New laws in Michigan impact installation and delivery charges

Michigan has changed the way most installation fees and delivery charges are taxed.

While some states consider delivery charges to be distinct from handling charges and/or shipping charges, the Michigan Department of Treasury uses the following terms interchangeably: delivery charges, shipping, handling, postage, freight, crating, and packaging. However, installation charges are not the same as delivery charges.

The new laws in Michigan apply to both installation fees and delivery charges. As of April 26, 2023, most delivery charges and installation fees are exempt from Michigan sales and use tax provided both of the following conditions are met:

The seller separately itemizes the delivery and installation charges on the customer’s invoice
The seller keeps books and records detailing how the tax on these transactions was calculated

Michigan sales and use tax still applies to delivery charges as well as installation fees that aren’t separately stated or properly recorded.

Furthermore, Michigan sales tax applies to delivery and installation charges if the transaction involves the sale of electricity, natural gas, or artificial gas by a utility, as defined in MCL 205.92 (2)(1)(v).

This policy change is due to the enactment of House Bills 4039 and 4253, which resulted in two new laws in Michigan: Public Act 20 and Public Act 21.

Why were delivery charges subject to Michigan sales tax before April 26, 2023?

Prior to Michigan Act 20 and Michigan Act 21, both delivery charges and installation charges were generally subject to Michigan sales tax because the fees were incurred prior to the transfer of ownership. In other words, the installation fee and delivery charge were considered part of the sale price and purchase price in Michigan.

“This was arguably a confusing test to determine whether tax applies to a transaction,” observed the Michigan Department of Treasury. The department also noted that taxing installation and delivery charges may have created a competitive disadvantage to businesses offering all-in-one services (i.e., including delivery and installation with the sale of a product).

Are businesses liable for tax incurred prior to April 26, 2023?

Although it’s common for tax officials to hold businesses liable for sales tax incurred prior to the effective date of a new sales tax exemption, the Michigan Department of Treasury is taking a more lenient approach. It will not issue new sales tax assessments on any delivery charge or installation fee incurred prior to April 26, 2023.

Moreover, “Treasury is actively identifying and cancelling all outstanding balances related to delivery and installation charges for tax periods before April 26, 2023.” It expects to complete this work by July 25, 2023.

Taxpayers that have received a Notice of Intent to Assess or a Final Assessment on unpaid balances related to installation or delivery charges are encouraged to contact the Michigan Department of Treasury at Treas-TCB-Technical@michigan.gov.

Will Michigan refund sales tax paid on delivery charges prior to April 26?

Despite the department’s unwillingness to go after outstanding sales tax on delivery charges and installation fees, it will not refund sales or use tax already remitted to the department.

Likewise, customers may not seek a refund of tax paid from sellers who collected tax from them before new laws in Michigan took effect April 26, 2023. See the Michigan Department of Treasury for sample scenarios.

Avalara has updated the Avalara AvaTax engine and impacted freight, delivery, and installation codes to reflect the new laws in Michigan. This is one advantage to automating sales tax calculation.

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.