What Transactions Are Subject To The Michigan Sales Tax?

Michigan is a great place to do business since there is a potential pool of 8 million customers willing to purchase goods and services. However, tapping into this patronage is not free. “[T]here is levied upon and there shall be collected from all persons engaged in the business of making sales at retail, by which ownership of tangible personal property is transferred for consideration, an annual tax for the privilege of engaging in that business equal to 6% of the gross proceeds of the business.” MCL 205.52(1). Failure to pay these taxes when required by law can lead to extensive penalties and interest. Is your business subject to Michigan’s General Sales Tax Act?

The tax applies to businesses making “sales at retail”, meaning “a sale, lease or rental of tangible personal property for any purpose other than for resale, sublease, or subrent.” MCL 205.51(1)(b). A lease or rental includes “any transfer of possession or control of tangible personal property for a fixed or indeterminate term for consideration and may include future options to purchase or extend.” MCL 205.51a(m). The sales tax applies to all of the following:

• “The transmission and distribution of electricity, whether the electricity is purchased from the delivering utility or from another provider, if the sale is made to the consumer or user of the electricity for consumption or use rather than for resale.” MCL 205.52(2)(a).

• “The sale of a prepaid telephone calling card or a prepaid authorization number for telephone use, rather than for resale, including the reauthorization of a prepaid telephone calling card or a prepaid authorization number.” MCL 205.52(2)(b).

• “A conditional sale, installment lease sale, or other transfer of property, if title is retained as security for the purchase but is intended to be transferred later.” MCL 205.52(2)(c).

The sales tax applies to the retail transaction, not any other service or transaction occurring at the same time. For example, a plumber who is installing new copper piping for a customer will have to pay a tax based on the sales price of the copper pipe itself, but will not pay sales tax for any amounts charged for the service of installing the copper pipe. The retailer is responsible for keeping records showing separately the business transactions subject to the sales tax and those which are not. If the retailer fails to distinguish these transactions, then the Michigan Department of Treasury can levy the 6% sales tax against the entire gross proceeds of the business. MCL 205.52(3). The burden of recordkeeping for proper assessment of taxes is on the taxpayer, not the state. These taxes, if assessed, become a personal obligation on the taxpayer.

The sales tax is paid on 6% of “gross proceeds”, which is the amount realized by the manufacturer. Gross proceeds does not include any amount of the sale price that is composed of federal excise taxes. Standard Oil Co v Michigan, 283 Mich 85, 96; 276 NW 908 (1937).

Sales tax for residential use of electricity, natural or artificial gas, or home heating fuels is at a reduced rate of 4%. MCL 205.54n.

What if the seller is based out-of-state? If my corporate office is outside of the state and my salesman was just passing through, does sales tax have to be paid on those transactions? Michigan law states that “[a] seller who sells tangible personal property to a purchaser in this state is presumed to be engaged in the business of making sales at retail in this state if the seller (other than a common carrier)…,engages in or performs any of the following activities in this state:”

• “Sells a similar line of products as the seller and does so under the same business name as the seller or a similar business name as the seller.” MCL 205.52b(1)(a).

• “Uses its employees, agents, representatives, or independent contractors in this state to promote or facilitate sales by the seller to purchasers in this state.” MCL 205.52b(1)(b).

• “Maintains, occupies, or uses an office, distribution facility, warehouse, storage place, or similar place of business in this state to facilitate the delivery or sale of tangible personal property sold by the seller to the seller’s purchasers in this state.” MCL 205.52b(1)(c).

• “Uses, with the seller’s consent or knowledge, trademarks, service marks, or trade names in this state that are the same or substantially similar to those used by the seller.” MCL 205.52b(1)(d).

• “Delivers, installs, assembles, or performs maintenance or repair services for the seller’s purchasers in this state.” MCL 205.52b(1)(e).

• “Facilitates the sale of tangible personal property to purchasers in this state by allowing the seller’s purchasers in this state to pick up or return tangible personal property sold by the seller at an office, distribution facility, warehouse, storage place, or similar place of business maintained by that person in this state.” MCL 205.52b(1)(f).

• “Shares management, business systems, business practices, or employees with the seller, or in the case of an affiliated person, engages in intercompany transactions related to the activities occurring with the seller to establish or maintain the seller’s market in this state.” MCL 205.52b(1)(g).

