Every month, we focus one blog on a “state of the month” where we share not only the state tax ramifications (including economic nexus rules for sales tax, among others), but also some information about the geography, business climate, various tax insights, and of course, some fun facts.
This month takes us to the Wolverine State of Michigan. The origins of this name are obscure, but may be derived from a busy trade in Wolverine furs during the 18th Century.
Its largest city, Detroit, is famed as the seat of the U.S. auto industry, which inspired Diego Riviera’s murals at the Detroit institute of Arts. Also in Detroit is Hitsville U.S.A., the original headquarters of the Motown Record Company. Michigan is home to many great musicians including The Supremes, The Temptations, Stevie Wonder, Smokey Robinson, Bob Seger, Kid Rock and Alice Cooper.
Michigan is the only state to consist of two peninsulas. The Lower Peninsula, to which the name Michigan was originally applied, is often noted to be shaped like a mitten. The Upper Peninsula (often referred to as “the U.P.”) is separated from the Lower Peninsula by the Straits of Mackinac, a five-mile channel that joins Lake Huron to Lake Michigan.
The heavily forested Upper Peninsula is relatively mountainous in the west. The Porcupine Mountains, which are part of one of the oldest mountain chains in the world, rise to an altitude of almost 2,000 feet above sea level and form the watershed between the streams flowing into Lake Superior and Lake Michigan.
A wide variety of commodity crops, fruits, and vegetables are grown in Michigan, making it second only to California among U.S. states in the diversity of its agriculture. Michigan is a leading grower of fruit in the U.S., including blueberries, apples, tart cherries, grapes, and peaches.
Business Climate
Although Michigan has come to develop a diverse economy, it is widely known as the center of the U.S. automotive industry, being home to the country’s three major automobile companies (whose headquarters are all within the Detroit metropolitan area). While sparsely populated, the Upper Peninsula is important for tourism thanks to its abundance of natural resources, while the Lower Peninsula is a center of manufacturing services, and the high-tech industry.
Products and services in the state include automobiles, food products, information technology, aerospace, military equipment, furniture, and mining of copper and iron ore. Michigan is the third leading grower of Christmas Trees with 60,520 acres of land dedicated to Christmas tree farming. The beverage Vernors was invented in Michigan in 1866, sharing the title of the oldest soft drink with Hires Root Beer. Two of the top four pizza chains were founded in Michigan and are headquartered there: Domino’s Pizza by Tom Monaghan and Little Caesars Pizza by Mike Ilitch.
Kellogg’s cereal is based in Battle Creek, Michigan and processes many locally grown foods. Thornapple Valley, Ball Park Franks, Koegel Meat Company, and National Hebrew sausage companies are all based in Michigan as well.
While sparsely populated, the Upper Peninsula is important for tourism thanks to its abundance of natural resources, while the Lower Peninsula is a center of manufacturing services, and the high-tech industry. Hunting and fishing are significant industries in the state. Charter boats are based in many Great Lakes cities to fish for salmon, trout, walleye and perch.
Michigan is home to very fertile land in the Saginaw Valley and “Thumb” areas. Products grown there include corn, sugar beets, navy beans, and soy beans. Michigan’s largest sugar refiner, Michigan Sugar Company, is the largest east of the Mississippi River and the fourth largest in the nation. Potatoes are grown in Northern Michigan, and corn is dominant in Central Michigan. Alfalfa, cucumbers, and asparagus are also grown in the state.
Tax Climate
The top individual income tax rate is 4.25% and the top corporate income tax rate is 6%.
Apportionment: Michigan taxpayers apportion income using a sales formula.
Michigan requires receipts from services to be sourced based on the location of the taxpayer’s market for the service., so “market based sourcing”..
Sales Tax Structure
The state sales tax rate is 6% and the highest combined rate is also 6%, as the state does not have any city, local or county taxes
Generally, sales of digital products in Michigan are nontaxable. Michigan imposes sales and use tax on the sales of prewritten computer software delivered electronically. Michigan does not impose sales and use tax on sales of custom computer software delivered electronically. There is not a Michigan statute or regulation that addresses cloud computing directly, so SaaS is likely not taxable. How products are produced, sold and delivered is critical to determining its tax status.
Michigan has an economic nexus law where if an out of state seller sells $100,000 in sales or makes 200 transactions into the state, sellers need to collect and remit sales tax on those transactions. Transactions that are included in the threshold are sales of tangible personal property delivered into the state, taxable services delivered into the state, exempt sales and exempt services. There are not any excluded transactions in the threshold. This threshold applies to the previous calendar year. This legislation went into effect on September 30, 2018.
In-state marketplace facilitators and remote facilitators with economic nexus must collect and remit tax on all taxable sales made through the marketplace in Michigan. Economic nexus is established when, in the previous calendar year, a remote marketplace facilitator has more than $100,000 in gross receipts from direct and facilitated sales into Michigan, or at least 200 direct or facilitated transactions in the state. This legislation was enforced on January 1, 2020.
Many states have annual sales tax holidays, during which certain items the state wants to promote the purchase of (i.e., school supplies, emergency preparedness supplies, or energy efficient appliances) can be purchased sales tax free. However, Michigan does not have any sales tax holidays.
Our team at Miles Consulting Group is always available to discuss the specifics of your situation, whether in Michigan or other U.S. States, and help you navigate the complex tax structures arising from multistate operations. Call us to help you achieve the best tax efficiencies.
Random Facts
- Michigan has 64,980 inland lakes and ponds. A person in the state is never more than 6 miles from a natural water source or more than 85 miles from a Great Lakes shoreline.
- Michigan has more fresh water coastline than any province of any country in the world (3,126 miles).
- Michigan has the world’s only floating post office. It delivers mail to ships as they pass under the Ambassador Bridge.
- Michigan has about 150 lighthouses, more than any other state in the United States.
- Michigan grows about 70% of tart cherries (sour cherries) produced in the United States (Washington state is the leading producer of sweet cherries in the United States). Traverse City, Michigan claims to be the “Cherry Capital of the World,” hosting a National Cherry Festival and makes the world’s largest cherry pie.
- Battle Creek, Michigan, is called the cereal capital of the world as it is home to Kellogg’s.
- Michigan has more miles of freshwater shoreline than any other state in the nation.
