State expected to bring in an extra $60 million annually
Starting Oct. 1, many Internet shoppers in Michigan may see an unusual item on their order summary page — Michigan sales tax.
In January of 2015 Gov. Rick Snyder signed the Main Street Fairness Act, which more explicitly defines which out-of-state companies will be compelled to collect Michigan sales tax.
It is not yet clear whether the change will affect purchases from the nation's top online retailer, Amazon. By most accounts, Amazon does not have a warehouse or fulfillment center in Michigan and so may be exempt from the new law.
The complication will come with third-party sellers on Amazon who may have a nexus in the state if they use an agent or warehouse here to complete a sale to a customer in Michigan.
“Note that this bill clarifies that storing goods in a warehouse, or contracting with installers or repair people will now specifically constitute a sales tax nexus with Michigan,” said Mark Faggiano, founder of TaxJar, a company that helps retailers with sales tax compliance.
Faggiano says a nexus will now also include agents that an out-of-state retailer may use to establish a market in Michigan, under what is known as a “click-through” nexus. He cites an example of an out-of-state seller using a Michigan-based website to sell merchandise.
The Michigan Department of Treasury does not publish a list of registered sellers in the state, and Amazon does not list Michigan as one of the 25 states for which it collects sales tax.
“Nexus” is a legal concept derived from the due process and commerce clauses of the U.S. Constitution. The Supreme Court ruled that a state may compel an out-of-state seller to collect sales tax from in-state customers only if the seller has a physical presence, or nexus, in the state.
With the burgeoning of online sales, many states, including Michigan, have been complaining that they are missing out on millions of dollars in sales tax revenue. Out-of-state merchandise is not exempt from sales tax, but the law does require purchasers to remit an equivalent “use” tax.
Compliance with the use tax requirement is low, according to the Michigan Department of Treasury. The department estimates that up to $444 million worth of use tax will go uncollected this fiscal year.
Diane Yetter, founder of the Sales Tax Institute and president of a sales tax consulting firm, says Michigan is not unusual in passing an Internet tax law. She said many states are waiting to see how tax fairness laws hold up in court.
“This year is probably the biggest year of states enacting these laws and it’s because litigation involving the laws in New York and Illinois came to an end in 2013,” said Yetter.
Yetter believes legal challenges to Michigan’s law are unlikely. It is similar to the law in New York. The high court declined to hear a challenge to that law.
Amazon could not be reached for comment, and Faggiano says the company does not disclose where it has fulfillment centers. TaxJar believes Amazon operates them in 17 states, but not Michigan.
According to its website, Amazon collects sales tax in 25 states. The Michigan Department of Treasury estimates that under the new sales tax law, Michigan will collect an additional $60 million a year in sales and use tax.