Michigan Real Estate Sales Tax

In Michigan sales and use tax law, determining whether an item of tangible personal property remains tangible personal property or becomes a fixture affixed to real estate can significantly affect the taxability of the item in question. This determination may impact whether the taxpayer is considered a retailer or a contractor. There are also several exemptions in Michigan sales and use tax law for purchases of tangible personal property that do not apply if the item is instead a fixture. The Michigan sales and use tax exemptions for both the agricultural industry and the industrial processing or manufacturing industry include such language.

Michigan case law has long held that a three-factor test is applicable in determining whether property remains tangible personal property or becomes part of the realty. As explained in Michigan Revenue Administrative Bulletin 2016-4 from Feb. 1, 2016 the Michigan Department of Treasury acknowledges that it too uses the three-factor test established by the Michigan Supreme Court in Sequist v. Fabianoin making these determinations. In order for an item of tangible personal property to lose its characteristics and be considered a fixture, the item must satisfy all three factors of the test. No single factor alone is determinative.

Retailers sell tangible personal property, while contractors install fixtures affixed to realty. If acting as a retailer, the taxpayer may distribute a resale certificate to its suppliers and pay no taxes on the purchase of goods acquired for resale. The retailer must then collect tax on its sales of those goods. If acting as a contractor, Michigan sales or use tax is due on the materials consumed in the project. A contractor should either pay sales tax to its suppliers or self-assess and report use tax on its Michigan sales and use tax compliance returns. A contractor should not collect sales tax from its customers.

Tangible personal property permanently affixed and becoming a structural part of real estate is not eligible for the agricultural producing exemption under Michigan sales and use tax law. A portable grain bin which can be disassembled and moved without significant damage to its parts or a grain bin on wheels would qualify for the exemption while a grain bin that was permanent or immovable would be taxable. Portable feeding troughs, water supply systems and other such movable equipment would qualify for the agricultural producing exemption while barns, fences or subsurface water supply systems that are a structural part of the real estate would be taxable.

Tangible personal property permanently affixed and becoming a structural part of real estate is not eligible for the industrial processing exemption under Michigan sales and use tax law. An air compressor that is portable would qualify for the exemption while one that was incorporated into the realty as a central building system would be taxable. Ductwork for a piece of equipment would be exempt tangible personal property while ductwork for the building’s heat would be taxable as a fixture. A generator used to power production equipment would qualify for the Michigan sales and use tax exemption for manufacturing while a generator providing power to the building would be taxable as a fixture.

Mixed-use tangible personal property which qualifies for the agricultural producing exemption or the industrial processing or manufacturing exemption may be apportioned to account for the percentage of use in qualifying nontaxable activities. For example, if a manufacturer purchases a transformer that is connected to industrial processing equipment as well as office or administrative equipment such as a copier, then the transformer’s cost can be apportioned for tax purposes according to the percentage of the energy which is consumed by the industrial processing equipment.

As with all sales and use tax research, the specific circumstances of each case need to be considered. Additional advice from Agile Consulting Group’s sales tax consultants can be found on our page summarizing Michigan sales and use tax exemptions . If you have questions, comments or would like to discuss the specific circumstances you are encountering regarding this issue or any other sales and use tax issue, please contact our sales tax consultants at (888) 350-4TAX (4829) or via email at info@salesandusetax.com .

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Michigan Real Estate Sales Tax: Determination of Property’s Taxability