I think we all should take a look a the state of Michigan and their recent court decision on cloud computing tax. This decision should be a model for how other states handle cloud computing. Let’s examine this issue more closely.
Many governments, including the Unites States (and other jurisdictions around the world) have been struggling with how to classify cloud computing, specifically, whether to classify cloud services as taxable. While some states have weighed in unambiguously on the side of taxing cloud services, states like Michigan are deciding to take a contrary view.
The Michigan Court of Claims recently held that cloud computing is not a service that can be taxed by the state of Michigan. In this case, an insurance company using cloud based applications was told they must pay a “use tax” on that “software.” Because the applications were cloud services, the insurance company claimed, in the end successfully, that they should not have to be use tax on cloud services. Here is what the Michigan Court of Claims held.
Michigan “use tax” is “for the privilege of using, storing, or consuming tangible personal property in this state.” Many states in the US have struggled with changing technology involving cloud computing and managed services and whether these new “services” should be taxable. Often, the tax collection entity will try and claim that a manage or cloud service is a taxable event. Why does this happen? Because to the uneducated tax collector they view a MSP managing a service, desktop, or software application, as a reseller. They assume that these MSPs are just selling these products rather than just managing them.
While the profession of managed services has evolved quite a lot over the years, it is important to remember that to the non-technical world, cloud and managed services are still very new concepts. In future blogs I will address some of the more common practices MSPs engage in that involve their services being taxed.
Until then, I look at the Michigan Court of Claims and applaud their decision as both correct and beneficial for the managed services profession. We need more of these types of cases being litigated to show that what MSPs are doing is more than just reselling hardware and software. MSPs make complex technology work for their customers. Many MSPs do not even sell hardware or software, but instead manage those objects on behalf of their customers.
If you are interested in reading more about this case: Auto-Owners Insurance Company v. Department of Treasury, Case No. 12-000082-MT (Mich. Ct. Cl. 2014).