Michigan SaaS Sales Tax: What You Need to Know

Knowing where Michigan stands on the taxation of Software as a Service (SaaS) is vital for companies operating in the software industry. Even though the state usually provides Michigan SaaS sales tax exemption, the Michigan sales tax on digital products depends on how these are delivered and used.

SaaS is a form of software that is remotely accessed via the internet with no tangible or downloaded components. Michigan does not charge this fee because the state’s tax laws focus on “prewritten computer software” that is “delivered by any means,” and SaaS does not deliver in this manner. However, these goods and services may be taxable if they contain a downloadable component.

TaxCloud takes a precise approach to tackling these SaaS taxation-related challenges through its automation features that simplify sales tax compliance for service providers. The platforms allow for speedy compliance with regulations to help grow rather than perform admin work that comes with tax management.

How Michigan Taxes SaaS and Software

You might be asking “Is SaaS taxable in Michigan?” The short answer is no—because Michigan classifies SaaS as a service (in most cases), which is not taxable.

However, “canned” or packaged computer software becomes taxable when delivered in physical form or when downloaded through the internet. The state’s Treasury Department has stated the customer would have to pay 6% as sales tax if they download the software program.

Michigan’s Tax Treatment of Digital Products

As we mentioned before, the Software taxability in Michigan depends on how they are classified and delivered to customers. Michigan makes a distinction between taxable “prewritten computer software” and other digital items that are tax-free.

Cloud-Based Software

Remotely accessed software where the consumer does not possess the software code and the software is classified as a service. The offerings are not taxed in Michigan because there is no exchange of any physical property.

Prewritten Software

It is software developed to standard specifications, not for a particular purchaser. If such software is provided in its full version through the internet or made available for download on devices, the product becomes liable for 6% sales taxes. For instance, the software applications procured from the internet and uploaded to a personal computer fit this description.

Digital Goods (Except Prewritten Software)

Digital products sold, such as e-books, digital songs, and even podcasts and ringtones, are not charged for sales tax, irrespective of whether they are being downloaded, subscribed, or listened to. These products are not available in their physical form and don’t fulfill the criteria of being tangible personal property.

Downloaded Software

If a consumer takes a full software suite, this means they are also acquiring the software code that comes with the package. It is a transfer of tangible personal property and, therefore, taxable in Michigan.

When Does a SaaS Business Have Nexus in Michigan?

A SaaS company in Michigan can form a tax nexus as long as they have a physical presence or meet certain economic requirements.

Physical Nexus

A SaaS company has a physical nexus in Michigan when they have a physical presence in the state in question. This can be in the form of an office, employees, or even servers in the jurisdiction.  The hiring of independent contractors or inventory maintenance aids in creating a physical presence. Once this type of nexus is established, the company will be subject to Michigan taxes.

Economic Nexus

Michigan has minimum thresholds that a remote seller must meet for collecting and remitting sales tax through an economic nexus. A business is obligated to register for sales tax if the preceding calendar year recorded gross sales over 100K or more than 200 individual sales transactions with clients from Michigan.  These quotas apply to all sales, taxable or tax-free.

While SaaS products do not usually incur sales tax in Michigan, it is important to understand that these products have nexus obligations. If a business sells taxable goods such as software through digital platforms, the firm must comply with the regulations and remit the corresponding taxes on these sales.

How to Stay Compliant with Michigan SaaS Sales Tax

Businesses should pay particular attention to the following areas for adhering to Michigan’s sales tax rules related to SaaS:

Classifying SaaS as a Non-Taxable Service

Software as a Service (SaaS) is considered a non-taxable service in Michigan as there’s no tangible personal property transferred. At the same time, if the SaaS that is being provided has a downloadable version or contains a transfer of prewriting software, companies should charge for these services. It is important to accurately identify SaaS products because the classification process affects tax liabilities.

Monitoring Economic Nexus Limits

Michigan has economic nexus laws that require out-of-state businesses to register to collect and pay sales tax, especially if the business meets certain conditions. If more than $100,000 in gross sales or over 200 individual transactions by Michigan-based customers were made in the last calendar year, such businesses must apply for a sales tax permit. Tracking the volume of sales and transactions performed is important to determine if and when these limits are reached.

Watching for Changes in Legislation

SaaS tax law changes, and Michigan might announce new policies about classifying SaaS within taxable services. Following the developments from the Michigan Department of Treasury and watching for other updates ensures that your business stays compliant. Setting up a system for routinely monitoring tax laws enables you to deal with any changes that might occur in your tax obligations.

Automate Michigan Sales Tax Compliance with TaxCloud

TaxCloud makes SaaS sales tax compliance easy and simple for businesses in Michigan.

TaxCloud’s automated features allow for real-time tax calculations so that clients know what rates to apply without any estimation. It also tracks Michigan’s economy nexus boundaries and alerts businesses when they are nearing the $100,000 revenue or 200 transactions milestone. Furthermore, TaxCloud makes it easier to report and file taxes while lowering the amount of manual effort needed and reducing compliance risk. Companies looking for an effortless approach to sales tax management can take full advantage of TaxCloud’s 30-day trial offer free of cost.

Final Thoughts

SaaS isn’t taxable in Michigan, but digital products like prewritten software or any content downloaded through the Internet are subject to sales tax.

It is crucial that business operators in Michigan pay attention to the state’s taxability rules and nexus responsibilities because staying up to date with the state’s economic thresholds and compliance requirements helps businesses avoid penalties. A proactive approach and utilizing tools such as TaxCloud make sales tax management easy and ensure compliance with the framework and regulations.

Get started with a free 30-day trial of TaxCloud today and simplify your Michigan SaaS sales tax compliance.