Internal Policy Directive 2004-5

Internal Policy Directive 2004-5
November 22, 2004
GENERAL SALES AND USE TAX ACTS: USE OF THE "ROUNDING RULE" IN COMPUTING SALES OR USE TAX DUE

POLICY ISSUE

Does a seller compute sales and use taxes on a transaction on an item-by-item basis or based on the total amount of the transaction?

POLICY DETERMINATION

A seller may elect to compute the sales or use tax due on a transaction either on an item-by-item basis or on an invoice (total amount) basis.

DISCUSSION

Michigan has participated in the Streamlined Sales and Use Tax Project and, with passage of the Streamlined Sales and Use Tax Administration Act (2004 PA 174, MCL 205.801 et. seq.), anticipates becoming a "member state" under the Streamlined Sales and Use Tax Agreement ("Agreement").

The General Sales Tax Act ("GSTA"), in addressing amounts which may be added by a seller to sales price for reimbursement purposes, and the Use Tax Act ("UTA"), in addressing how a seller shall compute the use tax due, provide in MCL 205.73(2) and MCL 205.107 that a seller:

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.

These provisions incorporate what is referred to as the "rounding rule." (The "bracket system" employed prior to September 1, 2004 may continue to be used only through December 31, 2005, at the seller's option, in determining amounts to be added to sales prices for reimbursement purposes.) Neither act, however, specifically indicates whether the tax on a transaction is to be computed on an item-by-item basis or on the total amount of the transaction. Historically, the Department has accepted both methods of tax computation.

Given that the GSTA and the UTA are silent on that issue, and in view of the Department's historical practice, the Department will interpret both the GSTA and the UTA as permitting a seller to elect to compute the sales or use tax due on a transaction on either an item-by-item basis or based on the total amount of the transaction.