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. As you read, keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both at the state and federal level.
The federal government is currently considering legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The proposed federal law, called the Marketplace Fairness Act of 2013, 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.
Below is an article on the current rules on Internet sales tax in Michigan. A new federal law would affect all state Internet sales tax laws so be sure to check for updates in this area.
The General Rule: Physical Presence in the State
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, a physical presence means such things as:
- having a warehouse in the state
- having a store in the state
- having an office in the state, or
- having a sales representative in the state.
Neither Michigan’s sales tax statute, MCL 205.51 through MCL 205.78, nor that portion of the Michigan Administrative Code that interprets the sales tax statute, appear to address how physical presence is determined specifically under Michigan law.
However, the Michigan Department of Treasury’s Revenue Administrative Bulletin from 1999 concerning use tax nexus standards is apparently still valid, and may be at least tangentially useful, as the use tax is essentially a companion tax to the sales tax, and “nexus” in this context is essentially a synonym for physical presence. The Bulletin discusses when an out-of-state seller is responsible for collecting use tax; the standards it presents track extremely closely with many other states’ standards for requiring out-of-state sellers to collect sales tax. While not specifically mentioning Internet sales, one of the examples in the Bulletin does state that “A company that has all of its goods delivered to purchasers in Michigan by an unrelated common carrier [e.g., U.S. Mail, UPS, Fedex] will not have nexus with Michigan.”
In sum, the guidance in the use tax Bulletin seems to conform to the physical-presence rule in Quill, and there appears to be no other indication that Michigan law departs from the general, federal standard embodied in the Quill decision.
The corollary to the physical-presence rule is that, if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state.
Example 1: You are operating solely out of a store in Gulfport, Mississippi and make a sale 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.
Example 2: You are operating solely out of an office in Grand Rapids, Michigan and make a sale 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 to a customer in Lansing, Michigan: You are required to collect sales tax from the Lansing customer.
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.
The Customer’s Responsibility
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.”
While you might not know it from looking solely at Michigan’s sales tax statute, the issue of whether to require online retailers to collect sales tax in states where they have no physical presence has been a matter of significant debate in many states and at the federal level. However, at this time Michigan has not enacted any law that would require out-of-state retailers to collect sales tax from Michigan customers.
In Michigan, the physical-presence rule applies for Internet retailers. However, because the issue is hotly debated in various quarters, you should consider checking in periodically with the Michigan Department of Treasury to see if the rules have changed. For more general information on taxes on Internet sales, see Nolo's article Sales Tax on the Internet. And, for information on the rules about collecting sales tax for Internet sales in any other state, see Nolo’s article, 50-State Guide to Internet Sales Tax Laws.