Michigan Moves Towards Remote Sales Tax

use tax is remitted by the buyer. Use tax is not a new tax--the Michigan use tax was enacted in 1937.

While noncompliance has always been an issue with use tax, the amount of lost sales tax revenue caused by remote sales has increased dramatically since the growth of Internet retailers. According to estimates, Michigan lost $377 million in unpaid use tax in fiscal year (FY) 2009, and $414 million in FY 2010. That number is expected to jump to an estimated $482.4 million in FY 2013-14, "almost 60% of which is attributable to e-commerce." 

Use tax = remote sales tax

As Michigan Department of Treasury, use tax "might be more aptly described as a remote sales tax because it is a 6 percent tax owed on sales made remotely (i.e. outside of Michigan)." Michigan lawmakers are currently working on legislation that would create an actual remote sales tax.

House Bills 4202 and 4203 would amend the General Sales Tax Act and the Use Tax Act, respectively. HB 4202 would "put into statute several presumptions concerning when a person selling tangible personal property is 'enaged in the business of making sales at retail' in Michigan." HB 4203 would require anyone selling tangible personal property to Michigan residents to "register with the Department of Treasury to collect the use tax." Under the bill, sellers "would be personally liable for the use tax, when the conditions of the presumptions are met."

The legislation presumes a seller to be engaged in the business of making sales at retail in Michigan if the seller or an affiliated person does any of the following:

• "Sells a similar line of products as the seller and does so under the same, or similar, business name as the seller;
• Uses its employees, agents, representatives, or independent contractors in the state to promote or facilitate sales by the seller to purchasers in this state;
• Maintains, uses, or occupies an office, distribution facility, warehouse, storage place, or similar place of business in this state to facilitate the sale or delivery of tangible personal property sold by the seller to the seller's purchasers in this state;
• Uses trademarks, service marks, or trade names in this state that are the same or substantially similar to those used by the seller, with the sellers consent or knowledge;
• Delivers, installs, assembles, or performs maintenance or repair services for the seller's purchasers in this state;
• Facilitates the sale of tangible  personal property in this state to purchasers in this state by allowing the seller's purchasers to pick up or return tangible personal property (sold by the seller) at an office, distribution facility, warehouse, storage place, or similar place of business maintained by the person in this state;
• Shares management, business systems, business practices, or employees with the seller, or in the case of an affiliated person, engages in intercompany transactions with the seller; and
• Conducts any other activities in Michigan that are significantly associated with the seller's ability to establish and maintain a market in the state for the seller's sales or tangible personal property to purchasers in this state."

Any of the above conditions would trigger a sales tax collection requirement provided both of the following two conditions are met:

• Cumulative gross receipts from sales by the seller to Michigan buyers referred to the seller by all residents of the state with an agreement with the seller are greater than $10,000 during the prior 12 months; and
• The seller's total cumulative gross receipts from sales to Michigan purchasers exceed $50,000 during the prior 12 months.

The legislation has been approved by the Michigan House Tax Policy Committee; however, not all Michigan lawmakers think a remote sales tax is a good idea. Rep. Vicki Barnett, D-Farmington called it “a tax increase on consumers who are looking for efficiency and convenience when they shop." (Detroit News).

Best bet = a federal solution

A summary of the proposed legislation acknowledges that federal legislation would be the best way to solve the issue of uncollected remote sales tax:

"As written, it is unlikely the bills would generate much revenue (relative to the amount that is currently uncollected) unless federal legislation is enacted. While the bills could potentially generate some sales and/or use tax collections, major online retailers (Amazon, Overstock, eBay, etc.) can avoid nexus in Michigan by eliminating affiliate partners and/or relocating warehouses located in Michigan to other states, a practice that has been adopted in the past when online vendors have faced similar laws elsewhere."

Federal legislation, the Marketplace Fairness Act of 2013, passed the U.S. Senate last May but has stalled in the House. Proponents of a federal solution are pushing for movement this fall.

How would your business cope with the proposed sales tax changes?

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