When a customer purchases an item in a brick-and-mortar store in Michigan, that item is generally subject to a 6% sales tax. The retailer collects this tax from the patron and remits the assessment to the Michigan Department of Treasury. However, there are many transactions involving tangible property that can evade the sales tax even if the customer is located within the state boundaries. What if the item was purchased on the internet from a retailer located in another state or country? What if an item is ordered by phone and shipped into Michigan through the mail? If the buyer and seller are not both located in Michigan to exchange money for merchandise, then is the transaction considered free and clear of taxes? Not exactly. If the sale was not subject to sales tax, then it may be subject to Michigan’s use tax instead. In addition, if the seller did not collect sales tax on the transaction, then the obligation of paying the use tax falls on the customer to remit to the State of Michigan.
The Michigan Use Tax Act imposes a “tax for the privilege of using, storing, or consuming tangible personal property in this state.” MCL 205.93(1). While the burden of paying sales tax in Michigan is on the seller, the burden of paying the use tax in Michigan is on the purchaser. Combustion Eng’g, Inc v Dep’t of Treasury, 216 Mich App 465, 468; 549 NW2d 364 (1996). The sales tax and use tax statutes operate differently, but are intended to supplement and complement each other to collect on the overall 6% tax liability. When the 6% sales tax has already been paid upon the retail sale of property to a customer, that personal property is exempt from use tax being paid by the customer. MCL 205.94(1)(a). Similarly, when a customer has already paid the 6% use tax on the property, that property is generally exempt from the provisions of the General Sales Tax Act. World Book, Inc v Dep’t of Treasury, 459 Mich 403, 408; 590 NW2d 293 (1999). The Legislature’s intent is that, if the sale or purchase evades payment by the customer to the retailer of the sales tax, then he or she must make up for it by instead paying the use tax to the Michigan Department of Treasury.
In addition, the use or consumption of the following services is taxed under Michigan’s use tax act in the same manner as tangible personal property is taxed:
- “[I]ntrastate telecommunications services that both originate and terminate in this state, including, but not limited to, intrastate private communications services, ancillary services, conference bridging service, 900 service, pay telephone service other than coin-operated telephone service, paging service, and value-added nonvoice data service, but excluding 800 service, coin-operated telephone service, fixed wireless service, prepaid calling service, telecommunications nonrecurring charges, and directory advertising proceeds.” MCL 205.93a(1)(a).
- “Rooms or lodging furnished by hotelkeepers, motel operators, and other persons furnishing accommodations that are available to the public on the basis of a commercial and business enterprise, irrespective of whether or not membership is required for use of the accommodations, except rooms and lodging rented for a continuous period of more than 1 month.” MCL 205.93a(1)(b).
- “[I]nterstate telecommunications services that either originate or terminate in this state and for which the charge for the service is billed to a service address in this state or phone number by the provider either within or outside this state including, but not limited to, ancillary services, conference bridging service, 900 service, paging service, pay telephone service other than coin-operated telephone service, and value-added nonvoice data services, but excluding interstate private communications service, 800 service, coin-operated telephone service, fixed wireless service, prepaid calling service, telecommunications nonrecurring charges, and international telecommunications service.” MCL 205.93a(1)(c).
- “The laundering or cleaning of textiles (e.g. clothing) under a sale, rental, or service agreement with a term of at least 5 days.” MCL 205.93a(1)(d).
- “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 205.93a(1)(e).
- “For a manufacturer who affixes its product to real estate in this state and maintains an inventory of its product that is available for sale to others or who makes its product available for sale to others by publication or price list, the price is the direct production costs and indirect production costs of the product affixed to the real estate in this state that are incident to and necessary for production or manufacturing operations or processes, as defined by the department.” MCL 205.93a(1)(f).
- “For a manufacturer who affixes its product to real estate in this state but does not maintain an inventory of its product available for sale to others or make its product available for sale to others by publication or price list, the price is the sum of the materials cost of the property and the cost of labor to manufacture, fabricate, or assemble the property affixed to the real estate in this state, but not the cost of labor to cut, bend, assemble, or attach the property at the site for affixation to real estate in this state.” MCL 205.93a(1)(g).
