sales tax

Out-of-State Companies Will Start Collecting Sales Tax from Michigan Residents

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affiliate nexus 2If you’ve made a very recent purchase from Amazon.com or another out-of-state company and were surprised that you were charged sales tax, this post will explain what has happened.

Background

The U.S. Supreme Court ruled over 20 years ago that a state could not force an out-of-state company to collect sales tax from the state’s residents if the company does not have a physical presence in the state. A company generally has a physical presence in the state if it has an office, employees, equipment, delivery trucks, etc. in the state.

What is Affiliate Nexus?

In 2014, the Michigan legislature passed a law that requires out-of-state sellers to collect sales tax from Michigan residents if the out-of-state seller has Michigan residents acting as solicitors. The solicitors do not have to be employees of the company. Basically, Michigan considers the out-of-state company to have physical presence in the state based on the presence of non-employee solicitors who are Michigan residents. This is referred to as affiliate nexus and similar laws have been passed in other states.

Amazon.com, among other companies, have affiliate programs where residents (individuals and business entities) can place links to the companies’ products on their own websites. The company would then pay a commission to the resident if a purchase is made from a purchaser who clicked through that resident’s website to the company’s.

Under the new law that became effective October 1, an out-of-state company is presumed to be engaged in the business of retail sales in Michigan if the seller has entered into an agreement with one or more Michigan residents under which the resident refers potential purchasers (by an internet link, by in-person oral presentation, etc.) to the seller for a commission or other consideration based on completed sales.

Which Out-of-State Companies are Affected?

The out-of-state company is exempt from this new law if it only has minimal sales in the state. The provision will apply if:
• Gross receipts from all referred sales to purchasers in Michigan are greater than $10,000 during the immediately preceding 12 months AND
• Gross receipts from all sales to purchasers in Michigan exceed $50,000 during the immediately preceding 12 months

Example: Internet.com sells products via the internet across the country. It has an affiliate program in Michigan. It has no other connection or presence in Michigan. The affiliate program generates $5,000 in sales over the past 12 months. Internet.com’s total sales in Michigan are $100,000. Internet.com is not subject to the new law because it has less than $10,000 in sales from the affiliate program.

Example 2: Same facts as above except that Internet.com has $10,001 in affiliate program sales and $50,001 in total Michigan sales over the past twelve months. Internet.com is now presumed to be in the business of retail sales in Michigan and is required to collect Michigan sales tax from Michigan residents because it surpasses both thresholds.

How Out-of-State Companies Rebut the Presumption

A company meeting the above requirements is presumed to be engaged in making retail sales in Michigan. The presumption can be rebutted by demonstrating that the residents with whom the seller has an agreement did not engage in any solicitation or other activity that is significantly associated with the seller’s ability to establish or maintain a market in Michigan.

The Michigan Department of Treasury issued proposed guidance on what type of evidence will rebut the presumption.

This evidence includes:
Contract Conditions: the agreement between the seller and the resident provides that the resident is prohibited from engaging in any solicitation activities in Michigan on behalf of the seller.

Proof of Compliance: Each resident representative provides to the seller a signed statement stating that the resident has not engaged in any prohibited solicitation or other activities in Michigan on behalf of the seller.

Merely hiring an advertising company or agent in Michigan will not subject the seller to this new law unless the advertising company or agent is compensated with a commission or other consideration based on completed sales.

Two Final Notes…

First, even if this law was not passed. Amazon.com is expanding its office in Detroit and will have a physical presence in the state that would require it to collect sales tax from Michigan residents anyway.

Second, Michigan residents were already required to report purchases from out-of-state companies and pay use tax on these purchases on their Michigan income tax returns.

To see how this applies to you, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

When Sales Tax Applies to Delivery and Installation Charges

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delivery-truck-860574_640Michigan has a 6% sales tax on gross proceeds from sales of tangible personal property. For periods after September 1, 2004, the sales tax act was amended to provide that gross proceeds includes delivery and/or installation charges in certain instances. New guidance from the State was recently issued to help determine when delivery and installation charges are subject to sales tax.

The law provides that gross proceeds include the following:
• Delivery charges incurred before the transfer of ownership of tangible personal property from seller to buyer and
• Installation charges incurred before the transfer of ownership of
tangible personal property from seller to buyer

The Factors the State of Michigan Considers when Determining if Delivery/Installation Charges Are Subject to Sales Tax

The Michigan Department of Treasury will consider all facts and circumstances to determine if delivery or installation charges are subject to tax. Such factors to be considered include:
• Whether the customer has the option to either pick up the property or have the property delivered
• Whether the delivery or installation charge is separately negotiated and contracted for on a competitive basis
• Whether the property and delivery or installation charges are separately invoiced
• Whether the taxpayer’s books and records separately identify the transactions used to determine the tax on the retail sale
• Whether delivery or installation service records (separated from the main business) indicate a profit
• The time at which risk of loss and title transfer from seller to buyer

What if a Single Delivery Charge Applies to Taxable and Exempt Sales?

Delivery charges on exempt property (e.g., sales for resale) are not subject to sales tax. However, when there is a single delivery charge on a sale containing both taxable and exempt property, the delivery charge is apportioned between the taxable and exempt sale. Sales tax will apply to the portion allocated to the taxable sale. This allocation can be based on either relative sales price or relative weight of each property.

The choice of allocation method is in the seller’s discretion.

