Revenue Administrative Bulletin 2023-26

Note: A taxpayer may rely on this Revenue Administrative Bulletin (RAB) until it is revoked by Treasury or until a law on which this RAB is based is altered by legislation or by binding judicial precedent. See MCL 205.6a and RAB 2016-20.

RAB 2023-26. The purpose of this RAB is to provide taxpayer guidance on how to source the sales of purchases made from states outside of Michigan and to describe the various sourcing rules. Please note, this guidance only applies to sourcing sales for purposes of Michigan sales and use tax.  To the extent a sale is not sourced to Michigan as discussed below, a seller must consult the other state’s law to determine proper sourcing.

A.         General Sourcing Rules for Sales of Tangible Personal Property

A sale can only be sourced to one state and whether a transaction is sourced to Michigan, meaning that the transaction is subject to Michigan sales/use tax, primarily depends on the location where the purchaser receives the tangible personal property according to MCL 205.69(1) (sales tax) and MCL 205.110(1) (use tax), respectively. If a transaction is sourced to Michigan, it is subject to Michigan sales/use tax and all applicable laws pertaining to sales/use tax, whereas a transaction sourced to another state is subject to the sales/use tax rules of that jurisdiction. This RAB does not address how other states source sales for purposes of sales and use tax. As used below, “receipt” and “receive” mean one or more of the following, but excludes possession by a shipping company on behalf of the purchaser:

a.     Taking possession of tangible personal property.

b.     Making first use of services.

The following sourcing rules apply for purposes of Michigan sales and use tax.  These rules are applied hierarchically, meaning a seller must source its sales under the first provision that applies. What constitutes “bad faith” for purposes of sourcing is a fact dependent inquiry and is determined based on a totality of the facts and circumstances surrounding the transaction.

1. If products are received by the purchaser at the business location of the seller at the time of purchase, the sale is sourced to the state in which the product was purchased and received.

   Example: A customer physically shops at a store located in Michigan and purchases tangible personal property while in the store. Since the customer received the item at the store, the sale is sourced to Michigan.

2. If (1) does not apply, the sale is sourced to the location where the product is received by the purchaser or the purchaser's designee, including the location indicated by instructions for delivery to the purchaser, known to the seller.

   Example: A customer located in Michigan purchases an item online from the website of a store located in Ohio and the item is shipped to the customer in Michigan. Since the product was received in Michigan, it is sourced to Michigan.

3. If (1) or (2) do not apply, the sale is sourced to the address for the purchaser available from the seller’s business records maintained in the ordinary course of the seller’s business, provided use of the address does not constitute bad faith.

   Example: A customer places an order for an item from a vendor located in Texas and the customer arranges the shipping of the item themselves. The customer has multiple locations but provides an address located in Michigan when asked for contact details to setup an ongoing account with the vendor. The vendor does not know where receipt took place and receipt by a third-party shipper does not constitute receipt by the customer (MCL 205.69(6)(a)). The sale is sourced to Michigan based on the address the customer provided to set up their account. (If the customer was located in Michigan and the seller used a different address, such as the address of their payment instrument to intentionally source the sale to another state to avoid paying tax in Michigan, this would be an example of bad faith.)

4. If (1) through (3) do not apply, the sale is sourced to the location indicated by an address for the purchaser obtained at the completion of the sale, including the address of the purchaser's payment instrument if no other address is available, provided use of the address does not constitute bad faith.

   Example: Same facts as the previous example, except the customer did not set up an account and did not provide an address for their business. However, the customer provided a Michigan zip code when using its credit card to make the purchase. This sale is sourced to Michigan based on the payment address when the vendor does not know where receipt of the item took place.

5. If none of the above apply, or if the seller has insufficient information to apply the above provisions, the sale is sourced to the location indicated by the address from which the tangible personal property was shipped or from which the computer software delivered electronically was first available for transmission by the seller. This should be used only as a last resort and sellers should attempt to source sales under (1) through (4) when possible.

Example: Customer located in Michigan purchases taxable prewritten computer software that is delivered electronically from a seller located in Ohio.  The seller does not obtain any address or location information from the customer.  The sale is sourced to Ohio. (For additional discussion on sourcing the sale of prewritten computer software, please see RAB 2023-10.)

