The State of Michigan recently issued guidance in response to the Wayfair decision. In this decision, the Supreme Court held that a business’ physical presence in a state is no longer required before a state can impose a sales or use tax collection requirement on that business. Even though a physical presence is no longer required, states must meet the Constitution’s Commerce Clause requirements before imposing a tax collection requirement on the business.
The Commerce Clause requires that a tax:
- is applied to an activity with substantial nexus with the taxing state. (prior to Wayfair, the Supreme Court held that a physical presence was required to establish nexus.)
- is fairly apportioned in and out of the state
- does not discriminate against interstate commerce
- is fairly related to services provided by the state
In Wayfair, the Supreme Court held that a seller has substantial nexus in a state if it “avails itself of the substantial privilege of carrying on a business in that [state].” In the Wayfair case, South Dakota required remote sellers to remit sales tax for sales sourced to South Dakota if the seller’s sales exceeded $100,000 or the seller had 200 or more separate transactions with customers in the state.
The Court found three factors important in finding South Dakota’s law constitutional:
- the law had a safe harbor for smaller sellers (those with under $100,000 in sales or under 200 transactions per year)
- the law only applied on a prospective basis—there was no retroactive tax remittance requirement
- South Dakota is a member of the Streamlined Sales and Use Tax Agreement that standardizes its sales tax rules to reduce administrative and compliance costs. Michigan is also a member of this body.
Sales and Use Tax Nexus in Michigan
A seller has substantial nexus in Michigan (and therefore has a sales/use tax remittance obligation) under three rules:
- The seller has a physical presence in Michigan
- The seller can have representational , attributional, or “click-through” presence. See a prior post explaining these rules.
- The seller has economic nexus as described in Wayfair
After September 30, 2018, a seller that has sales (both taxable and non-taxable) into Michigan exceeding $100,000, or a seller that has 200 or more separate transactions of sales (both taxable and non-taxable) into Michigan in the previous calendar year has nexus in Michigan and is required to remit sales or use tax on all of its taxable sales into Michigan and file all required returns.
Remote sellers must review their 2017 calendar year sales (January to December) to determine if they meet either of the two economic nexus thresholds. If they meet either threshold, they must begin filing and paying sales tax in Michigan beginning October 1, 2018 forward.
Remote sellers that only have nexus due to exceeding either of the economic nexus standards are not liable for any tax, penalty, or interest for any transactions occurring before September 30, 2018.
Example: Glamazon.com has no physical or representational presence in Michigan. However, it had $150,000 of sales into Michigan between January 1, 2018 and December 31, 2018. It has economic nexus in Michigan effective after September 30, 2018. It must begin reporting and paying sales tax on all taxable sales from October 1, 2018 forward.
Once a seller has nexus due to its economic presence, it must remit tax until a calendar year passes in which it does not meet either of the economic nexus standards.
Example: Assume same facts as above example; however, between January 1, 2018 and December 31, 2018, Glamazon.com only has $80,000 of sales into Michigan and only has 150 separate transactions into Michigan. Seller no longer has economic nexus beginning January 1, 2019 and may cease remitting and reporting tax after that date (i.e., it must continue to remit and report sales tax through December 31, 2018, but may cease remitting and reporting for sales on or after January 1, 2019).