because “software originally designed for the exclusive use and special needs of the purchaser” (i.e., custom computer software) is exempt from sales tax and use tax. MCL 205.54d(g); MCL 205.94a(d). Moreover, reasonable charges for modifying prewritten computer software to the customer’s particular needs are also exempt from sales and use tax if those charges are separately stated on the invoice or billing statement given to the consumer as that software has now become custom software. MCL 205.51a(p)(iii); MCL 205.92b(p)(iii).
Although some products can be easily identified as prewritten computer software, (e.g., a stand-alone canned software program purchased “off the shelf”), other types of products (particularly those characterized as cloud computing) often require a fact-intensive review of the product and how that product is delivered to the consumer to determine whether it qualifies as “prewritten computer software” for sales and use tax purposes. In this regard, it is worth noting that industry terminology and characterizations such as IaaS, PaaS, and SaaS (although sometimes useful) are not dispositive as the product will need to be evaluated under applicable statutory provisions and legal principles developed from Michigan case law.
Prewritten computer software is not always purchased outright by a consumer, as it is common for a consumer to pay a fee for a license, subscription, or other right to use prewritten computer software instead. In those circumstances, the transaction would often be considered a taxable “use” of prewritten computer software. As previously noted in this RAB, the UTA establishes that a “use” includes the “exercise of a right or power over tangible personal property incident to the ownership of that property ….” MCL 205.92(b). A license to use prewritten computer software is subject to sales tax if a copy of the software code or program is provided to the buyer along with the license.
The key feature in determining whether a party exercises a right or power over tangible personal property is “whether the party had some level of control over that property.” Auto-Owners at 70. Notably, in the context of cloud computing (including those involving licenses, subscriptions, and similar arrangements providing rights of access), the determination of whether the software involved qualifies as “prewritten computer software” often turns on the statutory requirement that the software be “delivered by any means” to the purchaser. MCL 205.51a(p); MCL 205.92b(p). As the Court of Appeals in Auto-Owners explained, transactions are taxable when the taxpayer exercises 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. Auto-Owners at 71.
As binding precedent, the Department must follow the Auto-Owners decision as it is instructive in determining whether certain products should be classified as “prewritten computer software,” including how to interpret the phrase “delivered by any means,” which is part of the definition of “prewritten computer software” under both the GSTA and UTA. In Auto-Owners, the Court of Appeals reviewed various categories of contracts that were essentially distilled into two types of software products to determine if those products constituted taxable “prewritten computer software” based on the method, if any, that the software was delivered.
The first type consisted of products that did not include the delivery of code that enabled the system to operate. These products did not satisfy the requirement that prewritten computer software be “delivered” in any manner. Rather, the user merely accessed the software that was hosted on a third-party server through a website. The Court held that this type of software was not “used” for purposes of the UTA’s definition of “use” because the taxpayer did not exercise “a right or power over the code incident to the ownership of that code,” so it was not taxable. Id. at 73.
The second type Auto-Owners addressed were products where computer code was “delivered” such as through a remote access agent (described as a “local client” or “desktop agent”) that was electronically delivered to the user and installed on the user’s computers to enable the user to gain remote access to the vendor’s network and its features. The Court held that these were a set of coded instructions designed to cause the computer to perform a task (i.e., “computer software” under MCL 205.92b(c)) and their electronic delivery was sufficient to constitute an “ownership-type right” over them such that they constituted prewritten computer software. Id. at 76-78. This did not end the analysis, however, because the transaction included both prewritten computer software and professional services, so the Court applied the Catalina “incidental to service” test to determine if the entire transaction was taxable. Id. at 78.
The Catalina “incidental to service” test, described in Catalina at 26, considers the following factors (none of which, alone, is dispositive):
- 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.
When applying this test, the determination of taxability is a fact intensive inquiry whereby each product must be analyzed based on the type of software and what is delivered to the customer.
Although not specifically addressed in Auto Owners, computer software that is downloaded in its entirety onto the user’s computer is “delivered” to the user and, therefore, treated as taxable “prewritten computer software.”
