Preliminary information for the Wholesale Marihuana Tax is now available.
You are a manufacturer/contractor that fabricates and installs countertops based on orders placed with retailers (“Retailers”) by their customers (“Customers”). You perform these functions based on agreements (“Contracts”) you have with these Retailers. Currently, you handle the installation of these countertops yourself, but you propose subcontracting the installation to third-party contractors (“Subcontractors”) that you will hire for that purpose. The facts relating to the proposed process are described below:
You request confirmation that you have “no Michigan Sales and/or Use Tax liability” on the materials you will use to manufacture the countertops that will be installed by your Subcontractors on the real property of the Customers. You also seek confirmation that you are eligible to claim the industrial processing exemption relating to these manufacturing activities.
Based on the facts you presented, there appear to be at least five transactions/events involved; some of which are taxable and some of which are not taxable. Each of these transactions/events are addressed separately.
The Michigan General Sales Tax Act (“GSTA”) and the Michigan Use Tax (“UTA”) Act are complementary tax statutes that generally levy a 6% tax on the sale or use of tangible personal property (e.g., materials) in Michigan. The sales tax is levied on all persons engaged in the business of making “sales at retail,” which involve transactions in which “ownership of tangible personal property is transferred for consideration.”, MCL 205.52(1).
A sale at retail does not include a sale “for resale.”, MCL 205.51(1)(b). Where the sale of tangible personal property is taxable, sales tax is measured by the “sales price” which is generally the “total amount of consideration, including cash, credit, property, and services, for which tangible personal property or services are sold.”, MCL 205.51(1)(d).
The UTA imposes tax on tangible personal property that is used, stored, or consumed in Michigan unless an exemption applies. For purposes of the use tax, contractors are considered the “consumers” of materials used, stored, or consumed by them when engaged in the business of constructing, altering, repairing, or improving real estate of others, MCL 205.92(g)(i): “a person is a consumer of tangible personal property, and therefore liable for use tax, if the person is “acquiring tangible personal property [and is] engaged in the business of constructing, altering, repairing, or improving the real estate of others.” See also Mich Admin Code, R 205.8. A “contractor” is a person directly engaged in the business of constructing, altering, repairing, or improving real estate for others and includes a prime, general, or subcontractor, Mich Admin Code, R 205.71.
With few exceptions, contractors are liable for use tax (based on the purchase price), MCL 205.92(f). See also RAB 2016-18, on the property they use, store, or consume, even if that property was not purchased by the contractor but was acquired from another. Under MCL 205.94ee, a contractor is not liable for use tax for storing, using, or consuming property acquired from another person so long as: (i) the property was purchased by that other person; (ii) that other person is not exempt from the tax imposed under the GSTA or the UTA, and; (iii) the property was acquired by the contractor for the sole purpose of affixing the property to real estate on behalf of that other person. However, the contractor’s obligation to remit use tax is satisfied if sales tax is due and paid on the property at the time of purchase in a retail sale, MCL 205.94(1)(a); RAB 2016-18. For example, the contractor may retain a copy of the customer’s sales invoice from the retailer separately stating the sales tax to demonstrate that sales tax was due and paid on the property.
A “manufacturer” is a person who “manufactures, fabricates, or assembles” tangible personal property, MCL 205.93a(5)(m). When a person is both the manufacturer of tangible personal property and the contractor that affixes that tangible personal property to real estate, that person constitutes a “manufacturer/contractor” regarding that tangible personal property. MCL 205.93a(1)(f)-(g). See also RAB 2016-24 (Use Tax Base of Tangible Personal Property Affixed to Real Estate by a Manufacturer/Contractor or other Contractor). Under certain conditions, a person may still qualify as a manufacturer/contractor even if that person subcontracts out the affixation (installation) work to another contractor. (See “Miscellaneous Questions and Answers” section of RAB 2016-24 which states, under Q&A #11: “If a manufacturer/contractor bills ‘time and material,’ but has a subcontractor perform the actual affixation of the product to realty in Michigan, the entity will still qualify as a manufacturer/contractor and will be liable for the use tax because the subcontractor was never billed for the material.” See also in RAB 2016-24, which explains: “[I]f materials are billed to the subcontractor, the manufacturer/contractor is making a retail sale and does not qualify as a manufacturer/contractor with that transaction.”). The use tax base applicable to a manufacturer/contractor depends upon whether the manufacturer/contractor maintains an inventory of its product that is available for sale to others or makes its product available for sale to others by publication or price list, MCL 205.93a(1)(f), (g); Revenue Administrative Bulletin (“RAB”) 2016-24. You describe yourself as a “manufacturer/contractor,” and it appears from the facts presented for purposes of the proposed process that you custom build the countertops that are installed by you (either directly or through a subcontractor) and no facts were presented to establish that you maintain an inventory of your countertops that are available for sale to others by publication or price list. Accordingly, the Department will treat you as a manufacturer/contractor subject to MCL 205.93a(1)(g).
A manufacturer/contractor may claim an industrial processing exemption under the UTA for tangible personal property it uses or consumes for industrial processing in connection with its product only if the product is either ultimately sold at retail or is affixed to and made a structural part of real estate located in another state. MCL 205.94o(1), (4)(a), (5)(a), (7)(a)-(b); RAB 2016-24. See also the industrial processing exemption from sales tax under MCL 205.54t which generally mirrors the language in the UTA except that it does not have an exception to the general rule (which prohibits industrial processing for property affixed to real estate) for affixation to real estate located outside Michigan. Because you are not making retail sales under the “proposed process,” the analysis is limited to the application of the industrial processing exemption under the UTA. The industrial processing exemption is limited to the percentage of exempt use to total use determined by a reasonable formula or method approved by the Department (which does not need to be pre-approved by the Department, but must reasonably reflect the percentage of exempt use to total use), MCL 205.54t(2); MCL 205.94o(2). See also RAB 2016-24.
If no sales tax was charged by the seller of the materials used by you to manufacture the countertops because you claimed “sale for resale” and/or “industrial processing” exemptions at the time of purchase, then you will owe use tax on the purchase price of those materials. You are not entitled to claim a resale exemption because the tangible personal property sold to you is not being purchased for resale, but will be used in the manufacture of countertops that will be affixed to real estate in Michigan. Likewise, you are not entitled to claim an industrial processing exemption because the tangible personal property sold to you is not going to be used to manufacture a product that will ultimately be sold “at retail” (there is no retail sale either between the Retailer and the Customers or between you and the Customers as title to the countertops does not pass to the Customers until after affixation to the Customer’s real estate) or affixed to real estate outside Michigan.
Under the “proposed process,” Retailers act as contractors (general or prime) and contract with you as a subcontractor. In turn, you hire Subcontractors to complete the installation of the countertops manufactured by you by affixing them to real estate. Because you are not billing Subcontractors for time and materials, you will constitute a manufacturer/contractor, even though you will be subcontracting the affixation work to them. Thus, the use tax liability will remain with you (as the consumer of the countertops) and will not pass to the Subcontractors performing the installation.
December 17, 2019
LR 2019-4
Lance R. Wilkinson
Director, Bureau of Tax Policy
