Michigan Sales and Use Tax: Who Collects, and Who Owes

Michigan's sales tax has a reputation for being one of the cleaner state systems. One rate, no local pile-on, no county surcharge. That reputation is mostly earned. But "simpler than New York" is not the same as "nothing to worry about," and the small businesses that get into trouble here are almost always the ones who stopped reading after they heard "six percent."

The One-Rate State With Plenty of Traps

Michigan imposes a flat 6% sales tax on the retail sale of tangible personal property and certain services. No city adds its own rate on top. No county collects a separate slice. For a Michigan business owner comparing notes with a friend in Colorado or Illinois, that simplicity is a genuine advantage.

Here is where the simplicity ends. Three traps catch Michigan small businesses with surprising regularity. First, the line between taxable goods and non-taxable services is blurrier than most service-business owners expect. Second, use tax, the mirror obligation that applies when you buy something taxable and nobody collected Michigan sales tax at checkout, is almost universally ignored and is a primary audit exposure. Third, economic nexus rules enacted after the U.S. Supreme Court's 2018 Wayfair decision mean that selling online into Michigan now creates a collection obligation even if you never set foot in the state.

The stakes are real. Back liability, interest, and penalties accumulate quietly. Audits are increasingly triggered by third-party marketplace data, not just field investigators. Understanding which category applies to your business is not a bureaucratic nicety; it is a cash-flow question.

Services vs. Goods: Where Most Service Businesses Get It Wrong

Michigan generally does not tax most professional services. A lawyer billing for legal advice, an accountant preparing a return, a marketing consultant building a campaign: none of those transactions produce a Michigan sales tax obligation on the service itself. Michigan Compiled Laws 205.51 et seq. define "retail sale" around the transfer of tangible personal property, which is why pure-service businesses often conclude they are simply out of scope.

That conclusion becomes dangerous the moment tangible property changes hands as part of the service.

Consider a residential contractor who installs cabinets. The labor to install them may not be taxable, but the cabinets themselves are tangible personal property transferred to the customer, and that component is taxable. A salon owner who provides haircuts does not owe sales tax on the service, but if she sells retail bottles of shampoo off the shelf, those sales are taxable. A consultant who produces a written report and emails a PDF is in a different position than one who ships a bound manual on a thumb drive.

Three specific service categories catch owners off guard because they look like services but are taxable regardless of how the invoice is structured. Telecommunications services, hotel and lodging accommodations, and intrastate transportation are all taxable in Michigan, and splitting the invoice line items does not change that.

The SaaS gray area deserves a specific note for tech-adjacent businesses. Michigan does not currently tax software-as-a-service delivered over the internet. However, prewritten software delivered on physical media is taxable. If your business sells a downloadable product on a USB drive, you are in a different position than one selling a cloud subscription. That distinction is not hypothetical; it is the kind of thing that surfaces in an audit of a small software or media company.

If you read this section and felt uncertain about how your own invoicing practices stack up, that is a reasonable reaction. The services-versus-goods line is genuinely fact-specific, and the answer for your business depends on how your revenue is actually structured.

Use Tax: The Bill That Arrives at Audit Time

Use tax is the 6% obligation you owe when you purchase something taxable and the vendor did not collect Michigan sales tax at checkout. It is not a penalty. It is the mirror image of sales tax, designed so that buying from an out-of-state or online seller does not create a permanent discount compared to buying locally.

The most common trigger for Michigan small businesses is purchasing supplies, equipment, or inventory from an out-of-state vendor or online marketplace that has not registered in Michigan and therefore does not collect Michigan sales tax. The Amazon Business account that your shop uses to order supplies is the most relatable example. If Amazon Business did not collect Michigan tax on a given order, your business owes 6% use tax on that purchase directly to the state.

Michigan requires a use tax filing when your annual liability reaches $25 or more. That threshold is low enough that almost every business that buys anything from out-of-state vendors crosses it. Businesses with larger liabilities may be required to file monthly or quarterly rather than annually.

In practice, use tax is one of the most commonly unfiled obligations among the small businesses we see. It tends to be invisible because no invoice line item prompts you to pay it. It accumulates quietly, and it surfaces at audit time alongside whatever else the auditor finds.

One practical note on the cash-flow side: use tax liability means money leaving the business that was not accounted for at purchase. If you are not already tracking that exposure, it connects directly to the estimated quarterly payments you may also owe on that income, and the two surprises together can sting in the same quarter.

Economic Nexus: What Wayfair Means for Michigan Sellers

Before 2018, the rule was straightforward: if your business had no physical presence in a state, that state could not require you to collect its sales tax. The U.S. Supreme Court's decision in South Dakota v. Wayfair changed that entirely. Physical presence is no longer required. Economic activity into a state is enough.