In summary, the Department will employ the following analysis when examining software delivery models to aid in determining whether computer software should be considered “prewritten computer software” and whether it is generally taxable or nontaxable for sales tax and use tax purposes:
- What the buyer sought as the object of the transaction;
- Software for which there is no delivery in Michigan. If the computer software will not be accessed or used by the consumer through a download or other application stored locally on the consumer’s hardware (e.g., computer), it falls within the first type of software at issue in Auto-Owners for which there is no delivery. In such cases, the transfer of the software (by subscription or otherwise) does not constitute a taxable retail sale or use of “tangible personal property” (“prewritten computer software”) in Michigan.
- Software for which there is some delivery in Michigan. If only a portion of the computer software is sold and, thereafter, accessible through a downloaded or locally stored code of instructions, such as the “desktop agent” or “local client” at issue in Auto-Owners, there is delivery of the software in Michigan. Therefore, that software is considered “prewritten computer software.”
- Software which is delivered in its entirety in Michigan. If the software is downloaded in its entirety (and, thereafter, locally stored on the consumer’s hardware), then the sale of that software is generally taxable as “prewritten computer software.”
After determining whether there is prewritten computer software (e.g., based on whether software has been delivered as explained above), to the extent that a transaction constitutes a single-mixed transaction involving both prewritten computer software and services, the Department will apply the Catalina “incidental to services” test to determine whether the transaction is taxable. For example, if a company offers a product suite that includes both taxable tangible personal property (e.g., right to use prewritten computer software) and an exempt service (e.g., technical support), the Department will apply Catalina’s “incidental to service” test to determine the taxability of the transaction.
Example 1. ABC LLC is an out-of-state vendor that sells a subscription service to XYZ, Inc, a Michigan corporation, through which XYZ can access ABC’s online database service through ABC’s software. All computer code involved with the software is controlled, maintained, and updated by ABC and resides solely on ABC’s servers. XYZ accesses ABC’s database through a web browser and no code, application, or desktop agent is delivered to XYZ. This transaction does not involve the sale of prewritten computer software in Michigan, so it is not taxable. See Auto-Owners at 72-73.
Example 2. Data, LLC provides construction and engineering information to its Michigan based customers. Contractor, Inc entered into a contract with Data, LLC under which Contractor, Inc submits various variables to Data, LLC over the internet and, after analyzing those variables, Data, LLC provides parameters and values to aid Contractor in its construction projects. Contractor, Inc does not use Data, LLC’s software and does not download any of Data LLC’s code to its computers. This transaction does not involve the sale of prewritten computer software in Michigan, so it is not taxable. See Auto-Owners at 73-75.
Example 3. Acme, Inc. is in the business of providing webinar, video conferencing, and similar services to its customers. Acme contracted with Retailer for Acme to provide those services through Acme’s website. No license for use of the applicable software is involved between Acme and Retailer. Although Retailer did not have access to any code that enabled Acme’s network, Retailer requested and downloaded a support program from Acme onto its computers that was controlled by Retailer and helped in fixing problems when using the program. The program is downloaded through a click box, which opens a session on Retailer’s computer. Acme bills one lump sum price to Retailer. In this transaction, there is some delivery of “prewritten computer software” due to the downloaded support program. Because this is a mixed transaction involving the transfer of tangible personal property (prewritten computer software) and the provision of services, the taxability of the downloaded software would be determined utilizing the Catalina “incidental to services” test. Applying the Catalina incidental to services test, the transfer of the tangible personal property (e.g., prewritten computer software) is incidental to the services so the transaction is not taxable. Applying the first factor under Catalina, Retailer primarily sought access to Acme’s networking infrastructure so it could participate in the conferencing; thus, this factor weighs in favor of characterizing the transaction as a service. Regarding the second factor, Acme is in the business of providing webinar, video conferencing and similar services, and it provided to Retailer access to the networking infrastructure it maintains for providing these services, so this factor weighs in favor of characterizing the transaction as a service. The third factor weighs in favor of characterizing the transaction as a service since the support program was a minor part of Acme’s business enterprise of providing web-based conferencing. Under the fourth factor, Acme did not provide the support program separate from its contract for conferencing, so this factor weighs in favor of characterizing the transaction as a service. Application of the fifth factor also weighs in favor of characterizing the transaction as a service as it was the conferencing access that gave value to the support program. See Auto-Owners at 76-82.
