Anaya Nolan
Michigan sales tax collection is a complex process with several variables. The state imposes a sales tax on tangible products, but some goods and customers are exempt. For example, groceries, prescription medications, and agricultural machinery are exempt from sales tax, and government agencies and some non-profit organizations are exempt from paying sales tax. Businesses must determine if they have a nexus in Michigan, which can be established through physical or economic activity, and then register for a sales tax permit. The state provides guidelines for when businesses must file sales tax returns, with varying frequencies. Sales tax may also apply to shipping and handling charges, and specific rules exist for out-of-state buyers and vehicle sales.
| Characteristics | Values |
|---|---|
| Tax rate | 6% |
| Taxable items | Tangible products, some services |
| Exemptions | Prescription medications, groceries, newspapers, medical devices, some agricultural and industrial machinery, vehicles sold to relatives |
| Exempt customers | Government agencies, some nonprofit organizations, merchants purchasing goods for resale, contractors and subcontractors |
| Nexus requirements | Physical or economic |
| Physical nexus | Having a tangible presence or activity in the state, including employees, an office, a retail store, or a warehouse |
| Economic nexus | Having a certain amount of economic activity in the state, such as meeting Michigan's economic threshold for total revenue or the number of transactions |
| Filing frequency | Monthly, quarterly, or annually |
| Due date | 20th of the month following the reporting period for monthly and quarterly filers; last day of February for annual filers |
| Payment methods | Online, mail, or AutoFile |
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What You'll Learn
- Nexus: physical and economic nexus definitions and how they apply to out-of-state sellers
- Taxable goods and services: what is taxable and what is exempt
- Online retailers: when online purchases are taxable
- Filing frequency: how often to file and pay sales tax
- Tax collection methods: how to collect and remit sales tax
Nexus: physical and economic nexus definitions and how they apply to out-of-state sellers
The concept of 'nexus' is central to understanding Michigan's sales tax laws. Nexus is a Latin word that means "to bind or tie," and it refers to the significant connection between a business and a state that gives the state legal authority to mandate the business to collect, file, and remit sales tax. Traditionally, nexus was limited to physical presence, meaning a business had to have a tangible presence or activity in a state, such as employees, an office, a store, or a warehouse, to be considered as having a nexus with that state.
However, in June 2018, the Supreme Court of the United States, in its decision for South Dakota v. Wayfair, Inc., overruled the physical presence rule. This decision gave states the power to tax businesses based on their economic and virtual connections, introducing the concept of 'economic nexus'. While physical presence still triggers a sales tax collection obligation in Michigan, out-of-state sellers can now also establish a sales tax nexus in several ways.
Physical Nexus
Physical nexus means a business has a tangible presence or activity in Michigan. If a business sells tangible personal property to a consumer in Michigan, it is considered to have a physical nexus with the state.
Economic Nexus
Economic nexus means a business has met Michigan's economic threshold requirements for total revenue or the number of transactions. Since October 1, 2018, Michigan considers vendors who make more than $100,000 in sales or have more than 200 transactions in the state in the previous calendar year to have an economic nexus. These vendors are required to collect sales tax from Michigan buyers.
Affiliate Nexus
An out-of-state retailer will be considered to have a nexus with Michigan if the seller or an affiliate has certain activities in the state. This includes the design and development of tangible personal property sold by the remote retailer or the solicitation of sales on behalf of the retailer.
Click-Through Nexus
This type of nexus occurs when a seller has an agreement to reward a person or entity in Michigan for directly or indirectly referring potential purchasers through an internet link or website. If the total cumulative gross receipts from such referrals exceed $10,000 in the previous 12 months and the seller's annual sales in Michigan total more than $50,000, a click-through nexus is established.
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Taxable goods and services: what is taxable and what is exempt
In Michigan, sales tax is levied on the sale of tangible goods and certain services. The state imposes a 6% sales tax on the sale of most personal property and some services. Tangible products are taxable in Michigan, though some goods and services are exempt from sales tax.
Goods that are exempt from sales tax include prescription medications, groceries, newspapers, and medical devices. Some agricultural and industrial machinery are also exempt, such as equipment used in agriculture. Vehicles sold to relatives are also exempt from sales tax.
Services that are exempt from sales tax include those directly related to an individual's personal well-being, such as personal grooming services. Courses, seminars, and other forms of training or education are also exempt from sales tax in Michigan. Insurance premiums and related services, such as claims processing and policy management, are also not subject to sales tax. Services related to real property, such as land and buildings, are generally exempt, as well as services related to breeding, raising, or caring for livestock or poultry.
Some customers are also exempt from paying sales tax in Michigan, including government agencies, some nonprofit organizations, and merchants purchasing goods for resale. Sales to organized churches or houses of religious worship are also exempt, as long as they do not involve property used in commercial enterprises.
It is important to note that businesses providing services tied to producing goods for resale may qualify for sales tax exemptions. Businesses should keep accurate records of exempt transactions and collect exemption certificates to ensure compliance with tax laws and minimize costs.
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Online retailers: when online purchases are taxable
In Michigan, sales tax is levied on the sale of tangible goods and some services. The tax is typically collected by the seller and remitted to the state tax authorities. The seller acts as a de facto collector and is responsible for remaining in compliance with state and local laws.
