Keith Mack
In Michigan, sales tax is levied on the sale of tangible goods and some services, and it's the seller's responsibility to manage the taxes they collect to remain in compliance with state and local laws. This includes registering with the state tax authority, collecting the correct amount of sales tax per sale, filing returns, and remitting the tax to the state. The Michigan sales tax rate in 2023 is 6%, and there are several exemptions, including prescription medications, groceries, and agricultural equipment. Businesses must also adhere to specific filing frequencies, with returns typically due on the 20th of the month following the reporting period. Out-of-state sellers may also be required to collect sales tax in Michigan if they meet certain criteria, such as having a physical or economic nexus in the state.
| Characteristics | Values |
|---|---|
| Tax collection | Sellers act as de facto collectors and remit collected revenue to the Michigan Department of Treasury |
| Tax ownership | All sales tax collected from customers belongs to the state of Michigan |
| Tax rate | 6% |
| Taxable goods | Tangible goods and some services |
| Tax exemptions | Prescription medications, groceries, newspapers, medical devices, some agricultural and industrial machinery, vehicles sold to relatives, clothing for specific work purposes, digital products, SaaS (unless there is a downloadable component) |
| Tax exemption requirements | Sellers are required to collect a valid exemption or resale certificate from buyers |
| Nexus | Physical or economic connection with the state of Michigan |
| Physical nexus examples | Employees, offices, retail stores, warehouses, similar places of business, trademarks, service marks, trade names |
| Economic nexus examples | Affiliate, click-through, certain amount of economic activity in the state |
| Economic nexus thresholds | $100,000 in total retail sales or 200 transactions in the previous calendar year |
| Registration | Required for out-of-state sellers with nexus in Michigan; no charge for a sales tax permit |
| Filing frequency | Monthly, quarterly, or annually |
| Filing methods | Online, by mail, or automated |
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What You'll Learn
Nexus: physical and economic nexus requirements
Nexus is a Latin word that means "to bind or tie," and it is the deciding factor for whether the state has the legal authority to require your business to collect, file, and remit sales tax. In Michigan, nexus is created through physical presence and/or economic presence.
Physical nexus is achieved when a business has a physical presence in the state of Michigan. This can include having employees, agents, representatives, or independent contractors working to promote or facilitate sales in the state. It can also include maintaining an office, distribution facility, warehouse, storage place, or similar place of business in Michigan to facilitate the delivery or sale of tangible personal property.
Economic nexus, on the other hand, 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 in gross sales or complete 200 or more separate taxable and non-taxable sales transactions in the previous calendar year. This is known as the "remote seller threshold" or "economic nexus threshold."
It's important to note that even if a business does not have a physical presence in Michigan, they can still establish a nexus if they have economic and virtual connections to the state. For example, having ties to businesses or affiliates in Michigan, or having an agreement to reward a person for referring potential customers through an internet link or website can create an economic nexus.
To summarize, both physical and economic nexus requirements are crucial for determining a business's obligation to collect and remit sales tax in Michigan. Businesses should carefully consider their activities and presence in the state to ensure compliance with the applicable laws and regulations.
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Taxable goods and services
In Michigan, sales tax is levied on the sale of tangible goods and some services. The seller collects the tax and remits it to the state tax authorities. The seller acts as an agent of the state of Michigan. Sales tax in Michigan was first introduced in 1933, and the rate has since risen to 6%.
There are specific business activities that create a physical nexus in Michigan, and businesses with this physical nexus must collect and remit sales tax on all taxable goods sold to Michigan customers. Examples of activities that create a physical nexus include using employees, agents, or independent contractors in Michigan to facilitate sales to Michigan purchasers, maintaining an office or warehouse in Michigan to facilitate the delivery of goods to Michigan purchasers, and using trademarks or service marks in Michigan that are the same or similar to those used by the seller.
Out-of-state merchants that make $100,000 in total retail sales or process 200 orders in the state during the previous calendar year must also collect, file, and remit Michigan state sales tax. This is known as an economic nexus. Remote sellers must include transactions made through a marketplace facilitator when determining if they have an economic nexus in Michigan.
Some goods are exempt from sales tax under Michigan law, including prescription medications, groceries, newspapers, medical devices, and some agricultural and industrial machinery. Additionally, some customers are exempt from paying sales tax, such as government agencies, certain nonprofit organizations, and merchants purchasing goods for resale.
The rules regarding restaurant food taxes in Michigan are complex. Food sold with eating utensils provided by the seller, such as utensils, glasses, napkins, straws, and plates, is subject to sales tax. However, if the customer collects the utensils themselves or if they are packaged for transport, the food is exempt from taxes.
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Tax exemptions
In Michigan, some goods and customers are exempt from sales tax under state law. Examples of goods that are exempt from sales tax include prescription medications, groceries, newspapers, medical devices, and some agricultural and industrial machinery.
The following are examples of exempt customers:
- Government agencies
- Some nonprofit organizations
- Merchants purchasing goods for resale
Sellers are required to collect a valid exemption or resale certificate from buyers to validate each exempt transaction. For instance, a purchaser must provide a valid claim of exemption to the vendor by completing a Michigan Sales and Use Tax Certificate of Exemption (Form 3372), Multistate Tax Commission's Uniform Sales and Use Tax Certificate, or Streamlined Sales and Use Tax Agreement Certificate.