• “Conducts any other activities in this state that are significantly associated with the seller’s ability to establish and maintain a market in this state for the seller’s sales of tangible personal property to purchasers in this state.” MCL 205.52b(1)(h).

• “[A] seller of tangible personal property is presumed to be engaged in the business of making sales at retail of tangible personal property in this state if the seller enters into an agreement, directly or indirectly, with 1 or more residents of this state under which the resident, for a commission or other consideration, directly or indirectly, refers potential purchasers, whether by a link on an internet website, in-person oral presentation, or otherwise, to the seller, if all of the following conditions are satisfied:

1. “The cumulative gross receipts from sales by the seller to purchasers in this state who are referred to the seller by all residents of this state with an agreement with the seller are greater than $10,000.00 during the immediately preceding 12 months.” MCL 205.52b(3)(a).
2. “The seller’s total cumulative gross receipts from sales to purchasers in this state exceed $50,000.00 during the immediately preceding 12 months. MCL 205.52b(3)(b).

These presumptions can be rebutted by the seller if he or she can demonstrate that activities in Michigan are not “significantly associated with the seller’s ability to establish or maintain a market in the state for the seller’s sales of tangible personal property to purchasers in this state” (e.g. online transaction from a one-building retailer in California). MCL 205.52b(2). Also, the presumption due to agreements made between the seller and Michigan residents may be rebutted if the seller can show that he or she did not engage in solicitation or other activity that was “significantly associated with the seller’s ability to establish or maintain a market in this state for the seller’s sales of tangible personal property to purchasers in this state” (e.g. written agreements that deny solicitation). MCL 205.52b(4). The Michigan Department of Treasury has significant discretion in making this determination in light of recent federal litigation. In South Dakota v. Wayfair, Inc., 585 U.S. __; 138 S.Ct. 2080; 201 L.ED.2d 403 (2018), the U.S. Supreme ruled that states may charge tax on purchases from out-of-state sellers, even if the seller does not have a physical presence in the taxing state, without violating the Dormant Commerce Clause of the U.S. Constitution.

For all other sellers subject to the General Sales Tax Act, they must apply for and obtain a license from the Michigan Department of Treasury to conduct business for the tax year. If the seller’s business has failed to comply with the sales tax act in the past, then the Department of Treasury can require a surety bond between $1,000.00 and $25,000.00 to be posted before a business license will be granted (either at annual renewal or any other time after 30-day notice). MCL 205.53(1). The sales tax is in addition to all other license fees and taxes imposed by law. MCL 205.55.

Despite the far reach of the sales tax, the statute has an extremely lengthy list of property and transactions that are exempt from taxation. Although not exhaustive, Michigan’s General Sales Tax Act excludes, but is not limited to, ALL OF THE FOLLOWING:

• “A sale of tangible personal property not for resale to a nonprofit school, nonprofit hospital, or nonprofit home for the care and maintenance of children or aged persons operated by an entity of government, a regularly organized church, religious organization, or fraternal organization, a veterans’ organization, or a corporation incorporated under the laws of this state, if the income or benefit from the operation does not inure, in whole or in part, to an individual or private shareholder, directly or indirectly, and if the activities of the entity or agency are carried on exclusively for the benefit of the public at large and are not limited to the advantage, interests, and benefits of its members or any restricted group” (but not a parent cooperative preschool). MCL 205.54a(1)(a).

• “A sale of tangible personal property not for resale to a regularly organized church or house of religious worship”, unless the sales is for activity mainly as a commercial enterprise or for a small passenger vehicle. MCL 205.54b(1)(b).

• “The sale of food to bona fide enrolled students by a school or other educational institution not operated for profit.” MCL 205.54b(1)(c).

• “[A] sale of tangible personal property to a person engaged in a business enterprise that uses or consumes the tangible personal property, directly or indirectly, for either the tilling, planting, draining, caring for, maintaining, or harvesting of things of the soil or the breeding, raising, or caring for livestock, poultry, or horticultural products, including the transfers of livestock, poultry, or horticultural products for further growth. MCL 205.54b(1)(e). This includes harvesting machinery, agricultural land tile, subsurface irrigation pipe, portable grain bins, grain drying equipment, barn or farm shop structural components, or greenhouses. MCL 205.54b(1)(f).

• “The sale of tangible personal property used in the direct gathering of fish, by net, line, or otherwise, by an owner-operator of a business enterprise, not including a charter fishing business enterprise.” MCL 205.54b(1)(h).

