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Michigan Appellate Court Issues Decision in Auto-Owners Insurance Company v. Department of Treasury

Tax Development Nov 03, 2015

On October 27, 2015, the Michigan Court of Appeals issued its decision in Auto-Owners Insurance Company v. Department of Treasury, Michigan Court of Appeals, No. 321505, October 27, 2015.  Between December 1, 2006 through December 31, 2010, Auto-Owners Insurance Company (“Auto-Owners”) entered into multiple contracts, some of which utilized software hosting arrangements.

On March 28, 2012, the Michigan Department of Treasury (“Department”) conducted a use tax audit, determined a use tax deficiency existed, and issued Auto-Owners a bill for taxes due. Auto-Owners paid the tax and filed a complaint on June 29, 2012, seeking a refund of tax and interest paid. The Court of Claims held in favor of Auto Owners, finding that the transactions were not subject to use tax because the software was never “delivered by any means” as specified in the definition of prewritten computer software, and ordered the Department to issue a refund.

The Department appealed, arguing that the Court of Claims erred when it determined that the transactions were not subject to use tax. In its analysis, the Appellate Court applied the “incident to the service test” and found that any taxable tangible personal property was incidental for the exempt services provided, basing its determination on several factors, including that Auto-Owners exercised an ownership-type right over the software. On October 27, 2015, the Appellate Court issued its decision, upholding the determination from the Court of Claims that the transactions in question were not subject to Michigan use tax.


John M. Polizzi

Leslie S. Hahn