• Streamlined Sales and Use Tax Administration Act
• Amendments to the General Sales Tax and Use Tax Acts
• Substantive Changes to General Sales Tax and Use
  (Includes information about Food items, Medical Goods, Sourcing of Gifts, Credit for Tax on Rentals, Prescription Drugs, Return Filing dates, and Calculation of Tax and Reimbursement Amounts)
• Streamlined Sales and Use Tax Revenue Equalization Act

Following extensive discussions with business interests, the Michigan legislature enacted a package of four acts intended to comply with the Agreement. This package includes:

Streamlined Sales and Use Tax Administration Act (P.A. 2004, No. 174)

This act authorizes the State Treasurer to enter into the Agreement with other states and details the manner in which Michigan will participate. Among its provisions are those that:

• Clarify that State law controls and the Agreement does not modify State law except as the terms of the Agreement are adopted and expressed in Michigan statutes.
• Establish a State delegation consisting of four persons to represent Michigan on the Governing Board created under the Agreement.
• Provide that the State may terminate participation in the Agreement if it is determined by the State Treasurer or by joint resolution of the legislature to be in the best interest of the State.
• Authorize a system allowing for centralized registration by sellers seeking to register under the Agreement.
• Establish technological models that may be used by sellers registered under the Agreement in collecting and remitting tax under the Agreement. These models provide compliance options for registered sellers which range from hiring a service provider to undertake virtually all of a seller's responsibilities (tax calculation, collection, and remittance) to authorizing a seller to retain full responsibility for its calculation, collection and remittance obligations.

Note: Participation by sellers in the Streamlined Agreement is voluntary. Other than complying with changes to Michigan law such as a new return date and new definitions of products, a currently registered seller may continue their current practices, and need not select a new technological model.

• Provide for additional collection allowances to offset some of the costs of creating the technological models used under the Agreement.
• Provide for privacy protection and limit the use and disclosure of identifying information obtained in the administration of taxes under the Agreement.
• Establish an amnesty for a limited time period for sellers who agree to register under the Agreement and collect and remit taxes to this State.

These two bills make substantive changes to the sales and use tax provisions of State law. Because these taxes are similar in administration, imposition, and exemptions, they are discussed together.

In drafting the legislation to comply with the Agreement, efforts were made to minimize revenue impact by maintaining both the current tax base and current exemptions. In some cases current law was easily modified to comply with the Agreement by making changes in form.

EXAMPLE: Michigan imposes tax on "sales at retail." Historically, some transactions have not been taxed because they were expressly excluded from what constituted a "sale at retail." Certain sales of water, "custom software", isolated transactions, and certain "commercial advertising elements" were expressly not included within the definition of a "sale at retail." These exclusions are not permitted under the definition of "sale at retail" required under the Streamlined Agreement. Compliance was achieved, without any substantive change in the tax base, by eliminating language excluding these items from "sale at retail" and replacing them with express exemptions from the imposition of the tax.

In other instances compliance with the Agreement resulted in unavoidable changes to the tax base. In cases where the revenue consequences were small, further adjustment was not made. In other cases the resulting changes are addressed in the Streamlined Sales and Use Tax Revenue Equalization Act by either imposing a tax or providing a credit to retain revenue neutrality.

• Food: Prior to Streamlined, Michigan taxed "prepared food intended for immediate consumption." Other food was exempt. The Agreement definition of "prepared food" differs slightly from the previous definition. This will result in a slight expansion of the exemption.

EXAMPLE: Prior to Streamlined, bakery goods were exempt if purchased for "off premise" consumption, and taxable if purchased for "on premise" consumption. Under Streamlined, bakery goods are exempt unless they are sold with an "eating utensil." "Eating utensils" are defined to include knives, forks, spoons, glasses, cups, napkins, straws, or plates.

EXAMPLE: Prior to Streamlined, Michigan law provided that food arranged on a plate or platter, whether intended for individual or multiple servings and whether sold by the pound or by the serving was taxed as "prepared food intended for immediate consumption." "Deli trays" were generally subject to tax. Under Streamlined, food sold in an unheated state by weight or volume as a single item is taxable only if sold with eating utensils. Under Streamlined, "deli trays" will generally not be subject to tax.

