US - Michigan Sales and Use Tax Guide | Rates, Nexus & Compliance

Sales and Use Tax Basics 

Sales Tax

Sales tax in Michigan generally applies to retail sales of tangible personal property to final consumers in the state. This means that individuals or businesses that sell tangible personal property to the final consumer should remit sales tax to the Michigan Department of Treasury on the total price of their taxable retail sales. 

Use Tax

Use tax complements sales tax and is paid to the Michigan Department of Treasury on the total price of all taxable items brought into the state or purchased through the Internet, by mail, or by phone from out-of-state retailers that do not collect and remit sales or use tax from their customers.

Michigan Sales and Use Tax Rates

Two sales tax rates apply to taxable items in Michigan. The 6% sales tax applies to the total price of all taxable retail sales in the state. In addition, a 4% sales tax rate is defined for selling electricity, natural or artificial gas, and home heating fuels for residential use.

A 6% use tax rate applies to the taxable transaction for which the sales tax was not charged, collected, and remitted to the Michigan Department of Treasury.

Unlike other US states, no county, city, or local sales and use tax rates exist.

Tax-Exempt Transactions

If a retailer purchases tangible personal property for resale at retail, that may be exempt from sales and use tax. Similarly, wholesalers that buy tangible personal property may exempt it from sales and use tax if they are purchased for resale at wholesale purposes.

Sales and use tax exemptions are defined for the sale, rental, or lease of the so-called rolling stock used by interstate motor carriers in interstate commerce. The exemption applies to items such as qualified trucks, trailers meant to be pulled by those trucks, and parts or other items directly used in operating the trucks or trailers.

Tax exemptions are also provided for the agricultural sector, mainly for tangible personal property used directly or indirectly in tilling, planting, caring for, maintaining, or harvesting things of the soil and in the breeding, raising, or caring of livestock, poultry, or horticultural products.

Sales to organized churches or houses of religious worship, the United States government, the State of Michigan and its political subdivisions, departments and institutions, hospitals, schools, and parent cooperative preschools are exempt from sales tax under strictly defined circumstances.

Nexus Rules in Michigan

There are several types of nexus defined under the Michigan state legislation. Suppose an individual or business established a nexus in Michigan. If there is a sufficient connection between taxable persons and the state, they should register for sales and use tax purposes, obtain a sales license, collect and remit sales tax, and file tax returns.

Physical Nexus

Physical nexus means that a taxable person has a physical presence in the state, which can be established differently. For example, a physical nexus can be established if a taxable person has any property in Michigan, such as goods, offices, real estate, or vehicles, or has employees, agents, brokers, representatives, subcontractors, or other personnel working on their behalf.

Employees' or representatives' activities relevant to establishing a physical nexus can range from promoting sales to providing services, regardless of how often this occurs. 

Economic Nexus

Economic nexus or presence is relevant for out-of-state sellers of taxable goods and services to Michigan consumers. For an economic nexus to be established, out-of-state businesses should exceed a threshold of USD 100,000 or complete 200 or more separate taxable and non-taxable sales transactions in the previous calendar year.

Once the nexus is established, the seller should register for sales and use tax in Michigan and charge, collect, and remit taxes until an entire calendar year in which it does not meet the economic threshold passes.

Marketplace Nexus

Under marketplace nexus, marketplace facilitators or platform operators whose gross receipts from sales to customers in Michigan exceeded USD 100,000 in the previous calendar year or who had 200 or more separate transactions in Michigan in the last calendar year should remit tax on behalf of their marketplace sellers.

However, this does not exclude marketplace sellers from having to register, charge, collect, and remit sales tax for sales made in Michigan. Marketplace sellers combine the sales made through a marketplace platform with their direct-to-consumer sales in Michigan to determine whether they exceed the economic nexus threshold.

Representational, Attributional, or “Click-Through” Nexus

Under Michigan legislation, an out-of-state seller is considered to be engaged in retail taxable activity in the state if it sells similar products under a related business name, uses representatives in Michigan to promote sales, or operates physical locations, such as offices or warehouses, in the state to support sales. 

