Michigan Streamlined Legislation
Legislation was enacted in 2004 to bring Michigan's sales and use tax statutes into compliance with the Streamlined Sales and Use Tax Agreement ("Agreement"), and again in 2008 to maintain Michigan's compliance with the Agreement.
- Streamlined Sales and Use Tax Administration Act (2004 PA 174 and 2008 PA 437)
- Amendments to the General Sales Tax and Use Tax Acts (2004 PA 173, 2004 PA 172, 2008 PA 438, and 2008 PA 439) -- Substantive Changes address Food items, Medical Goods, Sourcing of Gifts, Credit for Tax on Rentals, Prescription Drugs, Return Filing dates, Calculation of Tax and Reimbursement Amounts, Discounts, and Exemption Administration
Following extensive discussions with business interests, in 2004 the Michigan legislature enacted a package of four acts intended to comply with the Agreement. This package included:
Streamlined Sales and Use Tax Administration Act (2004 PA 174). This act authorizes the State Treasurer to enter into the Agreement with other states and details the manner in which Michigan will participate. Among its provisions are those that:
- Clarify that State law controls and the Agreement does not modify State law except as the terms of the Agreement are adopted and expressed in Michigan statutes.
- Establish a State delegation consisting of four persons to represent Michigan on the Governing Board created under the Agreement.
- Provide that the State may terminate participation in the Agreement if it is determined by the State Treasurer or by joint resolution of the legislature to be in the best interest of the State.
- Authorize a system allowing for centralized registration by sellers seeking to register under the Agreement.
- Establish technological models that may be used by sellers registered under the Agreement in collecting and remitting tax under the Agreement. These models provide compliance options for registered sellers which range from hiring a service provider to undertake virtually all of a seller's responsibilities (tax calculation, collection, and remittance) to authorizing a seller to retain full responsibility for its calculation, collection and remittance obligations.
Note: Participation by sellers in the Streamlined Agreement is voluntary. Other than complying with changes to Michigan law such as a new return date and new definitions of products, a currently registered seller may continue their current practices, and need not select a new technological model.
- Provide for additional collection allowances to offset some of the costs of creating the technological models used under the Agreement.
- Provide for privacy protection and limit the use and disclosure of identifying information obtained in the administration of taxes under the Agreement.
- Establish an amnesty for a limited time period for sellers who agree to register under the Agreement and collect and remit taxes to this State.
Use Tax Act amendments (2004 PA 172) and General Sales Tax Act amendments (2004 PA 173) These two bills made substantive changes to the sales and use tax provisions of State law. Because these taxes are similar in administration, imposition, and exemptions, they are discussed together.
In drafting the legislation to comply with the Agreement, efforts were made to minimize revenue impact by maintaining both the current tax base and current exemptions. In some cases current law was easily modified to comply with the Agreement by making changes in form.
EXAMPLE: Michigan imposes tax on "sales at retail." Before 2004, some transactions were not taxed because they were expressly excluded from what constituted a "sale at retail." Certain sales of water, "custom software", isolated transactions, and certain "commercial advertising elements" were expressly not included within the definition of a "sale at retail." These exclusions are not permitted under the definition of "sale at retail" required under the Streamlined Agreement. Compliance was achieved, without any substantive change in the tax base, by eliminating language excluding these items from "sale at retail" and replacing them with express exemptions from the imposition of the tax.
In other instances compliance with the Agreement resulted in unavoidable changes to the tax base. In cases where the revenue consequences were small, further adjustment was not made. In other cases the resulting changes are addressed in the Streamlined Sales and Use Tax Revenue Equalization Act by either imposing a tax or providing a credit to retain revenue neutrality.
- Food: Prior to Streamlined, Michigan taxed "prepared food intended for immediate consumption." Other food was exempt. The Agreement definition of "prepared food" differs slightly from the previous definition. This resulted in a slight expansion of the exemption.
EXAMPLE: Prior to Streamlined, bakery goods were exempt if purchased for "off premise" consumption, and taxable if purchased for "on premise" consumption. Under Streamlined, bakery goods are exempt unless they are sold with an "eating utensil." "Eating utensils" are defined to include knives, forks, spoons, glasses, cups, napkins, straws, or plates.
EXAMPLE: Prior to Streamlined, Michigan law provided that food arranged on a plate or platter, whether intended for individual or multiple servings and whether sold by the pound or by the serving was taxed as "prepared food intended for immediate consumption." "Deli trays" were generally subject to tax. Under Streamlined, food sold in an unheated state by weight or volume as a single item is taxable only if sold with eating utensils. Under Streamlined, "deli trays" will generally not be subject to tax.
- Medical Goods: Michigan law prior to Streamlined exempted "hearing aids, contact lenses if prescribed for a specific disease that precludes the use of eyeglasses, or any other apparatus, device, or equipment used to replace or substitute for a part of the human body, or used to assist the disabled person to lead a reasonably normal life" Under Streamlined, exemptions for these types of items may only be done by expressing the exemptions using the terms defined in the Agreement. These terms are "durable medical equipment," "mobility enhancing equipment," and "prosthetic device." It is believed that expressing the exemptions utilizing these terms will, with the exception of contact lenses noted below, slightly expand the exemption.