B.         General Sourcing Rules for Rentals/Leases

(For additional discussion on sourcing rules for rentals/leases, please see RAB 2023-13.)

For sourcing the lease or rental of tangible personal property (other than motor vehicles or other transportation equipment, discussed below), the sourcing rules differ based on whether or not the rental or lease requires periodic recurring payments, MCL 205.69(2):

1. If the rental or lease agreement requires periodic recurring payments, the following apply:

   a.     The first periodic payment is sourced the same way as a retail sale would be under the General Sourcing Rules for Sales (above).

   b.     Subsequent payments are sourced to the primary property location for each period covered by the payment as indicated by the location of the leased property provided by the lessee and available to the lessor from the lessor's records maintained in the ordinary course of business when use of this address does not constitute bad faith. The property location is not considered altered by intermittent use of the property at different locations such as business property that accompanies employees on business trips or service calls.

   Example: A customer in Ohio rents audiovisual equipment from a vendor in Michigan and will be renting the equipment for six months. The first payment is made upon receipt of the equipment (in Michigan) with five additional subsequent payments due while the equipment is being used in Ohio. The first payment is sourced to Michigan and all subsequent payments will be sourced to Ohio, provided the property’s location remained in Ohio. (If the seller was aware that the equipment would be used in Michigan but chose to source the sale to Ohio because the customer is located there, this would be an example of bad faith.)

2. If the rental or lease agreement does not require periodic recurring payments, the General Sourcing Rules for Sales (above) apply.

Example: Same facts as the previous example above, except that the full amount of the rental agreement is paid in one lump sum upon receipt of the equipment. The sourcing of this transaction would be Michigan due to the full amount being paid upon receipt and no additional recurring payments will be made.

C.         Sourcing Rules for Rentals/Leases of Motor Vehicles, Trailers, Semitrailers, and Aircraft

For a lease or rental of motor vehicles, trailers, semitrailers, and aircraft that are not transportation equipment, the sourcing rules differ based on whether the rental or lease requires periodic recurring payments, MCL 205.69(3):

1. For a lease or rental requiring recurring periodic payments, each payment is sourced to the location of the leased property as indicated by the address of the property provided by the lessee and available to the lessor from the lessor's records maintained in the ordinary course of business, when use of this address does not constitute bad faith. The property location is not considered altered by intermittent use of the property at a different location. (If the lessor was aware that the property would be used regularly at a location different than the address of the property and still sourced the sale to the state where the address is located, this would be an example of bad faith.)
2. If the rental or lease agreement does not require periodic recurring payments, it must be sourced the same way as a retail sale would be under the General Sourcing Rules for Sales (above).

The lease or rental of transportation equipment is sourced in the same manner as a retail sale under the General Sourcing Rules for Sales (above), MCL 205.69(4).

“Transportation equipment” means one or more of the following:

1. Locomotives and railcars utilized for the carriage of persons or property in interstate commerce.
2. Trucks and truck-tractors with a gross vehicle weight rating of 10,001 pounds or greater, trailers, semitrailers, or passenger buses, which are registered through the international registration plan and operated under authority of a carrier authorized and certificated by the United States Department of Transportation or another federal authority to engage in the carriage of persons or property in interstate commerce.
3. Aircraft operated by air carriers authorized and certificated by the United States Department of Transportation or other federal or foreign authority to transport air cargo or passengers in interstate or foreign commerce.
4. Containers designed for use on, or component parts attached or secured to, the equipment included in subparagraphs (i) to (iii).

D.         Sourcing Rules for Other Types of Transactions

Sales of advertising and promotional direct mail:  There are specific rules for sourcing sales of advertising and promotional direct mail. For more information see MCL 205.71a and MCL 205.103a.

Marketplace Sellers and Facilitators (MCL 205.52d): Michigan adopted marketplace facilitator legislation with the enactment of 2019 PAs 143 and 144, which became effective January 1, 2020 ("Marketplace Acts"). The Marketplace Acts require a person that meets the definition of "marketplace facilitator" to remit and report tax for sales they facilitate on behalf of third-party marketplace sellers. Marketplace facilitators must source sales consistent with this RAB for sales they facilitate on behalf of marketplace sellers.