The law presumes that purchases are subject to the use tax if tangible personal property is “brought into this state within 90 days of the purchase date and is considered as acquired for storage, use, or other consumption in this state.” MCL 205.93(1)(a). However, tangible personal property used for non-business purposes that is purchased outside of this state and is not an aircraft is exempt from the use tax if AT LEAST ONE OF THE FOLLOWING APPLY:
- The property is purchased by a person who is not a resident of this state at the time of purchase and is brought into this state more than 90 days after the date of purchase. MCL 205.93(1)(b)(i).
- The property is purchased by a person who is a resident of this state at the time of purchase and is brought into this state more than 360 days after the date of purchase. MCL 205.93(1)(b)(ii).
In Free Enterprises LLC v Dep’t of Treasury, unpublished per curiam opinion of the Court of Appeals issued November 6th, 2012 (Docket No. 306195), the petitioner and his wife purchased a recreational vehicle (RV) on May 7th, 2007 in Florida and titled it in Montana. No sales tax was paid since Montana does not impose taxes and Florida defers taxes to the state of registration. The vehicle was used for personal purposes and was stored in Michigan on six occasions between May 30th, 2008 and September 13th, 2010 (when not in Michigan, it was in a Florida storage facility). The Department of Treasury discovered the vehicle and assessed a bill for $39,253 for unpaid use tax. The Michigan Tax Tribunal and the Michigan Court of Appeals both determined that the use tax did not apply because the property met both exceptions that it was not brought into the state for more than a year after purchase (90 days for a non-resident or 360 days for a resident).
A taxpayer is generally not liable for the use tax where the tangible property is leased by and controlled by another entity. In WPGP1, Inc v Dep’t of Treasury, 240 Mich App 414, 416; 612 NW2d 432 (2000), the Michigan Court of Appeals held that a purchaser of aircraft did not have to pay use tax when the aircraft was subject to existing leases with Southwest Airlines. Since the purchaser “at no time used, stored or consumed the property in Michigan,” because the leases gave exclusive authority over use, storage and consumption of the planes to Southwest.” The purchaser “did not direct Southwest’s routes or otherwise exercise dominion over Southwest’s use of the planes.” Id at 419. Therefore, the Department of Treasury’s tax assessment was in error. However, this exemption would not apply if the taxpayer reserved and exercised the right to use the aircraft regardless if the lease exists or not. See Glieberman Aviation, LLC v Dep’t of Treasury, unpublished opinion per curiam of the Court of Appeals, issued February 19th, 2004 (Docket No. 242532).
The following transfers or purchases are NOT subject to Michigan’s use tax:
- “A transaction or a portion of a transaction if the transferee or purchaser is the spouse, mother, father, brother, sister, child, stepparent, stepchild, stepbrother, stepsister, grandparent, grandchild, legal ward, or a legally appointed guardian with a certified letter of guardianship, of the transferor.” MCL 205.93(3)(a).
- “A transaction or a portion of a transaction if the transfer is a gift to a beneficiary in the administration of an estate.” MCL 205.93(3)(b).
- “If a vehicle, ORV, manufactured housing, aircraft, snowmobile, or watercraft that has once been subjected to the Michigan sales or use tax is transferred in connection with the organization, reorganization, dissolution, or partial liquidation of an incorporated or unincorporated business and the beneficial ownership is not changed.” MCL 205.93(3)(c).
- “If an insurance company licensed to conduct business in this state acquires ownership of a late model distressed vehicle…, through payment of damages in response to a claim or when the person who owned the vehicle before the insurance company reacquires ownership from the company as part of the settlement of a claim.” MCL 205.93(3)(d).
Despite the far reach of the use tax, the statute has an extremely lengthy list of property and transactions that are exempt from taxation. Although not exhaustive, Michigan’s use tax EXCLUDES, but is not limited to, ALL OF THE FOLLOWING:
- “Property sold in this state on which transaction a tax is paid under the General Sales Tax Act…”. MCL 205.94(1)(a).
