You may owe Use Tax (Sales Tax by another name) on those online purchases!

Nov. 17, 2017

Michiganders purchasing holiday gifts from online retailers can conveniently pay their outstanding use tax when filing their annual Michigan Individual Income Tax Return, according to the Michigan Department of Treasury.

Michigan’s use tax generally applies to purchases made when a retailer does not collect sales tax. This often happens when individuals purchase items through online or mail-order retailers or television shopping networks without physical locations inside the state of Michigan.

“With the kick-off of the holiday shopping season happening after Thanksgiving Day, be sure to check if you are being charged sales tax when you purchase items online,” said Deputy State Treasurer Glenn White, head of Treasury’s Tax Administration Group. “If the online retailer doesn’t charge sales tax, state law requires you to keep a running total and pay your outstanding use tax when you file your annual state income tax return.”

Taxpayers paid millions of dollars in use tax through their state income tax return this filing year, helping fund schools and local police and fire departments. Most of the dollars collected from taxpayers through the use tax go to the School Aid Fund, General Fund and to the Local Community Stabilization Authority

The use tax is calculated at the rate of 6 percent of the total purchase. Items subject to use tax include appliances, books, clothing, computers, DVDs, CDs, electronics, furniture, pre-written computer software and tobacco products.

Taxpayers can report their total outstanding use tax annually when filing their Michigan Individual Income Tax Return between January and April.

Use Tax – What and Why?

 A Substitute for Sales Tax

Use Tax is essentially a substitute for Sales Taxes.  It has been in the Michigan tax law (and virtually every other state) for a very long time but now there is much more enforcement in Michigan, even asking on both business and personal returns if you owe any.  It is the same rate as the Michigan Sales Tax, currently 6%.

This article is particularly about Michigan and the laws may, and usually do, differ in other states—but it still provides some general context.

Michigan Use Tax Form

You should care about this because not paying (or being underpaid) may result in tax deficiencies, underpayment penalties and interest.  Underpayment penalties and interest rates are substantial in Michigan—ugly!

Use Taxes are Sales Taxes when you purchase something upon which you would have been charged Sales Taxes if you had gone into a store in Michigan and they charged you Sales Taxes.  In other words, just because someone doesn’t collect Sales Tax from you doesn’t mean you don’t owe it anyway in the form of Use Tax.

The Rules Are Complex

The rules, especially for certain business activities, are much more complex than these general guidelines and I am ready to help you!  Here are some examples of when Use Taxes apply or not:

  • You purchased clothing from Amazon.com and they don’t charge you Sales Tax. If you had purchased the clothing in a store in Michigan, they would have charged you Sales Tax.  In this case you owe Use Tax to Michigan.
  • You purchased a Dell computer online or over the phone and they charge you Michigan Sales Tax. In this case, you have already paid Sales Tax so you don’t owe Michigan Use Tax.
  • You purchase prescription medications from an online supplier and they don’t charge you Sales Tax. In Michigan, prescription medications are not subject to Sales Tax so you would also not be subject to Use Tax.
  • You purchase a riding tractor from your neighbor and they didn’t add Sales Tax to the price. A riding tractor is not exempt from Michigan Sales Tax so you would have to report the purchase on your Michigan Tax Return (whether business or personal) and pay Use Tax.
  • You went to Chicago, purchased a golf bag and they charged you Chicago and Illinois Sales Tax (which together are more than in Michigan). In this case, since you made the purchase when physically present in Chicago and they charged you Sales Taxes, you don’t owe Michigan Use Tax (or Sales Tax, either).

Of course, there are always exceptions to exceptions and you should ask if you are not certain. 

QuickBooks Users:  QuickBooks does not have a built-in function for Use Tax, however there is a very simple work-around to help you track and pay this.  Please call me for help!