• “The sale of a prosthetic device, durable medical equipment, or mobility enhancing equipment.” MCL 205.54b(1)(h).

• The sale and lease of equipment to run and maintain an industrial laundry. MCL 205.54b(1)(p).

• “The sale of a dental prosthesis.” MCL 205.54b(1)(r).

• The sale of tangible personal property to a person who a lessor under the Use Tax Act or has rental receipts that are taxed or specifically exempt under the Use Tax Act. MCL 205.54d(a).

• The sale of bottled water. MCL 205.54d(d).

• “The sale of tangible personal property to a person for demonstration purposes. For a dealer selling a new car or truck, the exemption for demonstration purposes shall be determined by the number of new cars and trucks sold during the current calendar year or the immediately preceding year without regard to specific make or style in accordance with the following schedule: 0 to 25, 2 units; 26 to 100, 7 units; 101 to 500, 20 units; 501 or more, 25 units; but not to exceed 25 cars and trucks in a calendar year for demonstration purposes.” MCL 205.54d(e).

• “Specific charges for technical support or for adapting or modifying prewritten computer software programs to a purchaser’s needs or equipment if those charges are separately stated and identified.” MCL 205.54d(f).

• “The sale of computer software originally designed for the exclusive use and special needs of the purchaser.” MCL 205.54d(g).

• “A sale made outside of the ordinary course of the seller’s business.” MCL 205.54d(i).

• “An isolated transaction by a person not licensed or required to be licensed under the General Sales Tax Act, in which tangible personal property is offered for sale, sold, or transferred and delivered by the owner.” MCL 205.54d(j).

• “The sale of oxygen for human use dispensed pursuant to a prescription.” MCL 205.54d(k).

• “The sale of insulin for human use.” MCL 205.54d(l).

• “A sale of a vehicle from a Michigan retailer for titling and registration in his or her home state of residency or domicile to a nonresident person of Michigan actually serving in the United States armed forces…”. MCL 205.54e.

• “Sales of drugs for human use that can only be legally dispensed by prescription, over-the-counter drugs for human use that are legally dispensed by prescription, or food or food ingredients, except prepared food intended for immediate human consumption.” MCL 205.54g(1)(a).

• “The deposit on a returnable container for a beverage or the deposit on a carton or case that is used for returnable containers.” MCL 205.54g(1)(b).

• “Live animals purchased with the intent to be slaughtered for human consumption.” MCL 205.54g(1)(e).

• “Food and food ingredients”, meaning “substances, whether in liquid, concentrated, solid, frozen, dried, or dehydrated form, that are sold for ingestion or chewing by humans and are consumed for their taste or nutritional value.” MCL 205.54g(3). Food and food ingredients do not include alcoholic beverages and tobacco. Food and food agreements do not include “prepared food” (e.g. Food sold in a heated state or that is heated by the seller, or two or more food ingredients mixed or combined by the seller for sale as a single item, or food sold with eating utensils provided by the seller, or food for immediate consumption). MCL 205.54g(4). Prepared food, however, does not include food that is only cut, repackaged or pasteurized by the seller, or raw eggs, fish, meat and poultry, or food sold in an unheated state by weight or volume as a single item, or bakery items. MCL 205.54g(5).

• “Sales to the United States, its unincorporated agencies and instrumentalities, any incorporated agency or instrumentality of the United States wholly owned by the United States or by a corporation wholly owned by the United States, the American Red Cross and its chapters and branches, and this state or its departments and institutions or any of its political subdivisions are exempt from the tax under the General Sales Tax Act.” MCL 205.54h.

• A sale of investment coins and gold, silver or platinum bullion. MCL 205.54s.

“If an exemption from the tax under this act is claimed, the seller shall obtain identifying information of the purchaser and the reason for claiming the exemption at the time of the purchase or at a later date.” MCL 205.62(1). The seller must complete the necessary exemption paperwork and file it with the Michigan Department of Treasury either by 120 days after requested by the Department, or the date an assessment is final, or the date that the claim for refund was denied (whichever is later). MCL 205.52(7). A seller who complies with the requirements for claiming the exemption is not liable for the sales tax even if a purchaser improperly claims an exemption (and the purchaser who improperly claims an exemption is liable for the sales tax due). MCL 205.62(5). A claim for refund may be filed within 4 years of the date of purchase if the proper paperwork and information is submitted to the Department. MCL 205.62(11).