Example 4. Tech, Inc.’s primary business involves taking “open-source” (i.e., publicly accessible, allowing anyone to inspect, modify, and enhance) software code that is generally not in a usable form or format and developing its own software by modifying and converting that code into computer software that it makes available to consumers for a profit. To obtain, use, and access the software, customers must enter into a subscription agreement with Tech, Inc. under which the customer, for a fee, receives software access, software maintenance (e.g., updates and upgrades), and support. Accordingly, access and use of the software are available only during the period the subscription is active. The subscription fee is billed as a lump sum and is a single-mixed transaction. To access the software, customers must download a desktop agent onto their own computers. Under these facts, the software qualifies as “prewritten computer software,” but the taxability must be determined by applying the Catalina incidental to services test. Applying the first prong of the Catalina test, Tech, Inc’s customers are primarily seeking access and use of the software program. Under the second factor, Tech, Inc’s main business is the ultimate sale of subscriptions to access and use the software it develops and not the ancillary services. Regarding the third factor of the Catalina test, Tech, Inc provides access to its software for the purpose of making a profit. Concerning the fourth factor, purchase of a subscription for use of and access to the software is a condition to having access to the attendant services. Applying the fifth prong of the Catalina test, the services have no value without access to and use of the software. Considering these factors together, the subscription is primarily for the purpose of gaining access to and use of the software and the services are merely incidental to that purpose. Accordingly, the entire subscription fee is subject to tax.
C. Service Maintenance Contracts for Prewritten Computer Software
Sales (or purchases) of prewritten computer software are often accompanied by the sale (or purchase) of a computer software maintenance contract, which may include, for example, any combination of phone/technical support, software updates, and software upgrades. A “computer software maintenance contract” is a contract that obligates a vendor of computer software to provide a customer with future updates or upgrades to computer software, support services with respect to computer software, or both. Although this term is not defined in the GSTA or UTA, this definition is consistent with the SSUTA.
Computer software maintenance agreements may be optional or mandatory at the time the prewritten computer software is purchased and that may determine whether the cost of the agreement (or charges under the agreement) is taxable, as set forth below:
- Optional Service Maintenance Contracts. These are computer software maintenance contracts that a customer is not obligated to purchase as a condition to the retail sale of the prewritten computer software. Although this term is not defined in the GSTA or UTA, this definition is consistent with the SSUTA. Under such contracts, charges for the prewritten computer software (including for software updates or upgrades) are taxable but charges for nontaxable services (e.g., technical support) are not taxable if those service charges are separately itemized on the invoice or billing statement presented to the consumer as they are not part of the “sales price” or “purchase price” under MCL 205.51(1)(d) and MCL 205.92(1)(f), respectively. Optional service contracts involving custom software (including those providing only updates or upgrades for that software) are not taxable; regardless of whether any components of that software (including updates or upgrades) are delivered electronically or via “load and leave” or whether the contract also provides support services for the software. However, if the contract is sold in conjunction with the prewritten computer software in a single-mixed transaction (e.g., a lump sum charge for the software and nontaxable services), then the Catalina “incidental to service” test will apply to determine whether the transaction is a taxable sale of tangible personal property or a nontaxable sale of services (e.g., support services).In addition, if the contract only provides for updates or upgrades for the prewritten computer software, then it is taxable- regardless of whether the updates or upgrades are delivered electronically or via “load and leave.”
- Mandatory Service Maintenance Contracts. These are computer software maintenance contracts that the customer is obligated by contract to purchase as a condition of the retail sale of prewritten computer software. Although this term is not defined in the GSTA or UTA, this definition is consistent with the SSUTA. Under such contracts, the purchase and use of that software are not severable from the software maintenance plan. In such cases, the Catalina “incidental to service” test will apply to determine whether the transaction is a taxable sale of tangible personal property or a nontaxable sale of services (e.g., support services). Auto-Owners at 81.
D. Digital Goods and Micro-transactions
To the extent that an item or product constitutes a “digital good” that does not fall within the definition of “prewritten computer software,” it is not subject to sales tax or use tax regardless of whether it is downloaded, streamed, or accessed through a subscription service. Generally, a “digital good” is an intangible good that exists in digital (as opposed to physical) form and is delivered or transferred digitally.
Products that may appear to be “digital goods” but constitute “prewritten computer software” under the framework discussed in Section B of this RAB include applications and video games downloaded or otherwise installed onto electronic devices such as smartphones, tablets, and game consoles. Even if such applications or video games qualify as “prewritten computer software,” there may be no applicable use tax base if no charge or fee was required for the application or video game (e.g., free apps and free-to-play” games).
