Understanding Michigan Sales and Use Taxes
Understanding and complying with the sales tax requirements in the states in which you do business is absolutely essential. More states are taxing services, as well as retail sales, so no business owner can afford to be in the dark. In addition, you may find that you are liable for use taxes for products purchased out of state. This article answers some of the basic questions regarding sales tax in Michigan.
In Michigan every retailer must pay a tax for the privilege of carrying on a retail business based on eligible gross sales proceeds. The eligible gross sale proceeds are those from:
- retail sales or transactions in the ordinary course of business in Michigan, including those in which title is retained for security purposes
- sales of electricity and gas for heat and light to consumers
- sales of prepaid telephone calling cards
- computer software offered for general sale to the public
- sales of tangible personal property by an industrial laundry under a sale, rental, or service agreement
Leases. In Michigan a lessor may choose either to pay the sales tax on the purchase of tangible personal property to be leased or to purchase the property free of tax under a sales tax exemption and then collect use tax on all rental receipts.
Sales and use tax rate. The Michigan sales and use tax rate is 6 percent on retail sales and 4 percent on sales of electricity and gas for heat and light to consumers. Only certain qualified local governments are allowed to assess a hotel sales tax; no other local sales taxes are permitted. The sales and use tax does not apply to services in Michigan unless it is specifically made subject to tax.
In Michigan a credit is allowed for sales or use tax paid in another state for tangible personal property used in Michigan. If the tax paid is less than what Michigan would have imposed, the difference is paid to Michigan.
Sellers Must Collect and Pay Over Tax
In Michigan although the sales tax is levied on the gross proceeds of retail sales, sellers are required to reimburse themselves by adding the tax to the amount of sale.
Absorbing the tax.In Michigan it is against the law to refund or offer to refund all or any part of the amount collected, or to absorb the amount of sales tax required to be added to the sales price and collected from the purchaser. As a seller, it is also against the law for you to advertise directly or indirectly that you will absorb the sales tax that is required to be added to the sales price.
Tax Permits Are Required
Every person engaged in the business of selling tangible personal property at retail must obtain a sales tax license before engaging in business. The annual license is obtained from the Department of Treasury and the license fee is one dollar.
Many Sales May Be Tax Exempt
Michigan has many specific items that are exempt from sales tax — for example, certain prescription medications are exempt from Michigan sales tax. You'll want to check and see if you are exempt from the sales tax.
Tax exemption certificates. An exemption certificate may be issued by a purchaser of a nontaxable item. The exemption certificate may be based on the type of transaction (such as a resale exemption) or on the item itself.
Exempt nonprofit organizations must present one of two forms of proof of exemption:
- the exemption ruling letter signed by the administrator of the Sales Tax Division, or
- a copy of the transferee's federal exemption letter along with a signed statement stating that the property is to be used in connection with the operation of the organization and that the organization qualifies as an exempt organization
Purchases of Items for Resale Are Not Taxed
Generally, a sale for resale is not considered a "retail sale" or a "sale at retail" and therefore is not subject to tax. The seller must obtain an exemption certificate from the purchaser to be relieved of the duty to collect tax on a sale for resale.
Resale exemption certificate requirements. When the resale exemption is claimed on a transaction, the seller is responsible for keeping a record of:
- the purchaser's name and address;
- the date of the sale;
- the article purchased;
- the use to be made of the article;
- the amount of the sale
- the buyer's sales tax license number (if available)
These records must be retained for four years.
Resale Exemption Automatically Includes Blanket Certificate
The majority of states do not require that a purchaser making recurring exempt purchases of the same type from the same retailer secure a separate exemption certificate for each transaction. Instead, they allow the purchaser to use a blanket exemption certificate covering future purchases. In Michigan, a valid sales tax exemption certificate includes a blanket exemption certificate. This blanket exemption certificate covers all exempt transfers between a buyer and a seller for a period of three years or for an agreed-upon, stated shorter period of time. The blanket certificate must be on a form prescribed by the Department of Treasury.
Physical Presence Triggers Sales Tax Liability
Michigan does not have a statute that specifically taxes out-of-state mail order and catalogue sellers. However, you will be responsible for paying this tax only if you have physical presence within Michigan. To determine if you have physical presence, ask yourself the following:
- Do I have retail facilities, a warehouse, or any office space in Michigan? Maintaining retail or warehouse facilities will give you physical presence. Also, having an office for employees, even for business activities unrelated to mail order sales, will give you physical presence.
- Do my employees or I enter Michigan for purposes of taking and transmitting orders from Michigan? If your employee or independent contractor goes into Michigan to take or transmit orders, your business may have physical presence in Michigan. However, contracting with a common carrier to deliver mail order goods does not constitute physical presence.
- Do my delivery vehicles frequently enter Michigan for purposes of delivering property? Frequent deliveries in Michigan by your trucks will give you physical presence in Michigan.
Claim Must Be Filed to Receive Refund of Overpayments
A taxpayer claiming a refund or credit must file a petition for refund with the Department. A tax return filed that reflects an overpayment or credits in excess of the tax liability is considered a claim for refund.
Michigan Imposes Use Tax on Out-of-State Sales
The use tax is a companion tax to the sales tax. Use tax of 6 percent must be paid on the total price (including shipping and handling charges) of all taxable items brought into Michigan or purchases by mail from out-of-state retailers. Because the use tax usually falls on sales made outside the state of Michigan, responsibility for its payment lies with the consumer.
Credit is given for tax paid to another state. Use tax is also applied to certain services such as telecommunications and hotel/motel accommodations. Michigan allows credit of up to 6 percent sales or use tax properly paid to another state or local unit of that state. Michigan does not have a provision for credit of purchases delivered or brought into Michigan from foreign countries or U.S. Territories.