• Medical Goods: Michigan law prior to Streamlined exempted "hearing aids, contact lenses if prescribed for a specific disease that precludes the use of eyeglasses, or any other apparatus, device, or equipment used to replace or substitute for a part of the human body, or used to assist the disabled person to lead a reasonably normal life" Under Streamlined, exemptions for these types of items may only be done by expressing the exemptions using the terms defined in the Agreement. These terms are "durable medical equipment," "mobility enhancing equipment," and "prosthetic device." It is believed that expressing the exemptions utilizing these terms will, with the exception of contact lenses noted below, slightly expand the exemption.

EXAMPLE: Prior to Streamlined, equipment that was not used to replace or substitute for a part of the human body would only be exempt if it was used to assist a disabled person to lead a reasonably normal life. This requirement of disability does not exist under Streamlined. Rather, the exemption rests upon the nature of the equipment and its use.

EXAMPLE: Prior to Streamlined, contacts were only exempt from tax if eyeglasses could not be worn due to a specific disease. Streamlined provides the option of either taxing all contacts or exempting all contacts. In addressing contact lenses the legislature had the option of either greatly expanding the exemption to all contact lenses or slightly reducing the exemption by taxing all contact lenses. Rather than expand the exemption to all contacts, the legislature opted to impose tax on contact lenses worn by the limited group of persons who cannot wear glasses.

• Sourcing of Gifts: Prior to Streamlined, Michigan law treated purchases made for gifting to a person outside of the State as made in Michigan and therefore subject to tax in Michigan. Streamlined, in accord with the practice in the majority of other states, sources gift purchases to the destination state.

EXAMPLE: A buyer located in Michigan purchases a gift item from a Michigan retail location to be sent to a third person in Ohio. The buyer does not take physical possession of the gift item but instead directs the store to ship the item to the unrelated third party in Ohio. Under Streamlined the transaction will be sourced to Ohio and any tax collected will properly be payable to Ohio.

• Credit for tax on rentals: Prior to Streamlined, Michigan law afforded an exemption from use tax on rental receipts for items purchased for rental where sales or use tax had been paid to Michigan on the purchase price. The amendments extend this credit to sales or use taxes paid to any state on the purchase price amount.

EXAMPLE: A lessor located in Indiana purchases a crane in Indiana to be leased to a Michigan construction contractor. The lessor pays Indiana sales tax on the purchase price. Prior to Streamlined, the crane would be subject to Michigan tax either on its purchase price or its stream of monthly rental receipts without credit for the tax paid to Indiana. After Streamlined, the crane will only be subject to Michigan tax to the extent Michigan's 6% tax applied to the purchase price exceeds the tax paid to Indiana.

• Bad Debt: Prior to Streamlined, Michigan law required that the period of limitations for taking a bad debt deduction be measured from the return due date of the period in which the sale was made. Streamlined applies a longer limitation period based on when the debt is, or could be, written off for federal income tax purposes. Streamlined also allows deduction for debts that have been sold to a third party and then re-transferred back to the seller. The general four year statute of limitations was previously applied from the return due date for the period within which the sale was made. Under Streamlined, the four year statute of limitations begins with the return due date for the period within which the debt becomes worthless and is, or could be, written off for federal income tax purposes.

EXAMPLE: A credit sale was made in August of 2000. The August 2000 return had a due date of September 15, 2000. The debt was found to be worthless and written off in December 2001. Prior to Streamlined, the bad debt had to be claimed (on an amended return for December 2001) no later than September 15, 2004. After Streamlined, the bad debt has to be claimed (on an amended return for December 2001) no later than January 15, 2006 (the December 2001 return due date was January 15, 2002).