Example: XYZ Corp purchases inventory and supplies from Seller, Inc. Inventory is exempt property and the supplies are taxable. XYZ pays $80 for inventory and $20 for supplies. The inventory weighs 50 pounds and the supplies also weigh 50 pounds. The delivery charge is $20. Based on price, the taxable delivery charge is 80% of $20 or $16. The sales tax is $0.96. If based on weight, half of the delivery charge is taxable ($10). The sales tax is $0.60.

Examples of Sales Tax on Delivery Charges

Example: ABC sells appliances. When a customer purchases property from ABC, she may either arrange for her own delivery or ABC, at additional cost, will provide delivery.

Scenario 1: if the customer chooses ABC for delivery, a separate contract is entered into by the customer and ABC after the sale which passed all rights of title to the customer. Because the delivery charge is incurred after the transfer of ownership, the delivery charge is not taxable.

Scenario 2: if the customer chooses ABC for delivery, no separate contract is entered and the delivery charges are itemized as “Shipping & Handling” on the same invoice as the appliance. Under the terms of the sale, risk of loss remain with ABC until delivery. The customer pays the entire invoice at the time of purchase. Because the delivery charge is incurred before the transfer of risk of loss, it is taxable.

To see how this applies to you, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Exemptions from Sales Taxes

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Michigan imposes a 6% sales tax on sales of personal property at retail.  The sales tax does not apply to services, even though Michigan has tried a few times to extend the sales tax to services.  Luckily, there are exceptions to the sales tax.  The exceptions prevent the imposition of sales tax to the sale of certain products, to certain transactions, and to certain purchasers.

Sales tax exemptions

Products Exempt from Sales Tax

Sales of the following items are not subject to sales tax:

Food. Food for human consumption, except prepared food intended for immediate consumption, is exempt from sales tax.   Any food purchased under the federal food stamp program is exempt from sales tax.  Prepared food is subject to sales tax.  The following items are not considered prepared food and are exempt from sales tax:

  • Food that is only cut, repackaged, or pasteurized by the seller
  • Raw eggs, fish, meat, poultry, and foods containing items requiring cooking by the consumer
  • Food sold in an unheated state by weight or volume as a single item without utensils
  • Bakery items sold without utensils

The “without utensils’ language is important.  If utensils (including napkins) are included with food sold in an unheated state or with bakery items, the food sale becomes subject to sales tax.  More details about the food exemption from sales tax.

Prescription Drugs.   Drugs for human use that can only be legally dispensed by prescription are exempt from sales tax.  Over the counter medication is subject to sales tax even if it was prescribed.

Medical Devices.  Sales of the following items under a prescription are exempt from sales tax:

  • prosthetic devices
  • mobility enhancing equipment
  • durable medical equipment for home use

Water.  Sales of water through water mains or by deliveries in bulk tanks in quantities of not less than 500 gallons are exempt from sales tax.  Sales of bottled water are also exempt.

Advertising elements.  A commercial advertising element is exempt if the element is:

  • used to create or develop a print, radio, television, or other advertisement,
  • discarded or returned to the provider after the advertising message is completed, and
  • custom developed by the provider for the purchaser.

A commercial advertising element is a negative or positive photographic image, audio or video master, layout, manuscript, copy writing, artwork, etc.

Transactions Exempt from Sales Tax

The following transactions are exempt from sales tax:

Sales for resale.  Property purchased for resale is exempt from sales tax.  The resale exemption applies even where the purchaser is not a licensed dealer, if the purpose for the purchase was resale.  Property purchased for resale does become subject to sales tax if the purchaser does not resell the product and instead uses it personally.

Computers used in industrial processing.  The following sales and uses of computer equipment are exempt from sales tax:

  • computers used in operating industrial processing equipment
  • equipment used in computer-assisted manufacturing systems
  • equipment used in a computer-assisted design engineering system integral to an industrial process
  • there are other exempt sales of computers used in industrial processing

Custom computer software.  Sales of prewritten computer software are subject to sales tax only if the software is available from the seller on an “as is” basis or as an end product without modification or adaptation.  Retail sales of computer software that is originally designed for the exclusive use or needs of the purchaser are not subject to sales tax.

Concrete manufacturing.  Specially designed vehicles that are used to mix and agitate materials added at a plant or jobsite in the concrete manufacturing process are exempt from sales tax.

Motor vehicles used for demonstration purposes.  This exception applies to auto dealers.

Agricultural equipment.

Property in interstate or foreign commerce.  Sales tax does not apply to any sale of tangible personal property is the tax is prohibited by the U.S. Constitution or federal laws.

Exempt Purchasers

The following purchasers are exempt from sales tax:

Federal and state governments

Nonprofit institutions.  Sales TO nonprofit institutions are exempt from sales tax.  Fundraising sales BY a nonprofit institution are exempt from sales tax if the total retail sales in the calendar year are less than $5,000.  Once sales exceed $5,000 in a calendar year, all sales are subject to sales tax (even the first $5,000 of sales).

Agricultural producers.  Property sold to persons engaged in horticultural or agricultural product is exempt from sales tax if used or consumed in the commercial production of horticultural or agricultural products for sale.

Industrial processors.  Property and equipment sold to manufacturers, processors, etc., for use or consumption in industrial processing is exempt from sales tax.

Industrial laundries. Textiles, cleaning products, equipment, machinery, supplies, utilities, and other items sold or leased to an industrial laundry are exempt from sales tax.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

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