Sales tax typically applies when a company sells tangible products or services in a state where it has nexus. Some states also charge sales tax on delivery or installation costs. In Michigan, delivery and installation charges are no longer subject to tax. Here’s what the new rule means and how to calculate the tax going forward.
What Are Michigan’s Delivery and Installation Charges?
Delivery, also known as shipping, charges are the costs of transporting goods or services. Sellers are free to set the fee for delivery or shipping and require their customers to pay it.
Installation charges are the costs of placing or installing a product or service in the customer’s home or place of business. When someone buys a refrigerator online, they may choose to pay a fee to have a professional bring it into their home, unbox it, place it in the right spot, and plug it in.
Before April 26, 2023, businesses had to add sales tax to Michigan delivery and installation charges. Starting April 26, 2023, delivery and installation costs are no longer subject to sales tax as long as certain conditions are met.
How Do You Determine if You Need to Tax on Michigan Delivery and Installation Charges?
Figuring out if you need to add sales tax to Michigan delivery and installation charges is pretty straightforward.
You don’t have to tax delivery and installation if you itemize those costs separately on your customer invoices and if you keep records showing how you calculated the sales tax for those transactions.
If your customer’s invoice looks like this, you don’t have to collect tax on delivery and installation costs:
- Four-seater sectional couch: $2,500
- Delivery charge: $50
- Installation and set-up charge: $100
- Sales tax: $150
In this case, you only need to charge sales tax on the cost of the couch, $150 (6%, Michigan’s sales tax rate).
If the following apply, you do need to continue to collect sales tax on delivery and installation charges:
- You didn’t separately itemize the delivery and installation costs or keep records of the calculation
- The transaction involved the delivery of electricity or gas (artificial or natural) by a utility
Let’s say you sold a couch to a customer but included the cost for delivery and set-up in the furniture price. You need to collect sales tax on delivery and installation charges if your customer’s invoice looks like this:
- Four-seater sectional couch: $2,650
- Sales tax: $159
Why Did Michigan Make the Change?
Michigan made the sales tax change for a few reasons. The state determined that the old way of collecting sales tax on delivery and installation charges was confusing.
It also decided that the old way of collecting tax on delivery and installation charges created a disadvantage for businesses that offer customers “all-in-one” service.
What if Your Company Owed Back Taxes?
Michigan’s delivery and installation charges tax rule is retroactive. That means the state’s treasury isn’t going to issue new delivery or installation charges tax assessments for periods before April 26, 2023.
The Treasury is also identifying and canceling any outstanding sales tax balances for delivery and installation charges that occurred before April 26, 2023.
Can You Get a Sales Tax Refund?
If your company paid sales tax on Michigan delivery or installation charges before April 26, 2023, you’re not entitled to a refund.
For transactions that occur after April 26, 2023, customers have the right to request a sales tax refund if your company erroneously collects sales tax on delivery or installation costs. As the seller, you can refuse the refund but must then pay any sales tax collected to the state treasury.
If you agree to the refund, you must pay the customer the amount of sales tax collected in error. You can then request a refund from the Treasury for your business.
Need more help deciphering what Michigan’s delivery and installation charges tax change means for your business? Our TaxGeeks are standing by. Get in touch and we’ll help you stay sales tax compliant.