Michigan’s Reach for Imposing a Sales & Use Tax on Remote Sellers Is Even Stronger
On August 1, 2018, the Michigan Department of Treasury issued a Revenue Administrative Bulletin describing the criteria for imposing sales and use tax on out-of-state and remote sellers. In light of the U.S. Supreme Court’s June 2018 ruling in South Dakota v. Wayfair, Michigan’s reach is now stronger than ever.
“Economic Presence” and “Nexus Standards”
Under the Commerce Clause of the U.S. Constitution, the general rule for one state to tax a business in another state is that the out-of-state seller must have a sufficient economic connection or “nexus.” To establish this “economic presence,” there is a four-prong test:
- Is the tax applied to an activity with substantial nexus with the taxing state?
- Is the activity, both in and out of the state, fairly apportioned?
- Does the tax not discriminate against interstate commerce?
- Is the tax fairly related to services provided by the state?
Previously, the Supreme Court held in Quill vs. North Dakota that to establish a substantial nexus, a seller must have a “physical presence” in the taxing state. Wayfair overturned the Quill decision, however, and substantially altered that rule.
Wayfair Expanding States’ Taxing Authority
In Wayfair, the Supreme Court reviewed a South Dakota law that required remote sellers, including companies lacking any physical presence in that state, to pay tax on sales made in South Dakota, if the seller’s sales exceeded $100,000 in the previous calendar year or if the seller had at least 200 separate transactions with customers in South Dakota. Rather than adhering to the “physical presence” standard, the Court found that sellers have sufficient nexus to a taxing state if they avail themselves of the “substantial privilege of carrying on business” in that state. Instead of a physical presence, they determined that an “economic presence” is the appropriate nexus standard.
Michigan Follows Suit
Consistent with the Wayfair ruling, Michigan amended its nexus standards as described in the recent Revenue Administrative Bulletin.
Beginning September 30, 2018, a seller that has sales in Michigan (both taxable and non-taxable) in excess of $100,000, or a seller that has at least 200 separate sales transactions in Michigan (both taxable and non-taxable) in the previous calendar year, is deemed to have sufficient nexus and is therefore required to pay sales or use tax on all of its taxable sales in the state and to file all required returns.
The Bulletin requires remote and out-of-state sellers to review their 2017 calendar year sales to determine if they satisfy the economic nexus thresholds and therefore have sufficient economic presence in Michigan as of September 30, 2018. Sellers who meet the nexus requirement by exceeding either of the thresholds are not liable for any tax, penalty, or interest for transactions occurring on or before September 30, 2018.
To assist remote and out-of-state sellers in understanding the application of the revised requirements, the Michigan Department of Treasury included two illustrations in the Bulletin:
Example 1: Seller has no physical presence, representational, attributional, or click-through nexus in Michigan. Seller had $100,001 of sales into Michigan between January 1, 2017, and December 31, 2017. Seller has nexus in Michigan effective after September 30, 2018, and must begin reporting and remitting 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 thresholds discussed in this RAB.
Example 2: Assume the same facts as Example 1; however, Seller has only $10,000 of sales and fewer than 200 transactions into Michigan from January 1, 2018, through December 31, 2018. Seller must report and remit tax for all taxable sales made after September 30, 2018, through December 31, 2018. Seller no longer has nexus due to its economic presence beginning on January 1, 2019, and may, therefore, cease remitting and reporting tax after that date.
If you are or have in interest in a business that sells into Michigan and have questions regarding your exposure for Michigan sales and use taxes, please contact us to discuss your situation.