Additionally, suppose an out-of-state seller permits the usage of its trademarks in Michigan, delivers or services products for Michigan consumers, or facilitates pickups or returns at local facilities. In that case, it may be subject to sales tax.

Furthermore, agreements with Michigan residents that involve referral through websites or oral presentation create a presumption of taxable activity if sales from such referrals exceed USD 10,000 and total Michigan sales exceed USD 50,000 in the previous 12 months.

Taxable Goods and Services in Michigan

Any individual or business that sells tangible personal property, that is, items that can be touched and moved, such as any goods or products, to the final consumer, should obtain a sales tax license from the Michigan Department of Treasury. Generally, only sales of tangible personal property listed as tax-exempt are not subject to sales and use taxes, whereas all other goods and products are subject to sales and use tax.

Regarding services, they are generally tax-exempt unless listed explicitly as taxable.

Retailers that sell goods to final consumers should obtain a sales tax license and collect and remit a 6% sales tax. In contrast, wholesalers who sell to other wholesalers or retailers, not to final consumers, do not need a sales tax license.

Materials that contractors and subcontractors buy and use to improve real estate properties are subject to sales and use tax rules and regulations, as they are treated as final consumers.

Businesses that repair or alter tangible personal property should obtain a sales tax license if they sell items alongside their services. This means that any sale of tangible personal property to the final consumer in connection with services is treated as a retail sale and, therefore, is subject to sales tax.

Bundled Transactions and the True Object Test

When a transaction is bundled and includes telecommunications service, ancillary service, internet access, or audio or video programming, the total price might consist of both taxable and non-taxable parts. The entire amount might be taxed if the service provider can not identify which part is non-taxable using its regular books or records.

Similarly, telecommunications services within Michigan or between Michigan and other states are exempt from use tax if their charges are bundled with taxable services and not listed separately.

E-Commerce Framework

E-commerce rules refer to rules defined for remote sellers, who can be out-of-state or foreign sellers who lack a physical presence in the state but sell tangible personal property to Michigan customers. 

Nevertheless, even when remote sellers do not have any physical presence in the state, they can establish an economic presence or nexus if they made over USD 100,000 in gross sales or 200 or more separate transactions with Michigan customers in the previous calendar year. This is known as the  "remote seller threshold" or "economic nexus threshold."

Some of the most common tangible personal property sold by remote sellers are clothes, furniture, books, magazines, or other periodicals in physical form and prewritten computer software.

If remote sellers exceed the economic threshold, they should register for sales tax purposes, ultimately leading to the responsibility of charging, collecting, and remitting sales tax on sales they make. 

However, if remote sellers sell their goods over the marketplace, they might be subject to different rules defined for marketplace sellers.

Marketplace Rules

Sellers that sell their goods through physical or online marketplaces operated by a marketplace facilitator are referred to as marketplace sellers and are subject to specially designed rules.

The economic nexus rules also apply to marketplace sellers. However, marketplace sellers may sell their goods through online marketplaces and their websites. In that case, marketplace sellers should include direct and indirect sales through the market to determine the gross sales amount and number of transactions relevant to the economic nexus.

In addition, the economic nexus threshold calculation includes all gross sales, including non-taxable and tax-exempt, made to customers in Michigan.

If, however, marketplace sellers do have a physical or economic nexus in Michigan and make sales over an online marketplace that does not have a nexus in Michigan, that seller should collect and remit sales tax for those transactions.

Digital Goods and Services

Sales tax generally applies only to tangible personal property and not service sales. However, there are exceptions to this.

For example, prewritten computer software, such as a stand-alone canned software program bought off the shelf or sold with the downloaded application, constitutes a sale of tangible personal property subject to sales and use tax.

However, it can sometimes be challenging to identify specific products as prewritten computer software, mainly those related to cloud computing, such as Software-as-a-Service (Saas), Platform-as-a-Service (PaaS), and Infrastructure-as-a-Service (IaaS). For such products, a fact-intensive review of the product and how it is delivered to the customer determines whether it is prewritten computer software subject to sales tax or tax-exempt. 

