If you are selling goods or products online and some of your customers are located in Michigan, you need to be aware of the state’s Internet sales tax rules. Keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both within individual states and at the federal level. Michigan is one of a number of states that has enacted special legislation (known as Amazon laws) that effectively forces larger, out-of-state Internet retailers to collect and pay sales tax.
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a physical presence. The physical presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail order businesses to collect sales tax on out-of-state sales; the decision has been extended to include online retailers. Generally speaking, physical presence means having:
The corollary to the physical presence rule is that, if you do not have a physical presence in the state, you are not required to collect sales tax for an Internet-based sale to someone in that state. However, Michigan has special rules that apply to certain larger Internet retailers that make them subject to sales tax laws even without a physical presence in the state (see Michigan’s Amazon law, below).
Examples of Physical Presence
Example 1: You are an online retailer located in Gulfport, Mississippi and make a sale through your website to a customer in Ann Arbor, Michigan—a state where your business has no physical presence: You are not required to collect sales tax from the Ann Arbor customer. (There is an exception to this example if you are a large seller with substantial sales in Michigan; see below.)
Example 2: You are an online retailer located in Grand Rapids, Michigan and make a sale through your website to a customer in Traverse City, Michigan: You are required to collect sales tax from the Traverse City customer.
Example 3: After several years of operating solely out of a store in Gulfport, Mississippi, you open a one-room satellite office just outside of Detroit, Michigan—a state where previously you had no physical presence. A day later, you make a sale through your website to a customer in Lansing, Michigan: You are required to collect sales tax from the Lansing customer.
In 2015, Michigan’s General Sales Tax Act was amended with new rules for out-of-state sellers. The changes have the effect of requiring certain larger Internet retailers with no physical presence in Michigan to collect and apy Michigan's sales tax. Specifically, an out-of-state seller needs to collect sales tax from Michigan customers if that seller:
Another part of the 2015 law deals with so-called affiliate nexus. In short, if an out-of-state seller has a person (affiliate) in Michigan who works in certain specific ways with the seller, then the seller is engaged in the business of making retail sales in Michigan for sales tax purposes. That means the seller must collect and pay Michigan sales tax. If you work with a person in Michigan to help you sell, store, or service your products, check MCL 205.52b.
Similar laws have been enacted in other states; they are commonly referred to as Amazon laws. As you might guess, the name refers to Amazon.com, which is a large, Internet-based retailer that does not have a physical presence in many states where it sells merchandise. Under the default physical presence rule, this type of seller would not have to collect sales tax from customers in states where it has no physical presence. Since most customers don’t pay the corresponding use tax, online sales by large online retailers like Amazon and Overstock.com constitute a significant lost tax revenue for many states. Amazon laws have been enacted to try to reduce this loss.
The Michigan Department of Treasury has published abulletinthat covers the main points of the 2105 law, including the parts that apply to large Internet sellers and to affiliate nexus.
While the physical presence rule may seem clear, this is not necessarily the case. InQuill, the Supreme Court discusses not only physical presence, but also several types of potential nexus (connections) between a business and a state. Many states, including Michigan, have used the term nexus rather than physical presence in their sales tax laws, regulations, or other official documents, and have sometimes defined nexus in ways that could go beyond physical presence.
A section of Michigan’s use tax statute—MCL 205.95a—provides some guidance on how physical presence (or nexus) is determined in Michigan for sales tax purposes. (Use tax, discussed below, is a complementary tax to sales tax.) That section largely follows the federal law. Neither Michigan’s sales tax statute, MCL 205.51 through MCL 205.78, nor thatportion of the Michigan Administrative Code that interprets the sales tax statute, directly addresses how physical presence—or nexus— is determined specifically under Michigan law.
Some items sold via the Internet to Michigan customers may be exempt from sales tax under Michigan law. For example, section 4a(1)(h) of MCL 205.54a states that certain medical devices are exempt from sales tax. For further information on exemptions, check MCL 205.54a, MCL 205.54d, and 205.54g.
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a use tax. The Michigan Department of Treasury has a webpage devoted specifically to the use tax as well as a webpage addressing internet and mail order purchases. The latter webpage states that the use tax “might be more aptly described as a remote sales tax because it is a . . . tax owed on sales made remotely” and “Remote sales are made up of traditional mail order or catalog sales and e-commerce completed using the Internet.”
At the federal level Congress has repeatedly considered legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The most recent form of a proposed federal law is the Marketplace Fairness Act of 2015. As in previous versions, the 2015 Act would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
For most small online businesses, it is the long established physical presence rule that will apply with regard to collecting tax on sales to customers in Michigan. However, larger online retailers and those with possible in-state affiliated status will need to check the rules under Michigan's Amazon law. Because Internet sales tax is a subject of ongoing debate, you should consider checking in periodically with the Michigan Department of Treasury to see if the rules have changed.
Updated: April 14, 2016