New streamlined sales tax laws go into effect

For more than two decades, Michigan Retailers Association has been leading the fight for “Main Street fairness” through the collection of sales and use taxes from remote sellers—Internet, catalog and drop-ship retailers outside Michigan.

That effort took a huge step forward this past summer with the signing of MRA-backed legislation to streamline sales and use tax laws, part of a national move by states to make it easier for remote sellers to voluntarily collect and remit sales taxes.

The following article outlines some of the changes for in-state retailers.

Michigan’s new streamlined sales and use tax laws, signed by Governor Jennifer Granholm on June 30, went into effect September 1, 2004. The biggest immediate impact is a change in the due date for filing monthly and quarterly sales tax returns—retailers will have an extra five days, beginning with the September return.

Most of the larger changes brought about by the new laws, which bring Michigan into compliance with the multi-state Streamlined Sales and Use Tax Agreement (SSUTA), will not be felt for some time. Eventually, the changes are expected to simplify the way sales taxes are collected in the participating states, making possible the collection of tax on remote sales—both Internet and catalog sales.

Some of the changes to state law are effective only when the Agreement becomes operational, a date that is determined in the agreement based on number of states participating and population in those states. These changes include “registering under the agreement,” which will involve the implementation of an online centralized registration system and an amnesty period for qualified businesses that register under the agreement.

According to Forrest Lewis, CPA, a tax partner in the East Lansing office of Plante & Moran, the current “best guess” for the date that the Agreement will be operational is October 1, 2005.

Due dates
Monthly and quarterly returns will now be due on the 20th day of the following month, rather than the 15th day. The first monthly return affected by the changes made to the sales and use tax acts is the September return, which is now due October 20, 2004.

The quarterly return for the period July, August and September 2004 will be due on October 20, 2004. The new laws do not affect the date for annual returns, February 28.

Retailers should continue to use their pre-identified return forms for 2004. The only change to the return is the due date that is printed on the form. The Combined Return for Michigan Taxes will be updated to reflect the correct due date for 2005.

Definitions and exemptions
Definition changes in the new laws will affect two areas of retail: food and medical goods. All businesses that deal in any products that are affected by the laws are advised to familiarize themselves with the new definitions and exemptions.

“Prepared food intended for immediate consumption” is still taxable under the new law, but the definition of that food has changed. Now, a food item is considered intended for immediate consumption only if it is customarily served with utensils. As a result, some foods which were formerly taxable, such as baked goods or deli trays, may be exempt.

Definitions regarding durable medical goods have been revised as well. Durable medical equipment, mobility enhancing equipment and prosthetic devices are now specifically exempt in all circumstances.

However, under the new laws, all contact lens sales are taxable, even when the wearer cannot wear corrective eyeglasses.

Taxes on medications are also slightly affected. Now, all over-the-counter medication is taxable, regardless of whether it is administered in compliance with a prescription. This will affect primarily nursing homes and facilities that administer medication rather than traditional pharmacies.

Sourcing of gifts, leasables
Before this legislation, gifts purchased in Michigan were subject to Michigan sales tax. Now, sales tax is due to the state where an item is received, not where it is purchased. Gifts purchased in Michigan for delivery in another state are no longer taxable in Michigan but are subject to the sales tax (if any) of the state where the item is received.

There are also new sourcing rules for interstate leasing and rentals of property, electronically delivered software, direct mail material and telecommunications services.

The new legislation does not, however, make other changes to current federal or state law on nexus, the legal determination of the states in which a seller has to collect and remit sales tax. If a seller has nexus in a state, it must follow that state’s law in terms of collection and remittance of sales tax.

Long term
Although these changes may require adjustment and extra work for some retailers in the short term, the real impact of the new legislation will be felt later, as the multi-state Agreement comes into effect, presumably in late 2005.

All retailers will in time need to decide whether to register under the new SSUTA system, then choose a software solution for collecting and managing sales tax that works best for them, and consider other ramifications of the new system on their business.

The changes are expected to benefit both traditional retailers and the state’s budget. Traditional retailers will no longer suffer in price comparisons to out-of-state retailers, whether from online or catalog sales, due to sales tax.

For 2005, the laws may actually mean less revenue for the state from sales tax because of greater exemptions—the short-term losses in revenue may be made up, however, as more retailers (both in-state and out-of-state) opt into the system.

Eventually, as more states join the Agreement, state officials believe the changes will help the state recoup about 10 percent, or $26 million, in unpaid taxes.

How does this affect you?
• Start using the new definitions, exemption provisions, and sourcing rules.
• Follow the new due dates for sales tax returns beginning in October (September’s return).
• Consider whether it will make sense for you to register under the SSUTA and to participate using one of the certified software systems.
• Monitor developments as the state implements the online registration, payment by automated clearinghouse and other provisions of the SSUTA.

Michigan Retailer will continue to follow the changes that result from this important legislation, and report on the practical impact of this legislation, as well as the “big picture” issue of sales tax fairness.

For more information on Michigan’s legislation, see http://www.michigan.gov/treasury, then search for the term “streamlined.” For more information about the multi-state Streamlined Sales Tax Project and the Agreement, see http://www.streamlinedsalestax.org.