Examples of digital goods include, but are not limited to, the following:
- Movies streamed over the internet
- Phone ringtones
- Electronic music (e.g., iTunes)
- Sound and video files
- Web URLs
- Digital images or photographs
- Digital tickets/tokens
- Internet TV and radio
- Digital fonts/logos/graphics
- Digital code on a blockchain comprised of unique identification codes and metadata that distinguish them from one another; commonly referred to a “non-fungible token.”
Example 5. Customer purchases recorded music that is transferred electronically in the form of a MP3. This purchase involves a digital good and is not taxable.
Example 6. Retailer sells a movie and “streams” the movie to the purchaser using the Internet. The purchaser watches the movie as it is being “streamed.” The movie is a digital good and not taxable.
Example 7. Student purchases an eBook to prepare a research paper. The eBook is electronically delivered to Student and is read through an app downloaded onto Student’s tablet. The eBook constitutes a digital good, so it is not taxable.
Charges involving microtransactions, commonly referred to as “in-app” or “in-game” purchases, are charges for the purchase of taxable “prewritten computer software” if the underlying application or game qualifies as “prewritten computer software.” If the underlying application or game that qualifies as “prewritten computer software” is free, but the customer is charged only for the microtransactions, sales or use tax is due on the purchase price of the microtransactions.
Example 8. Customer purchases a game that is downloaded or installed on its electronic device. While playing the game, customer purchases “gold coins” and “gems” for $10.00 that are used in the game. The purchased coins and gems become available to the customer within the game and do not require or involve the download of any additional software onto the device because the downloaded game contained the necessary code to make the coins and gems available. Instead, the coins and gems appear virtually within the game. The $10.00 purchase of the coins and gems is taxable as a purchase of “prewritten computer software.”
Example 9. ABC installs a free application for diagnosing trouble codes in motor vehicles. Because the features in the free version of the application are limited, ABC makes an in-app purchase of $10.00 that unlocks additional features or utilities within the application (i.e., enhancements). No additional upgrade or installation is necessary to obtain the new features after purchase as they were already included in the application but not made accessible until the $10.00 fee is paid. The $10.00 purchase is taxable as a purchase of “prewritten computer software.”
Example 10. Customer plays an online game on its computer through a web browser that does not require or include the download or installation of software (e.g., local client or desktop agent) on its computer to play the game or to engage in microtransactions involving the game. Customer pays $5.00 to purchase "unlimited lives" within the game for a 24-hour period and an additional $5.00 to purchase expedited “healing” for its character. Neither of the $5.00 charges are taxable as they represent the purchase of services rather than of “prewritten computer software.”
E. Sourcing of Prewritten Computer Software
For purposes of sales and use taxes, sourcing a sale is used to determine which taxing jurisdiction may tax the transaction. Before enactment of Public Acts 438 and 439 of 2008, the GSTA and UTA provided that a business purchaser (other than one holding a direct pay permit under MCL 205.98) who, at the time of its purchase of electronically delivered computer software, knows that such software will be concurrently available for use in one or more taxing jurisdictions could provide the seller of the software with a multiple points of use (MPU) exemption form that would relieve the seller of its sales or use tax liability for that sale and the purchaser would be obligated to pay the applicable (apportioned) tax on a direct pay basis.
With the enactment of Public Acts 438 and 439, the provisions allowing for this MPU exemption were repealed, effective January 9, 2009. The repealed provisions were MCL 205.70 and MCL 205.102. As a result of the repeal of the MPU exemption provisions, the GSTA’s and UTA’s general sourcing provisions under MCL 205.69 and MCL 205.110, respectively, apply to sourcing a sale of prewritten computer software such that a sale that is sourced to Michigan is taxable in Michigan based on the full sales or purchase price even if the software might also be used outside Michigan.