Michigan codified its economic nexus threshold at $100,000 in gross sales or 200 or more separate transactions delivered into Michigan in the current or prior calendar year. A remote seller who crosses either threshold must register, collect, and remit Michigan sales tax. The U.S. Government Accountability Office estimated that states lost between $8 and $13 billion annually in uncollected remote sales tax before Wayfair, which explains why every state, including Michigan, now enforces these rules aggressively.

If you sell on Amazon, Etsy, or eBay, there is some relief built in. Marketplace facilitators were required to collect and remit Michigan sales tax on behalf of third-party sellers on their platforms starting January 1, 2020, under MCL 205.52b. That means your Etsy sales are covered: Etsy handles the collection and remittance, and those sales count toward the threshold calculation but do not require you to independently register just for those transactions.

Here is the gap that trips up multi-channel sellers. The marketplace facilitator rule covers platform sales only. Your own website, your direct invoices, your Shopify store: none of those are covered. A seller who moves $80,000 through Etsy and $30,000 through a personal website has crossed Michigan's $100,000 threshold, but only the direct website sales create an independent registration obligation. Treating the marketplace exemption as a blanket solution is a mistake.

If your business crossed the threshold in a prior year and never registered, voluntary disclosure is available before an audit does it for you. That path is described in the final section.

How to Register: Form 518, MTO, and the $25 License Fee

Registration for Michigan sales tax happens through the Michigan Treasury Online portal, known as MTO, using Form 518, the Registration for Michigan Business Taxes. The fee is $25 for a sales tax license, and the license must be renewed annually.

This is a separate step from forming an LLC or registering an assumed name with LARA, the Licensing and Regulatory Affairs agency. Many new business owners complete the LARA filing, consider themselves registered, and never complete the Treasury step. They are registered as a business entity but are not registered to collect sales tax. Those are two different things handled by two different state agencies.

If your business owes use tax, you can register for that through the same MTO portal. One portal, one registration sequence, two separate obligations covered.

Also worth noting: if your business growth triggers sales tax registration, it likely triggered other compliance steps at the same time, including the payroll tax obligations that also kick in when you hire. New revenue thresholds and new employees tend to arrive together, and the registration checklist grows accordingly.

Filing Frequency: Monthly, Quarterly, or Annual

Michigan assigns sales tax filing frequency based on your annual tax liability. Knowing your tier matters because missing a filing deadline, even a period with zero tax owed, can trigger penalties.

The three tiers are:

• Monthly: Annual tax liability exceeds $720. Returns are due on the 20th of the following month.
• Quarterly: Annual tax liability falls between $72 and $720. Returns are due on the 20th of the month following each quarter.
• Annual: Annual tax liability is less than $72. One return covers the full calendar year.

The state can also assign accelerated payment schedules for very large filers, a scenario most small businesses will not encounter but worth knowing exists.

Filing frequency is not permanent. As your business grows and your tax liability increases, the state will reassign your filing schedule. The practical implication is that tracking revenue by category each month is not just good business hygiene; it is the mechanism that tells you when you are approaching a tier change and need to adjust your filing calendar.

Already Behind? What to Do Before the Audit Does It for You

If you read this article and realized somewhere around the use tax section that your business has an unfiled obligation, you are not alone. This is a common situation, and the worst response is to ignore it and hope nothing happens.

Michigan's statute of limitations for sales tax is generally four years for non-fraudulent failures to file. That is the window the state can look back through during an audit. It is not a short window, but it is a defined one.

Voluntary disclosure is a legitimate and widely used path. Coming forward proactively before an audit is initiated typically reduces or eliminates penalties, though it does not eliminate the back tax owed or the interest on it. The math almost always favors voluntary disclosure over waiting.

The risk of inaction has increased substantially since Wayfair. State tax authorities now receive third-party data from marketplace platforms, cross-reference it with registration records, and use industry-specific targeting to identify non-filers. The assumption that "nobody will notice" has become significantly less reliable.

A periodic compliance review that catches these gaps before an auditor does is the better version of this conversation to be having. And if you are already past that point and need to understand what to do when a tax agency comes knocking, that resource walks through the mechanics.

The one concrete step you can take this week: log into Michigan Treasury Online at mto.treasury.michigan.gov, pull your registration status, and compare it against your actual sales activity and purchasing history for the past two years. If you find a gap, call a CPA before you call the state. A voluntary disclosure handled properly is a very different conversation than one that begins with a notice in the mail.