- “Property, the storage, use, or other consumption of which this state is prohibited from taxing under the constitution or laws of the United States, or under the constitution of this state.” MCL 205.94(1)(b).
- “Property purchased for resale. Property purchased for resale includes promotional merchandise transferred pursuant to a redemption offer to a person located outside this state or any packaging material, other than promotional merchandise, acquired for use in fulfilling a redemption offer or rebate to a person located outside this state.” MCL 205.94(1)(c)(i).
- “Property purchased for lending or leasing to a public or parochial school offering a course in automobile driving except that a vehicle purchased by the school shall be certified for driving education and shall not be reassigned for personal use by the school’s administrative personnel.” MCL 205.94(1)(c)(ii).
- “Property purchased for demonstration purposes. For a new vehicle dealer selling a new car or truck, 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 calendar year…”. MCL 205.94(1)(c)(iii).
- “Property that is brought into this state by a nonresident person for storage, use, or consumption while temporarily within this state, except if the property is used in this state in a nontransitory business activity for a period exceeding 15 days.” MCL 250.94(1)(d).
- “Property the sale or use of which was already subjected to a sales tax or use tax equal to, or in excess of, that imposed by this act under the law of any other state or a local governmental unit within a state if the tax was due and paid on the retail sale to the consumer and the state or local governmental unit within a state in which the tax was imposed accords like or complete exemption on property the sale or use of which was subjected to the sales or use tax of this state. If the sale or use of property was already subjected to a tax under the law of any other state or local governmental unit within a state in an amount less than the tax imposed by this act, this act shall apply, but at a rate measured by the difference between the rate provided in this act and the rate by which the previous tax was computed.” MCL 250.94(1)(e).
- “Property purchased for use in this state where actual personal possession is obtained outside this state, the purchase price or actual value of which does not exceed $10.00 during 1 calendar month.” MCL 250.94(1)(k).
- “A person who is a resident of this state who purchases an automobile in another state while in the military service of the United States and who pays a sales tax in the state where the automobile is purchased.” MCL 250.94(1)(n).
- “Property or services sold to an organization not operated for profit and exempt from federal income tax under section 501(c)(3) or 501(c)(4) of the Internal Revenue Code…”. MCL 250.94(1)(w).
- “Property purchased or manufactured by a person engaged in the business of constructing, altering, repairing, or improving real estate for others, to the extent that the property is affixed to and made a structural part of real estate located in another state, regardless of whether sales or use tax was due and paid in the state in which the property is affixed to real estate.” MCL 250.94(1)(z).
- “Rental receipts if the tangible personal property rented or leased was previously taxed under a sales or use tax act of another state or a political subdivision of another state levied at a rate of 6% or more.” MCL 250.94a(b).
- “A meal provided free of charge or at a reduced rate to an employee during work hours by a food service establishment licensed by the department of agriculture.” MCL 250.94a(h).
- “The sale of diesel fuel to a person who is an interstate motor carrier for use in a qualified commercial motor vehicle.” MCL 250.94a(i).
- “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 250.94d(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 250.94d(1)(b).
- “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 205.94d(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 205.94d(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 205.94d(5).
- “Live animals purchased with the intent to be slaughtered for human consumption.” MCL 250.94d(1)(e).
Although the ultimate responsibility for use tax is on the customer, the seller is not necessarily off the hook. Michigan law presumes that a seller has sufficient nexus with the state and must BOTH register with the Department of Treasury and collect use tax from customers to remit to the state if that seller does ANY OF THE FOLLOWING:
- “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 205.95a(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 205.95a(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 for storage, use, or consumption in this state.” MCL 205.95a(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 205.95a(1)(d).
- “Delivers, installs, assembles, or performs maintenance or repair services for the seller’s purchasers in this state.” MCL 205.95a(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 205.95a(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 205.95a(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 for storage, use, or consumption in this state.” MCL 205.95a(1)(h).
