A Michigan appeals court recently addressed whether a taxpayer was entitled to a refund of use taxes paid on credit card processing terminals. The taxpayer, a credit card processor, provided its customers (merchants) with credit card processing terminals that were used by the customer to communicate with the taxpayer over a data line. Most of the terminals were provided free of charge, but some were sold. The terminals were stored in Troy, Michigan. The taxpayer agreed that it owed use tax on the terminals placed for free with Michigan customers. However, it did not believe it owed use tax on the terminals deployed outside Michigan and also argued that it did not owe use tax until a terminal was withdrawn from inventory because up until that point, the terminals were purchased for resale and it was not known if any individual terminal would be sold or placed for free. The Department’s position, in contrast, was that the taxpayer owed Michigan use tax at the time it purchased the terminals and that the sale for resale exemption did not apply because the relatively few sales of terminals were fundamentally intertwined with, and incidental to, the provision of the taxpayer’s services. After the Michigan Tax Tribunal ruled in the Department’s favor, the taxpayer appealed.
The court first addressed whether the taxpayer’s occasional sales of terminals, which were treated under the taxpayer’s books and records as separate transactions from its service agreements, meant that the terminals were purchased for resale. The court, agreeing with the Tribunal, concluded that the taxpayer’s purchases were not for resale because only a minority of terminals were actually sold, and all of the terminal sales were merely incidental to the taxpayer’s provision of services. In other words, what a customer sought when it bought a terminal was the taxpayer’s services and therefore the entire transaction was the provision of a service meaning the taxpayer owed use tax on the terminals. Key to this finding was that although a customer could buy a terminal without purchasing the taxpayer’s services, there was no evidence that this had ever happened. The court next addressed the taxpayer’s argument that it did not owe use tax on those terminals that were deployed outside Michigan. Under Michigan case law, “use” of property in the state does not encompass the withdrawal of inventory and subsequent distribution of inventory items in another state. However, the case cited by the taxpayer did not address the Department’s argument, which was that the terminals were subject to use tax based on storage in Michigan. In addition, the court noted that the terminals were not truly inventory because they were not purchased for resale. As a result, the terminals were subject to use tax at the time they were purchased. Please contact Dave Perry at 513-763-2402 with questions on North American Bancard, Inc. v Department of Treasury.