Marketplace facilitators who cross the threshold of either processing more than $100,000 in sales or 200 transactions in 2019 will now be required to collect and remit Michigan sales and use taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. effective January 1, 2020. Gov. Whitmer (D) signed this requirement into law in a group of four bills on Dec. 12.
While not perfect, these laws do well in codifying past regulations, creating a narrow definition of “facilitator,” and avoiding a “notch effect.” However, a well-designed safe harbor would have a de minimis threshold denominated in gross sales alone (rather than transactions) and consider the size of the state’s economy when setting such a de minimis threshold.
HB 4540 and 4541 brought marketplace facilitators into both the General Sales and the General Use Tax Acts, and HB 4542 and 4543 codified the remote seller regulations—including the safe harbor thresholds—released by the U.S. Department of the Treasury in 2018. Before the governor signed these bills, Michigan was one of five states whose authority to require collection from remote sellers was based on regulation alone. The new laws are backdated to October 1, 2018, when those regulations went into effect.
HB 4540 defines a marketplace facilitator as an entity that both lists products or services for sale and processes the transaction. This specificity avoids the possibility of capturing entities like credit card companies and advertising services. Such groups provide one of those two functions, but neither have enough interaction with the consumer or sale to be able to collect and remit sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. on behalf of the seller.
Michigan’s law determines a seller’s or facilitator’s obligation to collect by looking back at whether the entity surpassed the $100,000 or 200-transaction threshold in the previous year. This solves the potential for a “notch effect,” where an incremental change (one additional sale or dollar, in this case) affects the whole system (creating tax liability on all prior sales where no tax was collected).
On the other hand, Michigan’s remote seller and facilitator threshold depends on either gross sales or number of transactions. While the Wolverine State is certainly not alone in this (23 states do the same), a well-designed safe harbor should be denominated in gross sales alone. This would avoid the ambiguity of what constitutes a “transaction,” while avoiding the possibility of imposing burdens in excess of profits. For example, under a 200-transaction threshold, a small business that makes more than 200 sales into a state at $1 apiece could easily see compliance costs that outweigh the amount of sales tax remitted or—worse—outweigh the business’s profits on those sales.
Michigan’s gross sales threshold is also rather low at $100,000. South Dakota has the same safe harbor, but the Mount Rushmore State accounts for a mere 0.3 percent of personal consumption in the United States. Michigan consumers purchased over 10 times as much in 2018. Instituting the same $100,000 threshold in larger states will capture smaller remote sellers than it would in a state like South Dakota. Eight states have responded to these concerns by creating thresholds above $100,000. Michigan should consider doing the same.
The Michigan Senate Fiscal Agency estimates that HB 4540 and 4541 will increase sales and use tax revenue by $90 million each fiscal year when taxpayers become fully compliant. Most of that increase will be put toward the School Aid Fund, with the rest largely going toward local revenue sharing and the General Fund.
For a more in-depth discussion of state remote seller laws and their accompanying pitfalls, take a look at our recent report.
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