Michigan stands to gain an extra $250 million dollars in tax revenue as a result of this summer’s decision by the U.S. Supreme Court in South Dakota v. Wayfair and the Michigan Department of Treasury wasted little time to start collecting it. On August 1, the Department announced that it will require out-of-state sellers, regardless of whether or not they have an in-state physical presence to register, collect, and pay Michigan sales and use taxes starting October 1.
The Department’s recent guidance supplements its prior administrative guidance on sales and use collection responsibilities for those sellers with an in-state physical presence or those who are “present” through representation by an affiliate and/or so-called “click-through” nexus. Until further legislative authorization is forthcoming, the Department will administer the state’s sales and use tax on an economic presence basis as discussed in Wayfair.
Specifically, the Department will require sales and use tax collection and remittance by out-of-state sellers that meet one of the two following requirements:
- More than $100,000 in sales to Michigan customers, or
- At least 200 separate sales transactions into Michigan.
These thresholds are typically measured based on the seller’s annual accounting period. Although there are a number of separate periodic sales and use tax filing methods (monthly, quarterly, and annual). Further, the annual accounting period for Michigan sales and use tax is typically performed on a twelve month calendar year. In other words, if a seller exceeds one or more of these thresholds in the current calendar year, the Department will consider the seller to have “substantial nexus” – a sufficient economic presence in the state for Michigan sales and use tax purposes in the current year. Given that the Department is requiring compliance beginning with the 4th calendar quarter of this year, sellers should review a full twelve months of sales data to test if these thresholds are met. The Department specifically advises sellers to review their 2017 calendar year’s sales activity to determine if they have (or will) exceeded either economic presence threshold for the 2018 calendar year. Please note, out-of-state sellers that exceed either of these economic thresholds are not liable for any tax, penalty, or interest for any transactions occurring on or before September 30, 2018.
Once an out-of-state seller determines that it meets the economic nexus thresholds outlined above, they are advised by the Department to report and remit tax in the following manner:
- Out-of-state sellers making taxable sales to Michigan customers must collect and remit Michigan sales tax on the transaction.
- If the out-of-state seller makes a taxable sale(s) to a Michigan customer, but title to the goods pass out of Michigan, the seller is to collect and remit Michigan use tax.
- Out-of-state sellers who do not have nexus with Michigan but make retail sales to a Michigan customer and voluntarily choose to collect tax on the transaction are to report it as use tax.
- Finally, out-of-state sellers meeting the thresholds above are now required to register for sales and use tax in Michigan.
Michigan’s new economic presence nexus applies to all businesses – not just traditional e-commerce sellers. Furthermore, two months is not a lot of time for out-of-state businesses to prepare for compliance under the Department’s new guidance, especially because similar changes are occurring in about 45 other states. Affected sellers should contact Fraser Trebilcock’s tax professionals for any assistance regarding their obligation to collect and remit Michigan sales and use tax.
Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or firstname.lastname@example.org.