When a consumer pays a fee for a license, subscription, or other right to use prewritten computer software, the use is considered taxable and thus subject to sales and use tax. In addition, for a license to be subject to sales tax, a copy of the software code or program should be provided to the customer with the license.

To help taxable persons and Michigan consumers in determining whether a certain product is considered prewritten computer software, and under the binding ruling in the case of Auto-Owners, the Michigan Department of Treasury developed factors that should be considered when determining if a product is a prewritten computer software. These factors include whether it is software for which there is no delivery, some delivery, or delivered in its entirety in Michigan.

Digital goods are intangible goods that exist in digital form and are delivered or transferred digitally. As such, they are not subject to sales and use tax, regardless of whether they are downloaded, streamed, or accessed through a subscription service.

Nevertheless, some digital goods fall under the category of prewritten computer software, like applications and video games downloaded or otherwise installed onto electronic devices such as smartphones, tablets, and game consoles, that are subject to sales tax. However, if no fees or charges are required to access the application of video games, e.g., free apps or free-to-play games, then use tax is not applicable.

Non-taxable digital goods include e-books, movies streamed online, podcasts, digital images or photographs, audiobooks, and NFTs.

Digital Marketplace

Under the influence of the 2018 Wayfair Supreme Court ruling, Michigan introduced special rules and requirements for digital marketplaces and their operators. In the US, these rules are known as Marketplace Facilitator rules.

Rules for digital marketplaces have been in effect since January 1, 2020, and were introduced under the Marketplace Acts. 

Digital Platform Operator

Under the current Michigan legislation, digital marketplace operators or marketplace facilitators are individuals or companies that facilitate retail sales on behalf of marketplace sellers through listing and advertising tangible personal property or taxable services. Additionally, they should, directly or indirectly, collect payments from customers and forward those payments to marketplace sellers for a fee.

However, suppose an individual or company only operates an online platform that provides internet, print, electronic, or any other form of advertising services but does not facilitate sales or collect payments from customers on behalf of sellers. In that case, it is not considered a marketplace facilitator.

Suppose digital marketplace operators exceed the marketplace nexus set at USD 100,000 in sales, taxable and non-taxable, or more than 200 transactions, including taxable and non-taxable, to customers in Michigan. In that case, they should obtain a sales license and register for sales and use tax. This implies that the marketplace becomes liable to charge, collect, and remit the sales tax it facilitates. Furthermore, it should file all required tax returns for all facilitated sales.

Individuals or companies that operate digital platforms for leasing or renting tangible personal property are considered marketplace facilitators and, as such, responsible for collecting and remitting sales tax once they exceed the threshold. However, if the lessor provides a valid claim of exemption or the marketplace seller provides proof that it paid sales or use tax upon property acquisition, the marketplace operator may be exempt from this responsibility.

Filing and Payment Requirements in Michigan

Registered taxable persons should file monthly, quarterly, or annual tax returns. The filing frequency is determined based on a taxpayer's estimated activity level. Registered individuals and businesses should file a tax return even if no tax is due for the reporting period.

Monthly and quarterly returns should be filed and paid before the reporting period's 20th day of the following month. The final date to file and pay the annual return is February 28, the year following the tax year reported.

Tax returns may be filed electronically through the Michigan Treasury Online (MTO) or by an approved tax preparation software vendor. Delivering tax returns in paper form is also allowed.

Since Michigan is a Streamlined Sales Tax (SST) member, registered taxable persons may file returns in multiple states through the SST website. Those who decide to register with SST may file monthly Simplified Electronic Returns (SERs) to MTO.

Penalties for Non-Compliance with Sales and Use Tax Requirements

The Revenue Act determines penalties and interest for non-compliance. Interest is calculated by multiplying the due tax by the current interest rate. The current annual interest rate is 9.47%, and the daily interest rate is 0.0002595%.

In addition to interest, the Revenue Act defines a penalty of 5% of the total due tax for the first two months, after which the 5% penalty is calculated monthly. 

The maximum penalty for late filing and payments is 25% of the due tax. This penalty is usually intentional violations and fraud.