EXAMPLE: Prior to Streamlined, equipment that was not used to replace or substitute for a part of the human body would only be exempt if it was used to assist a disabled person to lead a reasonably normal life. This requirement of disability does not exist under Streamlined. Rather, the exemption rests upon the nature of the equipment and its use.
EXAMPLE: Prior to Streamlined, contacts were only exempt from tax if eyeglasses could not be worn due to a specific disease. Streamlined provides the option of either taxing all contacts or exempting all contacts. In addressing contact lenses the legislature had the option of either greatly expanding the exemption to all contact lenses or slightly reducing the exemption by taxing all contact lenses. Rather than expand the exemption to all contacts, the legislature opted to impose tax on contact lenses worn by the limited group of persons who cannot wear glasses.
- Sourcing of Gifts: Prior to Streamlined, Michigan law treated purchases made for gifting to a person outside of the State as made in Michigan and therefore subject to tax in Michigan. Streamlined, in accord with the practice in the majority of other states, sources gift purchases to the destination state.
EXAMPLE: A buyer located in Michigan purchases a gift item from a Michigan retail location to be sent to a third person in Ohio. The buyer does not take physical possession of the gift item but instead directs the store to ship the item to the unrelated third party in Ohio. Under Streamlined the transaction will be sourced to Ohio and any tax collected will properly be payable to Ohio.
- Credit for tax on rentals: Prior to Streamlined, Michigan law afforded an exemption from use tax on rental receipts for items purchased for rental where sales or use tax had been paid to Michigan on the purchase price. The amendments extend this credit to sales or use taxes paid to any state on the purchase price amount.
EXAMPLE: A lessor located in Indiana purchases a crane in Indiana to be leased to a Michigan construction contractor. The lessor pays Indiana sales tax on the purchase price. Prior to Streamlined, the crane would be subject to Michigan tax either on its purchase price or its stream of monthly rental receipts without credit for the tax paid to Indiana. After Streamlined, the crane will only be subject to Michigan tax to the extent Michigan's 6% tax applied to the purchase price exceeds the tax paid to Indiana.
- Bad Debt: Prior to Streamlined, Michigan law required that the period of limitations for taking a bad debt deduction be measured from the return due date of the period in which the sale was made. Streamlined applies a longer limitation period based on when the debt is, or could be, written off for federal income tax purposes. Streamlined also allows deduction for debts that have been sold to a third party and then re-transferred back to the seller. The general four year statute of limitations was previously applied from the return due date for the period within which the sale was made. Under Streamlined, the four year statute of limitations begins with the return due date for the period within which the debt becomes worthless and is, or could be, written off for federal income tax purposes.
EXAMPLE: A credit sale was made in August of 2000. The August 2000 return had a due date of September 15, 2000. The debt was found to be worthless and written off in December 2001. Prior to Streamlined, the bad debt had to be claimed (on an amended return for December 2001) no later than September 15, 2004. After Streamlined, the bad debt has to be claimed (on an amended return for December 2001) no later than January 15, 2006 (the December 2001 return due date was January 15, 2002).
- Prescription drugs: The Streamlined amendments codify case law decided prior to the Court of Appeals decision in Birchwood Manor Inc. v Commissioner of Revenue, 261 Mich App 248 (2004). After the Streamlined amendments, exemption for prescription drugs is limited to drugs for human use that can only be legally dispensed by prescription of a qualified licensed health professional. Aspirin and other over the counter medications will not be exempt from tax even if dispensed pursuant to a prescription or order of a qualified licensed health professional because they can be legally dispensed without a prescription.
EXAMPLE: A licensed nursing home dispenses aspirin as directed by a physician and as recorded in the patient's medical records. Prior to Streamlined, the aspirin would not be subject to tax in conformance with the Birchwood Manor decision. After Streamlined, the aspirin will be subject to tax. because it is not a drug that can only be legally dispensed pursuant to a prescription.
- Return filing requirement: Under Streamlined, returns are due on the twentieth day of the month following the end of the filing period, rather than the fifteenth day.
EXAMPLE: Prior to Streamlined, a return for the first quarter of the year was due on April 15th. After Streamlined, the same return will be due April 20th.
- Calculation of tax and reimbursement amounts: Not later than January 1, 2006 taxpayers that reimburse themselves for sales tax and taxpayers that remit use tax shall compute the tax to the third decimal place and round up to a whole cent when the third decimal place is greater than 4 or round down to a whole cent when the third decimal place is 4 or less. Beginning January 1, 2006 the current bracket system will no longer be permitted as a method for sellers to calculate sales tax that they pass on to a purchaser.
Streamlined Sales and Use Tax Revenue Equalization Act (2004 PA 175) This act separately imposes taxes and provides credits to modify the impact of the changes made to the General Sales Tax Act and the Use Tax Act.
