Issued: December 8, 2025
In May, the U.S. Treasury began phasing out the production of pennies. Although it is expected to take some time before the coins are fully out of circulation, sellers and customers engaging in cash transactions are already feeling the effects. To compensate for the elimination of the penny, sellers may decide to round the total amount due from their customers up or down to the nearest $0.05 (i.e., nearest nickel) depending on the transaction.
One key consideration for sellers is whether this rounding will impact their compliance with the General Sales Tax Act (“GSTA”) and Use Tax Act (“UTA”). Although this Notice focuses on the penny phase out in the context of Michigan’s sales tax and use tax for cash transactions, since they are the transactions directly impacted by the penny phase out, the guidance in this Notice is also applicable to Retailers that may choose to apply this rounding convention to their credit transactions as well. This Notice is limited to the legal obligations involving the sales and use tax and does not address or provide guidance on the application of any other applicable laws.
Sales and Use Tax Rounding Rules for Calculating the Tax Due
The GSTA and UTA contain rounding requirements for calculating the tax and for reimbursement purposes if collecting the tax from the customer. The rounding requirements, found in MCL 205.73(2) (sales tax) and MCL 205.107 (use tax), state that the 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.”
Application of the GSTA and UTA Rounding Rules When Seller Rounds Amount to be Collected from Customer to Compensate for Penny Shortages in Cash Transactions
To the extent that sellers engage in rounding to address the penny shortage issue (e.g., by rounding to the nearest $0.05) for their cash transactions, this rounding will not affect the calculation of the sales and use tax due because the GSTA and UTA’s rounding requirements apply before the seller utilizes its own rounding convention to address the penny shortage. In other words, the seller should calculate the tax based on the listed sales price of the property to the nearest cent and then any rounding needed to address a lack of pennies is in the seller’s discretion (i.e., rounding up, down, or to the nearest $0.05). Taxpayers are required by the GSTA and UTA to maintain sufficient records for Treasury to determine the proper amount of tax due, so sellers engaging in rounding should carefully evaluate whether their recordkeeping, point-of-sale, and other tax systems, procedures, documentation, etc. are adequate for continued compliance with the GSTA and UTA. For example, Treasury recommends separately itemizing on the customer’s bill, receipt, invoice, purchase order, etc. any additional amounts collected from the customer due to rounding up to address the penny shortage.
Examples
The following examples illustrate the sales tax or use tax calculations for sellers engaging in rounding “to the nearest nickel” in cash transactions.
Example 1: ABC, a Michigan retailer, charges $3.39 to its customers when selling a hand tool at retail. Sales tax due on this sale is $0.20 ($3.39 x 0.06 = $0.203 rounded down to $0.20). If ABC collects the tax from its customers, the total amount of cash to be collected would be $3.59 ($3.39 selling price + $0.20 sales tax) before any rounding by ABC for nontax purposes. ABC does not have pennies on hand and does not want to rely on its customers having four pennies, so ABC chooses to request $3.55 on the sale (i.e., rounding down to the nearest $0.05) from its customers and absorbs the $0.04 differential. Regardless of this rounding by ABC, ABC’s sales tax liability for this sale will be $0.20.
Example 2: Same facts as Example 1, except that ABC requests $3.60 from its customers for sales of the hand tool (i.e., ABC is rounding up to the nearest $0.05). Regardless of this rounding by ABC, ABC’s sales tax liability for each sale of these hand tools will be $0.20. The additional $0.01 collected by the seller would not be in violation of the prohibition against unjust enrichment under MCL 205.73(4).
Example 3: XYZ Lodging LLC, a motel operator, rents a room to its customer for 2 nights at a rate of $79.00 per night. Use tax due on this rental is $9.48 ($158.00 x 0.06 = $9.480 rounded down to $9.48). The total amount of cash to be collected would be $167.48 ($158.00 selling price + $9.48 use tax) before any rounding by XYZ for nontax purposes. XYZ does not have pennies on hand and does not want to rely on its customers having three pennies, so XYZ chooses to request $167.45 on the rental (i.e., rounding down to the nearest $0.05) from its customers and absorbs the $0.03 differential. Regardless of this rounding by XYZ, XYZ’s use tax liability for this room rental will be $9.48.
Example 4: Same facts as Example 3, except that XYZ requests $167.50 from its customers for the room rental (i.e., XYZ is rounding up to the nearest $0.05). Regardless of this rounding by XYZ, XYZ’s use tax liability for this room rental will be $9.48. The additional $0.02 collected by the seller would not be in violation of the prohibition against unjust enrichment under MCL 205.73(4).
