What Is the Use Tax in Michigan and How Does It Work?

Michigan’s use tax is an often-overlooked obligation that affects individuals and businesses when purchasing from out-of-state or online retailers. Unlike sales tax, which is collected at the point of sale, use tax is self-reported and applies when Michigan residents buy taxable goods without paying the state’s sales tax.

When It Applies

Use tax applies when tangible personal property is purchased without paying Michigan’s 6% sales tax. This occurs when buying from out-of-state vendors, online marketplaces, or mail-order catalogs that do not collect Michigan sales tax. If a seller does not charge this tax, the buyer must report and pay it directly to the state.

The tax also applies to goods brought into Michigan for use, storage, or consumption. For example, if a Michigan resident buys furniture from an Indiana retailer that does not collect Michigan sales tax and has it delivered, they must pay use tax on the purchase. The same rule applies to vehicles, boats, and aircraft purchased outside the state but registered in Michigan, with tax due at the time of titling.

Businesses must also pay use tax when acquiring equipment, supplies, or inventory from vendors that do not collect Michigan sales tax. If a company orders office furniture from an out-of-state supplier without paying sales tax, it must self-assess and remit the tax. This applies to leased property as well, where use tax is due on rental payments if the lessor did not collect sales tax upfront.

Exemptions

Certain transactions are exempt. Purchases made for resale are not taxable if the buyer provides a valid Michigan Sales and Use Tax Certificate of Exemption (Form 3372). This ensures tax is collected only when the final consumer makes a purchase.

Manufacturers qualify for exemptions on machinery and equipment used directly in industrial processing. Under Michigan law, equipment that alters raw materials during production is exempt. This includes assembly line machinery, conveyor systems, and quality control devices. However, office equipment and storage units do not qualify.

Nonprofit organizations, including charities and religious institutions, may be exempt when purchasing goods for tax-exempt activities. Organizations must be registered under Section 501(c)(3) of the Internal Revenue Code and provide exemption documentation to vendors. Government entities, such as state agencies and municipalities, are also exempt when acquiring goods for official use.

Calculating Liability

Use tax liability is based on the total purchase price of taxable goods or services, including shipping and handling fees if they are part of the sale. Michigan law defines the tax base as the total amount paid, meaning discounts applied at purchase reduce the taxable amount, but rebates received later do not.

The tax rate is 6%. For example, if someone buys a computer online for $1,200 and the seller does not collect Michigan sales tax, they owe $72 in use tax. Multiple purchases throughout the year must be added together to determine total liability. Businesses must track these expenses carefully to avoid underpayment.

Michigan allows a credit for sales tax paid to another state, but only up to 6%. If a buyer paid 4% sales tax in another state, they owe the remaining 2% to Michigan. If the other state’s tax rate was higher than 6%, no additional use tax is due.

Payment Steps

Individuals report use tax on their annual Michigan Individual Income Tax Return (Form MI-1040). A dedicated line on the return allows taxpayers to enter untaxed purchases and calculate tax due. If no income tax return is required, residents can submit payment separately using Form 5087, the Purchaser Use Tax Return.

Businesses must register for a sales, use, and withholding (SUW) tax account through the Michigan Department of Treasury. Once registered, they report and remit use tax using Form 5080 (Sales, Use, and Withholding Taxes Monthly/Quarterly Return) or Form 5081 for annual filers. Filing frequency—monthly, quarterly, or annually—is based on a company’s tax liability history. Payments must be made electronically if tax due exceeds $720 for a period, as required by Michigan law.

Recordkeeping Requirements

Accurate records are necessary for compliance. The Michigan Department of Treasury can review records for up to four years, so taxpayers must retain relevant documents for at least this period.

Receipts, invoices, and purchase orders should be kept for all taxable transactions where sales tax was not collected. These records must show the date of purchase, vendor details, item descriptions, and the total amount paid. Businesses should also maintain exemption certificates for tax-exempt purchases, as failure to provide these during an audit could result in an assessment of unpaid tax. Digital records are acceptable but must be easily accessible for review.

Businesses should also keep general ledgers, expense reports, and accounting system records to track use tax liabilities. If using accrual accounting, tax obligations must be recorded in the correct reporting period. Failure to maintain adequate records can lead to estimated assessments, where the state determines tax liability based on industry averages or prior filings, often resulting in higher tax bills.

Potential Penalties

Failing to comply with Michigan’s use tax requirements can result in penalties and interest charges.

A late payment incurs a penalty of 5% of the unpaid tax if less than two months overdue. If the delay extends beyond two months, the penalty increases by an additional 5% per month, up to a maximum of 25%. Interest also accrues on unpaid balances, calculated at the state’s annual interest rate, which is adjusted twice a year based on the federal short-term rate plus 1%. As of 2024, Michigan’s interest rate on delinquent taxes is 10%.

Intentional failure to pay use tax can lead to criminal charges, with fines up to $5,000 and potential imprisonment for up to five years. Businesses that repeatedly fail to comply may face audits and possible revocation of their tax licenses. Michigan’s Voluntary Disclosure Program allows taxpayers to report unpaid use tax before being contacted by the state, potentially reducing penalties.