- Section 5: Provides a levy on interstate motor carriers for the privilege of consuming diesel fuel in the State at a cents per gallon rate based on a statewide average price of diesel fuel. A credit is given for 6% of the actual price of diesel purchased in the State upon which sales tax was paid. This tax was moved intact and without change from the Use Tax Act to the Equalization Act because the tax base is expressed as "cents per gallon" which deviates from the definition of "price" mandated by the Agreement for sales and use taxes. The use tax was collected on the International Fuel Tax Agreement (IFTA) return, and that collection method is retained in the Equalization Act. As a result, this "new" tax should appear as a seamless change to those affected.
- Section 9: Provides for a tax on the privilege of storing, registering, or transferring ownership of a vehicle not obtained from a dealer, an ORV, manufactured housing, a snowmobile, a watercraft or certain aircraft. These items were previously taxed using a use tax base which was the greater of purchase price paid or retail dollar value at the time of acquisition. This base does not comply with the Agreement definition of "price" which is required to be used in the Use Tax Act. To retain revenue neutrality, the imposition of a tax on retail dollar value was moved to the Equalization Act. A non-refundable credit for use tax paid on purchase price is provided and can be used to totally or partially offset the equalization tax obligation. The Department is planning for methods of administration and collection of this "new" tax that should be accomplished in a seamless manner that will be virtually transparent to consumers.
- Section 11: Provides for imposition of a tax for the privilege of storing, registering, or transferring ownership of a qualified aircraft that was purchased outside of the state solely for personal (non-business) use which is subsequently brought into Michigan under certain specific circumstances. Prior to Streamlined, the tax base for these qualified aircraft was the "value of the aircraft at the time it first enters this state." This base does not comply with the Agreement definition of "price" for sales and use taxes. To retain revenue neutrality, the imposition of a tax on the value upon entry into Michigan was moved to the Equalization Act. A credit for use tax paid on purchase price is provided and can be used to offset the equalization tax obligation or refunded.
- Section 13: Establishes a refund provision for those hotels, motels and similar establishments which provide accommodations and pay the convention and tourism and marketing , the state convention facility development, the regional tourism marketing, or the community convention and/or tourism marketing tax. These impositions were expressly exempted from the use tax prior to Streamlined. Under Streamlined these taxes must be included in the use tax base or "price" of the services being taxed. In order to attain revenue neutrality, persons that pay use tax calculated on these specific taxes may seek refunds of the amount of use tax paid on the specific taxes.
The Agreement has been amended several times since October of 2005 by the Governing Board. In order to maintain compliance with the Agreement, the Michigan legislature in 2008 enacted a package of four acts. This package included:
Streamlined Sales and Use Tax Administration Act (2008 PA 437). This amendment provides liability relief to Certified Service Providers ("CSPs") and Model 2 Sellers for reliance on the Department of Treasury's certification of the certified automated system they use, and provides CSPs with the same liability relief as is given to sellers is MCL 205.62.
General Sales Tax Act amendments and Use Tax Act amendments (2008 PA 438 and 2008 PA 439). These two bills made changes to the sales and use tax provisions of State law. Because these taxes are similar in administration, imposition, and exemptions (except as noted), notable changes made in the bills are discussed together.
Delivery Charges for exempt property - the seller is not liable for sales tax for delivery charges allocated to the delivery of exempt property
Discounts -sales/purchase price includes consideration received by the seller from third parties, if certain conditions are met. Employee discounts that are reimbursed by a third party on sales of motor vehicles are NOT included in sales/purchase price.
Durable Medical Equipment - "durable medical equipment repair or replacement parts" are components or attachments used in conjunction with durable medical equipment and are eligible for exemption.
"TRAC" leases - motor vehicle or trailer terminal adjustment clause ("TRAC") leases, where the consideration is increased/decreased based on the amount realized upon sale of the leased item, are included in the definition of "lease or rental."
Hearing aid prescriptions - prescriptions for hearing aids issued by hearing aid dealers or salespersons who are licensed under the Occupational Code may be used to support exemption claims for hearing aids.
Telecommunications (Use Tax Act) - many definitions have been added or updated, and outdated terms have been removed. New definitions include "ancillary services," "conference bridging service," "fixed wireless service," "900 service," "value-added nonvoice data service," "telecommunications nonrecurring charges," and "telecommunications service." Mobile telecommunications services are now designated as "mobile wireless services."
Drop-shippers - a seller who sells tangible personal property to a person not licensed for resale to a Michigan purchaser and delivers the property directly to the Michigan purchaser may use acceptable information evidencing qualification for a resale exemption to support their buyer's resale exemption claim.
Exemption Administration - a seller making a counter sale will not be relieved of sales/use tax liability where the exemption form clearly indicates that the claimed exemption is not available. Blanket exemption certificates will remain valid throughout a "recurring business relationship" instead of a 4-year maximum effective period.
Multiple Points of Use - the provisions which allowed a purchaser to provide a seller with a Multiple Points of Use ("MPU") exemption form and remit the applicable tax on a direct pay basis (and relieved the seller from tax liability) have been deleted. The MPU exemption claim is no longer available.
Streamlined Sales and Use Tax Revenue Equalization Act (2008 PA 436). The amendment to this act provides a credit/refund for vehicle purchases by persons who are not employees of auto manufacturers, where the manufacturer requires the dealer to give the purchaser a specified discount or price reduction.