Under these general sourcing rules, if a transaction includes not only a license agreement but also a copy of the prewritten computer software itself and the software is received by the purchaser at a seller’s business location, the sale is sourced to that business location. MCL 205.69(1)a); MCL 205.110(1)(a). If the prewritten computer software is not received by the purchaser at the seller’s business location, the sale is sourced to the location where it is received by the purchaser or the purchaser’s designee, as indicated by instructions for delivery. MCL 205.69(1)(b); MCL 205.110(1)(b). Where access to and use of prewritten computer software is purchased by a Michigan taxpayer, where no copy of the software is provided to the purchaser, and the software is placed or remains on the seller’s (or a third party’s) server in Michigan or in another state, the transaction would be sourced according to the hierarchy outlined in MCL 205.69(1)(c) or MCL 205.110(1)(c) and MCL 205.69(1)(d) or MCL 205.110(1)(d), as follows: (1)(c): to the location indicated by an address for the purchaser available from the seller’s business records maintained in the ordinary course of business, provided use of the
address does not constitute bad faith, or; (1)(d): if (1)(c) above does not apply, to the location indicated by an address for the purchaser obtained at the completion of the sale, including the address of the purchaser’s payment instrument if no other address is available, provided use of the address does not constitute bad faith. Reciprocity and credit for tax due and paid to another state may be applicable as provided under MCL 205.94(1)(e).
Example 11. Transaction includes not only a license agreement but also a copy of the prewritten computer software and the software is received by the purchaser at a business location of the seller. The sale is sourced to the business location of the seller. MCL 205.69(1)(a); MCL 205.110(1)(a).
Example 12. Prewritten computer software is not received by the purchaser at the business location of the seller. The sale is sourced to the location where the software is received by the purchaser or the purchaser’s designee, as indicated by instructions for delivery. MCL 205.69(1)(b); MCL 205.110(1)(b).
Example 13. Access to and use of prewritten computer software is purchased by a Michigan taxpayer, no copy of the software is provided to the purchaser, and the software is placed or remains on the seller’s (or a third party’s) server in Michigan or in another state. The transaction would be sourced according to the hierarchy outlined in MCL 205.69(1)(c) or MCL 205.110(1)(c) and MCL 205.69(1)(d) or 205.110(1)(d), as described above.
Example 14. Retailer sells prewritten computer software to ABC Corp, a Michigan corporation, under which a license is granted to ABC’s employees at its Michigan office and at its satellite offices in other states to access and use the software. ABC Corp advises Retailer of the intended multi-state use of the prewritten computer software and provides Retailer with a MPU exemption certificate. Retailer will be liable for sales tax for this retail sale regardless of the use of the software in other states or the MPU exemption certificate. To the extent sales tax is not charged by Retailer and paid by ABC to Retailer, ABC will owe Michigan use tax for the entire purchase price of the prewritten computer software.
MISCELLANOUS QUESTIONS AND ANSWERS
- Is domain name registration or domain privacy services taxable?
Answer: No. These activities do not involve the retail sale (or use, storage, or consumption) of “tangible personal property” and are not included among the limited taxable services under either the GSTA or UTA.
- Are computer software design services taxable?
Answer: If those services are not part of the “sales price” or “purchase price” under the GSTA or UTA (e.g., not “services necessary to complete the sale” of taxable computer software), then they are not taxable as they do not involve the retail sale (or use, storage, or consumption) of “tangible personal property” and are not included among the limited taxable services under either the GSTA or UTA.
- I own a professional legal and accounting services firm and purchase prewritten computer software for drafting or preparing documents, tax returns, etc. Is this software taxable given that it is used in the rendering of professional services?
Answer: Yes. Even though the professional services are not subject to sales or use tax, the purchase of prewritten computer software by the firm is taxable like any other tangible personal property purchased to be used in rendering the service.
- We provide a spam filtering and anti-virus service for our clients, which involves installing prewritten computer software on the client’s servers. We charge a monthly fee for that service. Is the monthly fee subject to sales or use tax?
Answer: Yes. The monthly fee is taxable as a sale of prewritten computer software under the GSTA and UTA. However, fees under the same arrangement would not be taxable if the software was custom software.
- Are there tax exemptions under the GSTA and UTA applicable to prewritten computer software (excluding those related to customizing or modifying such software)?
Answer: Prewritten computer software is treated the same as any other tangible personal property for purposes of exemption under the GSTA and UTA. For example, the agricultural production exemption, MCL 205.54a(1)(e) and MCL 205.94(1)(f), the industrial processing exemption, MCL 205.54t(1)(d)(vi) and MCL 205.94o(1)(d)(vi), and the data center exemption, MCL 205.54ee and MCL 205.94cc, may commonly apply to computer software.