Introducing our Sales Tax Automation 101 series. The first installment covers the basics of sales tax automation: what it is and how it can help your business.
Sales tax is a tax paid to a governing body (state or local) on the sale of certain goods and services. Michigan first adopted a general state sales tax in 1933, and since that time, the rate has risen to 6 percent. In many states, localities are able to impose local sales taxes on top of the state sales tax. However, as of March 2019, there are no local sales taxes in Michigan.
As a business owner selling taxable goods or services, you act as an agent of the state of Michigan by collecting tax from purchasers and passing it along to the appropriate tax authority. Sales and use tax in Michigan is administered by the Michigan Department of Treasury.
Any sales tax collected from customers belongs to the state of Michigan, not you. It’s your responsibility to manage the taxes you collect to remain in compliance with state and local laws. Failure to do so can lead to penalties and interest charges.
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 state tax authorities. The seller acts as a de facto collector.
To help you determine whether you need to collect sales tax in Michigan, start by answering these three questions:
If the answer to all three questions is yes, you’re required to register with the state tax authority, collect the correct amount of sales tax per sale, file returns, and remit to the state.
If you meet the criteria for collecting sales tax and choose not to, you’ll be held responsible for the tax due, plus applicable penalties and interest.
It’s extremely important to set up tax collection at the point of sale — it’s near impossible to collect sales tax from customers after a transaction is complete.
The need to collect sales tax in Michigan is predicated on having a significant connection with the state. This is a concept known as nexus. Nexus is a Latin word that means "to bind or tie," and it’s the deciding factor for whether the state has the legal authority to require your business to collect, file, and remit sales tax.
Sales tax nexus in all states used to be limited to physical presence: A state could require a business to register and collect and remit sales tax only if it had a physical presence in the state, such as employees or an office, retail store, or warehouse.
In June 2018, the Supreme Court of the United States overruled the physical presence rule with its decision in South Dakota v. Wayfair, Inc. States are now free to tax businesses based on their economic and virtual connections to the state, or economic nexus.
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 with Michigan.
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. This includes, but isn’t limited to, the design and development of tangible personal property (goods) sold by the remote retailer, or solicitation of sales of goods on behalf of the retailer.
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, and:
Economic nexus: Having a certain amount of economic activity in the state. For sales made after September 30, 2018, a remote seller that makes retail sales into Michigan must register with the state then collect and remit Michigan sales tax if the remote seller meets either of the following criteria (the economic thresholds):
Inventory in the state: Storing property for sale in the state. This includes merchandise owned by Fulfillment by Amazon (FBA) merchants and stored in Michigan in a warehouse owned or operated by Amazon.
Sales tax nexus can linger even after a retailer ceases the activities that caused it to be “engaged in business” in the state. This is known as trailing nexus. In Michigan, nexus is established on the date of contact and continues for the remainder of that month and the following 11 months.
If you’re an active Amazon seller and you use Fulfillment by Amazon (FBA), you need to know where your inventory is stored and if its presence in a state will trigger nexus. FBA sellers can also download an Inventory Event Detail Report from Amazon Seller Central to identify inventory stored in Michigan.
If you sell taxable goods to Michigan residents and have inventory stored in the state, you likely have nexus and an obligation to collect and remit tax. To begin to understand your unique nexus obligations, check out our free economic nexus tool or consult with a trusted tax advisor.
In some states, sales tax rates, rules, and regulations are based on the location of the seller and the origin of the sale (origin-based sourcing). In others, sales tax is based on the location of the buyer and the destination of the sale (destination-based sourcing).
Michigan is a destination-based state. This means you’re responsible for applying the sales tax rate determined by the ship-to address on all taxable sales.
For additional information, see the Michigan Department of Treasury Sales and Use Tax page.
After determining you have sales tax nexus in Michigan, you need to register with the proper state authority and collect, file, and remit sales tax to the state. We get a lot of questions about this and recognize it may be the most difficult hurdle for businesses to overcome. Avalara Licensing can help you obtain your Michigan business license and sales tax registration.
You can register for a Michigan seller’s permit online through the Michigan Department of Treasury. To apply, you’ll need to provide the Michigan Department of Treasury with certain information about your business, including but not limited to:
There is currently no cost to register for a seller’s permit in Michigan.
You must register with the Michigan Department of Treasury if you acquire an existing business in Michigan. The state requires all registered businesses to have the current business owner’s name and contact information on file.
The Streamlined Sales and Use Tax Agreement (SSUTA), or Streamlined Sales Tax (SST), is an effort by multiple states to simplify the administration and cost of sales and use tax for remote sellers. Remote sellers can register in multiple states at the same time through the Streamlined Sales Tax Registration System (SSTRS).
Michigan became a full member of the SST on October 1, 2005.
Once you've successfully registered to collect Michigan sales tax, you'll need to apply the correct rate to all taxable sales, remit sales tax, file timely returns with the Michigan Department of Treasury, and keep excellent records. Here’s what you need to know to keep everything organized and in check.
How you collect Michigan sales tax is influenced by how you sell your goods:
Brick-and-mortar store: Have a physical store? Brick-and-mortar point-of-sale solutions allow users to set the sales tax rate associated with the store location. New tax groups can then be created to allow for specific product tax rules.
Hosted store: Hosted store solutions like Shopify and Squarespace offer integrated sales tax rate determination and collection. Hosted stores offer sellers a dashboard environment where Michigan sales tax collection can be managed.
Marketplace: Marketplaces like Amazon and Etsy offer integrated sales tax rate determination and collection, usually for a fee. As with hosted stores, you can set things up from your seller dashboard and let your marketplace provider do most of the heavy lifting.
Mobile point of sale: Mobile point-of-sale systems like Square rely on GPS to determine sale location. The appropriate tax rate is then determined and applied to the order. Specific tax rules can be set within the system to allow for specific product tax rules.
Michigan sales tax collection can be automated to make your life much easier. Avalara AvaTax seamlessly integrates with the business systems you already use to deliver sales and use tax calculations in real time.
Some goods are exempt from sales tax under Michigan law. Examples include prescription medications, groceries, newspapers, medical devices, and some agricultural and industrial machinery.
We recommend businesses review the laws and rules put forth by the Michigan Department of Treasury to stay up to date on which goods are taxable and which are exempt, and under what conditions.
Some customers are exempt from paying sales tax under Michigan law. Examples include government agencies, some nonprofit organizations, and merchants purchasing goods for resale.
Sellers are required to collect a valid exemption or resale certificate from buyers to validate each exempt transaction.
Michigan sales tax exemption and resale certificates are worth far more than the paper they’re written on. If you’re audited and cannot validate an exempt transaction, the Michigan Department of Treasury may hold you responsible for the uncollected sales tax. In some cases, late fees and interest will be applied and can result in large, unexpected bills.
Sales tax holidays exempt specific products from sales and use tax for a limited period, usually a weekend or a week. Approximately 17 states offer sales tax holidays every year.
As of March 2019, however, there are no sales tax holidays in Michigan.