The seller has the duty to collect the 6% sales tax and remit it to the Michigan Department of Treasury. Depending on how much money is collected per month, these sellers may be required to remit use tax either monthly, quarterly or annually. MCL 205.56. A seller is permitted to make a claim for credit or refund for any returned goods. MCL 205.56b. A seller “liable for any tax imposed under this act shall keep in a paper, electronic, or digital format an accurate and complete beginning and annual inventory and purchase records of additions to inventory, complete daily sales records, receipts, invoices, bills of lading, and all pertinent documents in a form the department requires” for a period of 4 years. MCL 205.68(1).

A seller may be entitled to claim a refund for sales tax it remits that become bad debts or to deduct bad debts from its gross proceeds for purposes of computing its sales tax. “The amount of gross proceeds deducted must be charged off as uncollectible on the books and records of the taxpayer at the time the debt becomes worthless and deducted on the return for the period during which the bad debt is written off as uncollectible in the claimant’s books and records and must be eligible to be deducted for federal income tax purposes.” MCL 205.54i(2). “Bad debt” does not include “any finance charge, interest, or sales tax on the purchase price, uncollectible amounts on property that remains in the possession of the taxpayer until the full purchase price is paid, expenses incurred in attempting to collect any account receivable or any portion of the debt recovered, any accounts receivable that have been sold to and remain in the possession of a third party for collection, and repossessed property.” MCL 205.541(1)(a). However, “[i]f a consumer or other person pays all or part of a bad debt with respect to which a taxpayer claimed a deduction under this section, the taxpayer is liable for the amount of taxes deducted in connection with that portion of the debt for which payment is received and shall remit these taxes in his or her next payment to the department.” MCL 205.54i(2). The Michigan Court of Appeals, however, determined that retailers are not entitled to refunds under the bad debt provision if the loss was incurred by a third-party financing company and the retailer was reimbursed. Menard Inc v Dep’t of Treasury, 302 Mich App 467; 838 NW2d 736 (2013).

A seller who fails to comply with the General Sales Tax Act is subject to the following:

• A person who engages in any business in this state that is taxable under the General Sales Tax Act and who fails to secure from the Department of Treasury a license to engage in that business or who continues to engage in business after the license has expired or was suspended by the state treasurer or his or her designee, is guilty of a misdemeanor punishable by a fine up to $1,000.00 or up to 1 year in the county jail, or both. MCL 205.53(3).

• If a seller fails or refuses to file a return or pay the sales tax on time, “a penalty of 5% of the tax shall be added if the failure is for not more than 2 months, with an additional 5% penalty for each additional month or fraction of a month during which the failure continues or the tax and penalty is not paid, to a maximum of 25%” (plus interest). MCL 205.24(2).

• A person who violates the General Sales Tax Act with intent to defraud or to evade or assist in defrauding or evading the payment of a tax, or a part of a tax, is guilty of a felony, punishable by a fine of not more than $5,000.00, or imprisonment for not more than 5 years, or both. MCL 205.27(2).

• A person who violates the General Sales Tax Act with intent to defraud or to evade or assist in defrauding or evading the payment of a tax, or a part of a tax AND knowingly swears to or verifies a false or fraudulent return or a false or fraudulent payment, or a return or payment containing a false or fraudulent statement, with the intent to aid, abet, or assist in defrauding the state, is guilty of perjury punishable by up to 15 years in prison. MCL 205.27(3).

• A person who knowingly violates the General Sales Tax Act but DID NOT do so with intent to defraud or to evade or assist in defrauding or evading the payment of a tax, or a part of a tax, is guilty of a misdemeanor, punishable by a fine of not more than $1,000.00, or imprisonment for not more than 1 year, or both. MCL 205.27(4).

The Michigan Department of Treasury is aggressive about collecting sales tax revenue from all eligible businesses, whether registered or unregistered. You can be sure that revenue officers are on the lookout to ensure that all retailers are in compliance with these rules and paying all the tax due to them. If you find yourself under inquiry by the Department of Treasury, you need the assistance of an experienced attorney in your corner to protect your rights and minimize any penalties. If you or a loved one have questions about the general sales tax or any other aspect of Michigan taxation, then do not hesitate to contact the experienced lawyers at Kershaw, Vititoe & Jedinak PLC today.