• Prescription drugs: The Streamlined amendments codify case law decided prior to the Court of Appeals decision in Birchwood Manor Inc. v Commissioner of Revenue, 261 Mich App 248 (2004). After the Streamlined amendments, exemption for prescription drugs is limited to drugs for human use that can only be legally dispensed by prescription of a qualified licensed health professional. Aspirin and other over the counter medications will not be exempt from tax even if dispensed pursuant to a prescription or order of a qualified licensed health professional because they can be legally dispensed without a prescription.

EXAMPLE: A licensed nursing home dispenses aspirin as directed by a physician and as recorded in the patient's medical records. Prior to Streamlined, the aspirin would not be subject to tax in conformance with the Birchwood Manor decision. After Streamlined, the aspirin will be subject to tax. because it is not a drug that can only be legally dispensed pursuant to a prescription.

Administrative Changes

• Return filing requirement: Under Streamlined, returns are due on the twentieth day of the month following the end of the filing period, rather than the fifteenth day.

EXAMPLE: Prior to Streamlined, a return for the first quarter of the year was due on April 15^th. After Streamlined, the same return will be due April 20^th.

• Calculation of tax and reimbursement amounts: Not later than January 1, 2006 taxpayers that reimburse themselves for sales tax and taxpayers that remit use tax shall compute the tax to the third decimal place and round up to a whole cent when the third decimal place is greater than 4 or round down to a whole cent when the third decimal place is 4 or less. Beginning January 1, 2006 the current bracket system will no longer be permitted as a method for sellers to calculate sales tax that they pass on to a purchaser.

Streamlined Sales and Use Tax Revenue Equalization Act (P.A. 2004, No. 175) This act separately imposes taxes and provides credits to modify the impact of the changes made to the General Sales Tax Act and the Use Tax Act.

• Section 5: Provides a levy on interstate motor carriers for the privilege of consuming diesel fuel in the State at a cents per gallon rate based on a statewide average price of diesel fuel. A credit is given for 6% of the actual price of diesel purchased in the State upon which sales tax was paid. This tax was moved intact and without change from the Use Tax Act to the Equalization Act because the tax base is expressed as "cents per gallon" which deviates from the definition of "price" mandated by the Agreement for sales and use taxes. The use tax was collected on the International Fuel Tax Agreement (IFTA) return, and that collection method is retained in the Equalization Act. As a result, this "new" tax should appear as a seamless change to those affected.

• Section 9: Provides for a tax on the privilege of storing, registering, or transferring ownership of a vehicle not obtained from a dealer, an ORV, manufactured housing, a snowmobile, a watercraft or certain aircraft. These items were previously taxed using a use tax base which was the greater of purchase price paid or retail dollar value at the time of acquisition. This base does not comply with the Agreement definition of "price" which is required to be used in the Use Tax Act. To retain revenue neutrality, the imposition of a tax on retail dollar value was moved to the Equalization Act. A non-refundable credit for use tax paid on purchase price is provided and can be used to totally or partially offset the equalization tax obligation. The Department is planning for methods of administration and collection of this "new" tax that should be accomplished in a seamless manner that will be virtually transparent to consumers.

• Section 11: Provides for imposition of a tax for the privilege of storing, registering, or transferring ownership of a qualified aircraft that was purchased outside of the state solely for personal (non-business) use which is subsequently brought into Michigan under certain specific circumstances. Prior to Streamlined, the tax base for these qualified aircraft was the "value of the aircraft at the time it first enters this state." This base does not comply with the Agreement definition of "price" for sales and use taxes. To retain revenue neutrality, the imposition of a tax on the value upon entry into Michigan was moved to the Equalization Act. A credit for use tax paid on purchase price is provided and can be used to offset the equalization tax obligation or refunded.

• Section 13: Establishes a refund provision for those hotels, motels and similar establishments which provide accommodations and pay the convention and tourism and marketing , the state convention facility development, the regional tourism marketing, or the community convention and/or tourism marketing tax. These impositions were expressly exempted from the use tax prior to Streamlined. Under Streamlined these taxes must be included in the use tax base or "price" of the services being taxed. In order to attain revenue neutrality, persons that pay use tax calculated on these specific taxes may seek refunds of the amount of use tax paid on the specific taxes.