Some specific exemptions in Michigan include:
- Sales to the American Red Cross and its chapters and branches
- Sales to hospitals that are not operated for profit
- Sales to schools and parent cooperative preschools that are not operated for profit
- Vans or buses with a manufacturer's rated seating capacity of 10 or more used primarily for transportation for religious purposes
- Sales of prosthetic devices, durable medical equipment, or mobility-enhancing equipment
- Water delivered through water mains, in bulk tanks of 500 gallons or more, or bottled water
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Tax registration and collection
The need to collect sales tax in Michigan is predicated on having a significant connection with the state, known as nexus. Nexus is the deciding factor for whether the state has the legal authority to require your business to collect, file, and remit sales tax. Physical nexus means a business has a tangible presence or activity in the state, while economic nexus means a business has met Michigan's economic threshold for total revenue or transaction number.
Before 2018, sales tax nexus in all states was limited to physical presence. However, the Supreme Court of the United States overruled the physical presence rule in 2018, and states can now tax businesses based on their economic and virtual connections. While physical presence still triggers a sales tax collection obligation in Michigan, it is now possible for out-of-state sellers to have sales tax nexus. Out-of-state sellers can establish sales tax nexus through affiliate nexus, click-through nexus, or economic nexus.
Businesses and remote sellers with physical nexus in Michigan must collect and remit sales tax on all taxable goods sold to Michigan customers. Examples of activities that create physical nexus include using employees, agents, or contractors in Michigan to facilitate sales, maintaining an office or warehouse in Michigan, or using similar trademarks or service marks to those used by the seller.
To determine if you need to collect sales tax in Michigan, you should answer the following three questions:
- Do you have a physical presence in Michigan?
- Do you have a significant number of sales transactions into the state?
- Do you sell taxable products or services to Michigan customers?
If the answer to all three questions is yes, you are required to register with the state tax authority, collect the correct amount of sales tax per sale, file returns, and remit the tax to the state. You can register online at the Michigan Department of Treasury, and there is no charge to register for a sales tax permit. However, other business registration fees may apply.
Once registered, businesses must regularly file sales tax returns and remit the collected revenue to the Michigan Department of Treasury. The frequency of filing and payment depends on the assigned filing frequency and the state's due dates. In Michigan, businesses will typically be required to file and remit sales tax monthly, quarterly, or annually. All taxpayers, even those on a monthly or quarterly schedule, must file an annual sales tax return by the final day of February of the year following the taxable period. Sales tax returns are usually due on the 20th of the month following the reporting period.
There are several options for filing and paying Michigan sales tax:
- File online at the Michigan Department of Treasury and remit payment through their online system.
- File by mail using Form 5080, applicable for monthly or quarterly filers.
- Use a service like TaxJar or Avalara AvaTax to automate the process and calculate sales and use tax in real time.
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Penalties for non-compliance
The Michigan Department of Treasury conducts audits to ensure compliance with sales tax laws. These audits involve a detailed review of financial records, such as sales invoices, purchase records, and tax returns. If discrepancies are found, the Department issues an assessment detailing the additional tax owed, along with penalties and interest. Businesses can dispute audit findings through an informal conference with the Department, and if necessary, appeals can be filed with the Michigan Tax Tribunal or the Court of Claims.
To avoid penalties, businesses should ensure timely payments and use automation tools to streamline tax collection and remittance. It is also important to maintain accurate transaction records and register with the Michigan Department of Treasury before collecting sales tax.
In Michigan, sales tax is levied on the sale of tangible goods and some services. The tax is collected by the seller and remitted to the state tax authorities. The seller acts as a de facto collector and is responsible for managing the taxes collected to remain in compliance with state and local laws. Failure to do so can result in penalties and interest charges.
To achieve sales tax nexus in Michigan, out-of-state sellers must meet certain criteria, such as having a physical presence in the state or establishing an economic nexus by making a certain number of sales or exceeding a certain sales threshold. Once a business has achieved sales tax nexus, it is required to register and collect sales taxes.
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Frequently asked questions
Sales tax nexus refers to having a significant connection with the state of Michigan, which gives the state the legal authority to require your business to collect, file, and remit sales tax. Physical nexus means having a tangible presence or activity in the state, while economic nexus refers to meeting Michigan's economic threshold for total revenue or transaction number.
The sales tax rate in Michigan as of 2023 is 6%. This rate applies to taxable transactions and varies depending on the product or service.
Several items are exempt from sales tax in Michigan, including prescription medications, groceries, newspapers, certain clothing and footwear, agricultural equipment, and industrial machinery.
In Michigan, businesses are required to file and remit sales tax either monthly, quarterly, or annually, depending on their assigned filing frequency and state due dates. All taxpayers must file an annual sales tax return by the last day of February following the taxable period.
Non-compliance with sales tax laws in Michigan can result in penalties and interest charges. Late tax payments may be subject to a 5% negligence penalty, with interest compounding daily at an 8.25% annual rate.