The need to collect sales tax in Michigan is predicated on having a significant connection with the state, known as nexus. Previously, this was limited to a physical presence in the state, such as employees or an office, retail store, or warehouse. However, since the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., states can now tax businesses based on their economic and virtual connections to the state, or economic nexus.
Out-of-state sellers with no physical presence in Michigan may still establish sales tax nexus in several ways:
- Affiliate nexus: Having ties to businesses or affiliates in Michigan, including the design and development of tangible personal property (goods) sold by the remote retailer or solicitation of sales on their behalf.
- Click-through nexus: Having an agreement to reward individuals in the state for referring potential purchasers of goods through an internet link, website, or other means, with total cumulative gross receipts from such referrals exceeding $10,000 in the previous 12 months, and annual sales in Michigan totalling more than $50,000.
- Economic nexus: Having a certain amount of economic activity in the state. For sales after September 30, 2018, a remote seller making retail sales into Michigan must register with the state and collect and remit Michigan sales tax if they meet certain economic thresholds. These thresholds include sales (taxable and non-taxable) into Michigan exceeding $100,000 in the previous calendar year or 200 or more separate transactions during the same period.
It is important to note that some goods and customers are exempt from paying sales tax in Michigan. Examples of exempt goods include prescription medications, groceries, newspapers, medical devices, and some agricultural and industrial machinery. Exempt customers may include government agencies, certain nonprofit organizations, and merchants purchasing goods for resale. Sellers are responsible for collecting valid exemption or resale certificates from buyers to validate each exempt transaction.
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Filing frequency: how often to file and pay sales tax
In Michigan, the filing frequency for sales tax is assigned by the state when a business registers for its sales tax permit. This is usually based on the amount of sales tax collected from buyers in the state, with larger businesses typically required to file more frequently. In Michigan, businesses will be asked to file and remit sales tax either monthly, quarterly, or annually.
All taxpayers in Michigan, even those on a monthly or quarterly schedule, are required to file an annual sales tax return by the final day of February in the year following the taxable period. Sales tax returns are almost always due on the 20th of the month following the reporting period. If the filing due date falls on a weekend or holiday, sales tax is generally due the next business day.
There are three options for filing and paying Michigan sales tax:
- File online: File online at the Michigan Department of Treasury and remit your payment through their online system.
- File by mail: Use Form 5080 and file and pay through the mail, though this form is only applicable for monthly or quarterly filers.
- AutoFile: Use a third-party platform like TaxJar or Avalara AvaTax to file your sales tax for you and take care of the payments.
It's important to note that failure to file by the assigned date can lead to late fines and interest charges. Additionally, the Michigan Department of Treasury requires all businesses to "close their books" by filing a final sales tax return, even when no sales tax was collected.
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Tax collection methods: how to collect and remit sales tax
In Michigan, sales tax is levied on the sale of tangible goods and certain services. The tax is collected by the seller and remitted to the state tax authorities. The seller acts as a de facto collector.
The need to collect sales tax in Michigan is predicated on the concept of nexus, which means having a significant connection with the state. Nexus is a Latin word that means "to bind or tie". While physical presence still triggers a sales tax collection obligation in Michigan, it’s now possible for out-of-state sellers to have sales tax nexus. Physical nexus means a business has a tangible presence or activity in the state. Out-of-state sellers with no physical presence in a state may establish sales tax nexus in the following ways:
- Affiliate nexus: Having ties to businesses or affiliates in Michigan.
- Click-through nexus: Having an agreement to reward a person(s) in the state for directly or indirectly referring potential purchasers of goods through an internet link, website, or otherwise.
- Economic nexus: Having a certain amount of economic activity in the state.
Businesses and remote sellers need to collect sales tax in Michigan if they have either physical or economic nexus in the state. Effective October 1, 2018, Michigan considers vendors who make more than $100,000 in sales or have more than 200 transactions in the state in the previous calendar year to have economic nexus.
In Michigan, you will be required to file and remit sales tax either monthly, quarterly, or annually. All taxpayers, even those on a monthly or quarterly schedule, are required to file an annual sales tax return by the final day of February in the year following the taxable period. Sales tax returns are almost always due on the 20th of the month following the reporting period.
There are three options for filing and paying your Michigan sales tax:
- File online: File online at the Michigan Department of Treasury. You can remit your payment through their online system.
- File by mail: You can use Form 5080 and file and pay through the mail, though this form is only applicable for monthly or quarterly filers.
- AutoFile: Let TaxJar file your sales tax for you. They take care of the payments, too.
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Frequently asked questions
The sales tax rate in Michigan is 6%.
Nexus is a Latin word that means "to bind or tie". It refers to the connection a business has with the state of Michigan, which determines whether they are required to collect sales tax.
Physical nexus means having a tangible presence or activity in the state, such as employees or an office. Economic nexus means having a certain amount of economic activity in the state, such as meeting a certain revenue threshold or number of transactions.
Some goods and services are exempt from sales tax in Michigan. Examples include prescription medications, groceries, newspapers, medical devices, some agricultural and industrial machinery, and SaaS (unless there is a downloadable component).
You can file your Michigan sales tax return online at the Michigan Department of Treasury, by mail using Form 5080, or by using a third-party service like TaxJar or Avalara AvaTax, which can automate the process for you.