- “[T]he 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:
- The cumulative gross receipts from sales by the seller for storage, use, or consumption in this state 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 205.95a(3)(a).
- The seller’s total cumulative gross receipts from sales for storage, use, or consumption to purchasers in this state exceed $50,000.00 during the immediately preceding 12 months. MCL 205.95a(3)(b).
The seller has the burden of rebutting these presumptions or else they will have the duty to register with the Department of Treasury, collect the 6% use tax and remit it to the State. Depending on how much money is collected per month, these sellers may be required to remit use tax either monthly, quarterly or annually. In addition, “[a]ny seller who is required or authorized to collect the tax fails to do so, he shall be liable personally for such amount as he failed to collect together with penalty and interest thereon.” MCL 205.99. The Department of Treasury has the power to make the assessment against the seller based upon any information coming into its possession that the seller is liable. However, this does not mean that the seller is strictly liable for collecting the use tax. The Michigan Court of Appeals holds that, despite statutory language indicating that the seller merely “fails to” charge the tax is enough, the legislative intent of the use tax statute requires the Department of Treasury to show the seller’s conduct was unreasonable or fault-based before assessing tax or criminal penalties. Michigan Bell v Treasury Dep’t, 229 Mich App 200, 217 (1998).
If the seller did not charge the use tax, then the consumer has the duty to pay use tax. The Michigan Supreme Court has recognized that, although the seller is required to collect the use tax on behalf of the state, the ultimate burden of paying the tax is on the consumer or purchaser, which is the party exercising the privilege of use, storage, or consumption. Lockwood v Comm’r of Revenue, 357 Mich 517, 527; 98 NW2d 753 (1959). If sales tax was paid on the property but the Department of Treasury believes use tax to be due, then “[t]he burden of demonstrating entitlement to this tax exemption rests on the taxpayer seeking the exemption” under MCL 205.94(1)(a). Andrie, Inc v Dep’t of Treasury, __ Mich __; 819 NW2d 920 (2014). Taxpayers should keep their invoices and receipts at least four years to protect themselves if the state examines your returns. Michigan residents are required to calculate their use tax owed and enter it on line 23 of their MI-1040 annual tax returns. Any tax owed must be paid and remitted to the state with the annual income tax return if income withholding or estimated tax payments were insufficient to cover the assessment.
The following penalties apply to noncompliance with Michigan’s Use Tax Act:
- If a person fails or refuses to file a return or pay the use 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).
- Any seller who fails, neglects or refuses to collect the tax as required by this act, or fails, neglects or refuses to comply with the provisions of this act, or excepting as expressly authorized pursuant to this act, refunds, remits or rebates to a consumer, either directly or indirectly and by whatsoever means, all or any part of the tax levied by this act, or makes in any form of advertising, verbal or otherwise, any statements which might imply he is absorbing the tax or paying the tax for the consumer by an adjustment of prices or at a price including the tax, or in any other manner whatsoever, is guilty of a misdemeanor punishable by a fine between $100.00 and $500.00, or up to one year in the county jail, or both. MCL 205.106. These fines are in addition to any civil penalties and interest that can be imposed by the Michigan Department of Treasury.
- Any consumer who refuses to pay the use tax when required by law, or refuses to comply with the provisions of the use tax act, or makes a false statement to the seller that the storage, use or consumption of the items are not subject to the use tax, is guilty of a misdemeanor punishable by a fine between $500.00 and $5,000.00, or up to one year in the county jail, or both. MCL 205.108. These fines are in addition to any civil penalties and interest that can be imposed by the Michigan Department of Treasury.
- A person who violates the Use 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 Use 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 Use 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).
As Michigan’s budget constraints become worse, you can be sure that the Department of Treasury will become more aggressive about collecting the revenue they believe to be due to them. If you find yourself on the wrong end of an audit, you need the assistance of an experienced attorney in your corner to protect your rights. If you or a loved one have questions about the use tax or any other aspect of Michigan taxation, then do not hesitate to contact the lawyers at Kershaw, Vititoe & Jedinak PLC today.