Michigan, known for its breathtaking Great Lakes and diverse landscapes, offers abundant business prospects. However, unraveling the complexities of Michigan sales tax might prove more challenging than charting a course across its expansive lakes.
This guide breaks down everything you need to know about Michigan’s sales tax, from determining the right sales tax rates to understanding exemptions and filing processes. By the end of this comprehensive guide, you’ll be equipped to handle Michigan’s sales tax with confidence and ease.
Sales Tax Nexus in Michigan
When a business creates either a physical or economic nexus, it is required to collect sales tax in Michigan.Physical Nexus
A physical nexus means having a significant physical presence or engaging in enough activities within a state to require the collection and payment of sales tax. The factors that determine a physical nexus in Michigan include:- Physical Location: This includes having an office, a place for distribution, sales, or showcasing products, a warehouse or storage facility, or any other place where you conduct business.
- Inventory in the State: This covers situations where you store your products within the state, even if it’s done through a third-party fulfillment center or 3PL (like Amazon FBA) or an online marketplace.
- Employees, independent contractors, agents, or other representatives operating on your behalf.
- Affiliate Nexus or Click-through Nexus: You could trigger a physical nexus if you have affiliates, whether they operate online or in-person, who have collectively sold more than $10,000 worth of products for delivery in Michigan in the preceding 12-month period and your total sales in Michigan are more than $50,000.
- Presence at Trade Show: You must collect sales tax at Michigan trade shows if you are taking orders/sales or attending a trade show for longer than 10 days total each year.
Economic Nexus
States have established regulations to collect sales tax from out-of-state sellers who meet certain revenue and/or transaction thresholds. This rule is known as economic nexus. Beginning October 1, 2018, the threshold for economic nexus in Michigan is $100,000 in gross revenue or 200 transactions in the previous or current calendar year’s sales or prior 12 months. While the nexus criteria mentioned above generally apply to most businesses, additional methods exist for establishing sales tax nexus. To access a comprehensive list of these rules, please refer to the governing laws for sales tax nexus requirements in Michigan.
Michigan Sales Tax on Goods and Services
One of the first things you need to know is whether the goods you’re selling or services you’re offering are taxable in Michigan.Tangible Products
Almost all goods are taxable in Michigan, including:- Cosmetics
- Electronics
- Clothing
- Furniture
- Jewelry
- Automobiles
- Home Goods
- Groceries – Food and other nonalcoholic drinks are exempt, while prepared products intended for immediate consumption are taxable.
- Feminine hygiene products – Starting from February 3, 2023, tampons, panty liners, menstrual cups, and sanitary napkins are tax-exempt. The exemption also covers other items specifically meant to manage menstrual flow. However, feminine sprays, powders, creams, ointments, douches, and wipes are still taxable, unless they qualify as over-the-counter drugs.
- Prescription drugs and medicines
- Industrial Processor
- Newspapers and periodicals
- Agricultural processing
- Oxygen
- Eyeglasses and contact lenses
- Hearing aids
- Prosthetic devices
Services
In Michigan, the majority of service-based transactions, such as professional services and advertising, are not subject to sales tax. However, there are specific situations where certain services are taxable. If a business offers repair, enhancement, or modification services for items owned by others, and also sells tangible products, it needs to get a sales tax license. Any item provided to the customer as part of the service or repair is seen as a retail sale and, therefore, is subject to sales tax.Software-As-A-Service (SaaS)/Digital Products
SaaS is not taxable in the state of Michigan. Digital products (i.e., ebooks, downloadable video content, mobile apps) are also not taxable.Shipping/Handling
Shipping and handling charges in the state of Michigan are not taxable if the seller:- Itemizes delivery and installation charges separately on an invoice to the customer, and
- Keeps books and records that show how the tax levied was calculated for these transactions.
- The items are not billed or recorded in a manner that satisfies the abovementioned conditions, or
- The transaction involves the sale of electricity, natural gas, or artificial gas by a utility.
Sales Tax Permits and Licenses in Michigan
Now that you’ve got a handle on when sales tax nexus applies and which products are taxable in Michigan, the next important step is getting your Michigan Seller’s Permit, also known as a sales tax permit.Seller’s Permit
You can register for a Michigan sales tax permit online at the Michigan Treasury Online. Ensure you have specific information on hand when registering for a seller’s permit, including, but not limited to:- Business Identification Information (name, address, phone number, email address)
- Business Entity Structure (sole proprietorship, partnership, corporation, LLC, etc.)
