LANSING – A pair of bills that would exclude the definition of Software-As-A-Service from the use tax and sales tax and grant the right to use prewritten software installed on another person’s server won unanimous approval in the Senate Finance Committee on Tuesday.

Without SB 82 and SB 83 , a 6 percent tax exists on the sale or consumption of tangible personal property, including prewritten computer software as computer software, delivered by any means and that is not designed and developed by the author or other creator to the specifications of the specific purchaser, according to a Senate Fiscal Agency analysis.

Sen. John Proos (R-St. Joseph) said he has been working on this issue since 2011 with then-Sen. John Pappageorge and now Sen. Peter MacGregor (R-Rockford).

“Treasury has offered some conflicting guidelines as to how this service would be taxed or not taxed,” Proos told the committee.

“There’s really no possession or control of this software,” MacGregor added. “Once your contract is up, you have nothing. They don’t physically have any type of tangible product.”

He said the conflict as it currently exists creates two losers in the scenario – the companies that may leave the state due to the remaining unpredictability and the taxpayers whose tax dollars are continually being used by the Department of Attorney General to be in front of a court on the matter.

The SFA estimated the bills could reduce state revenue by an unknown amount that would likely increase over time, and the Department of Treasury projected the annual revenue loss in fiscal year 2015-16 would total approximately $70 million, “although it is unknown what portion of this would represent actual revenue losses from tax that is currently being paid or would represent forgone revenue the state is not currently collecting because taxpayers believe the transactions are not taxable,” the analysis stated.

But Proos also pointed out that the projected revenue loss has been going up year after year since the bills were being discussed, so if nothing else, that should indicate why the Legislature needs to act now on the matter.

“The question isn’t for us to determine revenue impact when looking at the overall impact of the cascading effect,” he said. “We’ve lost many cases, and continue to, which is only putting more and more businesses in line to file suit (against the state).”

Indeed, in three recent Michigan court cases, the court has ruled the transactions at issue were primarily the provision of a service and not the transfer of tangible personal property, and therefore are not subject to the sales and use tax.

But officials with the Department of Treasury asserted the only real “loss” involves a case with Thompson Reuters that is now before the Supreme Court. Otherwise, there are two pending cases at the Court of Appeals. The bigger case that state officials and Governor Rick Snyder are watching, said Paul Connors of Treasury, is one involving Auto Owners Insurance. The department said it is opposed to SB 82 and SB 83.

“The governor wants clarity too. After Auto Owners is decided in the summer or fall, the governor will propose a fix (based on that ruling), because that has the broadest appeal,” Connors said, noting that if there are vehicle bills in the House or Senate that they would be used for the legislative fix.

But senators across the panel were aghast at such a notion, and both bills were reported from the committee with unanimous support.

“To avoid a court case before coming before us should have been the goal in the first place,” Sen. Marty Knollenberg (R-Troy) said. “It shouldn’t take a court case to say, ‘what if we lose?’ … We’ve got a whole lot of uncertainty out there. In my mind, we need a fix pretty quickly.”

Tricia Kinley with the Michigan Chamber of Commerce spoke in support of passage of the bills, explaining that their members had been working with Proos and others for five years now on a fix that hasn’t come because of fear of what might come from Treasury on the issue.

“It simply does feel like the state is trying to just ride this out in court. This is a horrible approach,” she said. “It sends a horrible message to job providers about how this state is going to treat job providers.”

She continued, “We urge you not to buy into any inflated estimates … because the estimates should not be based on how much the department wishes it could tax. The state is not allowed, by law, to legally tax these services. If the department and administration want to tax these services, then we respectfully request they introduce legislation to do that.”

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