When to collect sales tax or use tax in Michigan

Michigan has enacted House Bills 4542 and 4543, which codify the Michigan Department of Treasury’s existing economic nexus rule. House Bills 4540 and 4541, which require marketplace facilitators to collect and remit sales or use tax on behalf of third-party sellers, have also been enacted.

HB 4542 and HB 4543 are substantially the same, as are HB 4540 and HB 4541. However, HB 4540 and HB 4542 pertain to sales tax while HB 4541 and HB 4543 pertain to use tax. And this begs the question: When should a seller collect sales tax and when should a seller collect use tax?

The answer depends largely on nexus, the connection between a business and state that enables the state to impose a tax obligation on the business. Nexus can be established in a variety of ways: through physical presence in a state, economic activity in a state (economic nexus), ties to affiliates in the state (affiliate nexus), and more.

A seller or marketplace facilitator that has sales tax nexus with Michigan must collect, remit, and report sales tax on its taxable retail sales to consumers in Michigan. However, if ownership of the property is transferred outside of The Great Lakes State, the tax must be collected, remitted, and reported as use tax.  

A seller or marketplace facilitator that doesn’t have nexus with Michigan but voluntarily collects and remits tax on sales delivered into Michigan must collect, remit, and report use tax on its sales into the state.

Whether sales tax or use tax is collected shouldn’t make a difference to consumers, because Michigan sales tax rates and Michigan use tax rates are the same. Nonetheless, sales and use tax must be properly reported.

Effective October 1, 2018 (or after September 30, 2018), a remote seller is required to collect sales or use tax in Michigan if, in the previous calendar year, it:

• Has more than $100,000 in taxable and non-taxable sales in Michigan; or
• Completes 200 or more separate transactions of taxable and non-taxable sales in Michigan.

Starting January 1, 2020, a marketplace facilitator that has nexus with Michigan must collect and remit the tax due on all taxable sales made directly by the facilitator or made by the facilitator on behalf of a third-party seller. The tax must be collected and remitted regardless of whether the marketplace seller has nexus with Michigan.

The bills specifically exclude referrers from the definition of “marketplace facilitator.” In addition to listing tangible personal property for sale on behalf of a marketplace seller, a facilitator must directly or indirectly collect payment from customers and transmit that payment to the marketplace seller.

In signing the bills, Michigan Governor Gretchen Whitmer criticized the fact that the purchasers are prohibited from bringing a class action suit against a marketplace facilitator “if it is ‘in any way related to an overpayment’ of sales or use tax.” She called this “an anti-consumer provision that could allow online operators to overcharge Michiganders under the guise of collecting sales tax by depriving consumers of an effective remedy.”

To learn about how a business can trigger nexus in Michigan and other states, see our seller’s guide to nexus laws and sales tax collection requirements.