- Federal Employer Identification Number (EIN or FEIN)
- Owner/Partner/Officer Information
- Business Activity Details (description of products or services sold, sales volume, date of the first sale, or the expected date to start dates)
Resale Certificate
A resale certificate is a document that allows businesses to buy products without paying sales tax on them, as long as they plan to resell those items to customers, who will then pay the tax. As a seller, you can also accept resale certificates from others looking to buy for resale. In Michigan, sellers use resale certificates to buy goods from their suppliers that they intend to resell. The issuance of the certificates is always done in good faith that the seller would report tax on the final sale of the items. You can fill out Form 3372 – Michigan Sales and Use Tax Certificate of Exemption provided by the State, or you can also fill out the Streamlined Sales and Use Tax Certificate of Exemption if you would like to get sales tax exemption for multiple states simultaneously. If you don’t want the hassle of registering, sign up for our all-inclusive service that includes sales tax registration.Streamlined Sales Tax (SST)
The Streamlined Sales Tax (SST) is an initiative to simplify and standardize sales tax regulations across multiple states. Michigan has been a party to this program since October 1, 2005, meaning you may use your SST in this state. Check with the Department of Treasury for the most current information on Michigan’s participation in the Streamlined Sales Tax initiative.Calculating and Collecting Sales Tax in Michigan
Sales Tax Computation
In Michigan, the sales tax is made up of only the statewide sales tax. To figure out the total sales tax for your calculation, you’ll need to determine where your transaction occurs. Use TaxHero’s Michigan Sales Tax Calculator to compute for sales tax. Here’s an example. Suppose an out-of-state seller satisfies the economic nexus criteria in Michigan and sells to a customer in Detroit, Michigan, with a ZIP code of 48226. In that case, the seller has to charge the customer a total sales tax, which can be broken down as follows:
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Origin-based vs. Destination-based
When making in-state sales, it is important to determine if you are located in an origin-based or destination-based state to figure out what rate to charge for sales tax. Michigan is a destination-based state, meaning sales tax is determined based on the buyer’s location. That means for a Michigan-based seller, sales tax is generally based on the location of the buyer when selling within the state. For out-of-state or remote sellers, the sales tax rate is always determined by the buyer’s location. For instance, if you’re selling a product from California to a customer in Detroit, Michigan, where you have nexus, you’d apply Detroit’s sales tax rate to that sale. To make life easier, consider using sales tax software or consulting a tax professional, like TaxHero, to ensure accurate tax calculations and collections. Understanding these tax rules helps you stay compliant, whether you’re in-state or out-of-state.Filing and Remitting Sales Tax Returns in Michigan
The next step after collection is filing and remitting your Michigan sales tax returns. Filing and remittance can vary in frequency, typically monthly, quarterly, or annually. It’s crucial to keep accurate records of your sales and tax collections and adhere to the filing schedule set by the state to remain compliant with Michigan’s sales tax regulations.Due Dates
In Michigan, the due date falls on the 20th day of the following month for monthly and quarterly filers. For instance, sales tax collected in January is due by February 20th for monthly filers. However, if this day is a holiday, weekend, or in the rare occurrence of a natural disaster, the deadline is typically extended to the next business day. For instance, if you’re a monthly filer and filing sales tax for the month of January, and the February 20th deadline falls on a holiday or weekend, you’ll have until February 21st, the following business day, to submit. If you’re an annual filer, the due date for remittance falls on February 28 (or February 29 if a leap year) following the reported tax year.Accelerated Filing Requirements
Taxpayers whose average sales or use tax annually is an average of $720,000 are required to remit on an accelerated schedule of about 75% of the total tax liability on or before the 20th day of the current month. For more detailed information regarding the accelerated EFT filing requirements, check out the Michigan Department of Treasury.Filing Sales Tax Returns
To file your sales tax return for Michigan, a few options are available:- File online through the Michigan website portal.
- File by mail – Form 5080 (monthly/quarterly filers) or Form 5082 (annual filers)
- File with TaxHero – Let TaxHero take care of it so you don’t have to worry about missing a payment or return.
Timely Filing Discount
Some states offer a discount to businesses for collecting, filing, and remitting sales tax on time as an incentive to process sales taxes promptly. Michigan’s timely filing discount amount is determined using specific formulas based on the tax due. The maximum discounts available range from $15,000 to $20,000, depending on the filing period.Sales Tax Holiday
Currently, for 2023-2024, there are no planned sales tax holidays in Michigan.Michigan Sales Tax Penalties
Like in most states, sales tax is a big part of how Michigan generates revenue. Thus, maintaining compliance with sales tax regulations is of utmost importance. Failure to do so can lead to consequences and sales tax penalties. Therefore, it is crucial always to ensure you are up-to-date in filing, collecting, and remitting sales tax to the state. Here are the specific penalties for non-compliance with sales tax regulations in Michigan:- Civil penalties amounting to 5% of the total sales tax owed if submitted within two months, with an extra 5% of the total sales tax owed for each subsequent month or part thereof (up to a maximum of 25%);
- On the criminal side, offenses can be classified as either misdemeanors or felonies, depending on the severity and specific circumstances.