A Prescription for Use Tax Issues in Michigan

Sovos
April 25, 2014

This blog was last updated on June 26, 2021

Michigan Skyline Blog The Michigan legislature recently passed H.B. 4831. Effective March 14, 2014, the bill exempts from sales tax over-the-counter (OTC) drugs purchased pursuant to a prescription. Although true for sales tax, H.B. 4831 does not equally exempt the purchase of OTC drugs from use tax. While this might seem like an innocuous distinction, this lack of unity between an exemption for sales tax and full taxability for use tax could have serious consequences for entities doing business and serving customers in Michigan. In order to understand the issues presented,Michigan Blog Photo 2 a brief explanation of how use tax operates is required. The most common understanding of use tax is that it is simply due when sales tax has not been paid. A prime example of this would be purchasing an item in a state that does not collect sales tax (such as New Hampshire) and bringing the item into a state which does collect sales tax (such as Massachusetts). When this occurs, the purchaser must remit sales tax to Massachusetts since they will be making “use” of the item that state. Use tax becomes more complicated than this example when you look at the two separate types; consumer’s use tax and seller’s use tax. Consumer’s use tax is a tax on the purchaser and requires self-assessment and remittance by the purchaser. Tax needs to be paid on the consumption, or use of the item. Conversely, seller’s use tax applies to sales made by a vendor to a customer located outside the vendor’s state, or for sales in interstate commerce if the vendor is registered in the jurisdiction where delivery will be made. These concepts are fairly straightforward, where use tax is due by either the seller or consumer depending on the factors surrounding the transaction. Michigan Blog Photo 1Turning back to Michigan’s recent law change, only use tax is currently due on OTC drugs purchased pursuant to a prescription. This means that consumers who purchase these types of products in Michigan would theoretically only be required to remit consumer’s use tax. Consumer’s use tax presents a bit of a problem for taxing jurisdictions, as it requires self-remittance. Most consumers are not exactly knowledgeable about use taxes, which could mean they may not be apt to pay them. In theory, this means that sellers which conduct interstate commerce into Michigan would be required to remit seller’s use tax, whereas businesses located within Michigan do not. This not only seems unfair, but presents a constitutional law issue. While the Supreme Court of the United States has rarely handled sales tax cases, it did establish a long line of jurisprudence. A number of cases, beginning with National Bellas Hess v. Department of Revenue, have established a variety of important rules with regard to sales and use taxes, namely one of non-discrimination for interstate commerce. The Supreme Court has held that states cannot put into place sales and use taxes which discriminate against interstate commerce. This means, for instance, that a state cannot force out-of-state sellers to pay one type of tax, and in-state sellers a different use tax. Unfortunately, this is exactly what is set to happen in Michigan. Without an exemption for use tax, out-of-state sellers will be forced to remit seller’s use tax, whereas instate sellers can instead pass the burden of consumer’s use tax on to their customers. This is, by default, the type of discrimination on interstate commerce that the court’s decision in National Bellas Hess was trying to prevent. As a result, it appears that the implementation of H.B. 4831 is unconstitutional. This discrepancy is not simply due to Michigan suddenly wanting to brazenly ignore constitutional law over OTC drugs, but rather due to how Michigan’s tax statutes are arranged. Michigan has two separate sections of its governing statutes for its tax law; one for sales tax, and the other for use tax. Any time the Michigan legislature wishes to create an exemption for a taxable transaction, an amendment must be made to both of these code sections. With the current state of political affairs across the country, passing two pieces of legislation, let alone one, is extremely difficult. This is, of course, not the first time Michigan has run into an issue where their use tax and sales tax exemptions were out of sync. For instance, Michigan recently passed an exemption for vehicle trade-ins; however, the legislation for the sales tax exemption was passed and enacted well before the use tax component, leading to a similar scenario to the one which exists now.

In response to this issue, the Michigan Legislature has introduced HB 5342, which eliminates use tax on sales of OTC drugs pursuant to a prescription.  HB 5342 was introduced on February 19, 2014, and, as of

Michigan Blog Photo 4March 13, 2014, is currently awaiting a vote in the Michigan Senate’s Committee on Finance. HB 4831 has been on the books for over a month, and while no use tax issues have yet to be raised, the constitutional problems surrounding this law still exist. Hopefully, Michigan will be able to rectify this issue shortly, or otherwise the passage of HB 4831 is a prescription for tax trouble.  

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Sovos

Sovos is a global provider of tax, compliance and trust solutions and services that enable businesses to navigate an increasingly regulated world with true confidence. Purpose-built for always-on compliance capabilities, our scalable IT-driven solutions meet the demands of an evolving and complex global regulatory landscape. Sovos’ cloud-based software platform provides an unparalleled level of integration with business applications and government compliance processes. More than 100,000 customers in 100+ countries – including half the Fortune 500 – trust Sovos for their compliance needs. Sovos annually processes more than three billion transactions across 19,000 global tax jurisdictions. Bolstered by a robust partner program more than 400 strong, Sovos brings to bear an unrivaled global network for companies across industries and geographies. Founded in 1979, Sovos has operations across the Americas and Europe, and is owned by Hg and TA Associates.
Share this post

North America Unclaimed Property
February 10, 2025
Delaware Announces 2025 VDA Invitation Dates

This blog was last updated on February 10, 2025 Mark your calendars – April 11, 2025 and August 15, 2025 are this year’s anticipated release dates for the Delaware’s Secretary of State (SOS) VDA program invitations. In the event that an organization receives an invitation to participate in the Voluntary Disclosure Agreement (VDA) program  , […]

North America Sales & Use Tax
February 6, 2025
The Tariff and Sales Tax Mishmash – Untying the Mess

This blog was last updated on February 6, 2025 Talk of tariffs dominates the current news cycle with some commentators suggesting that tariffs will spell disaster for our economy while others say the exact opposite. We’ve seen the stock market sometimes fluctuate as tariffs are announced but later suspended, leaving us to wonder whether an […]

retailer dtc wine shipping
North America ShipCompliant
February 6, 2025
Retailer DtC Wine Shipping: The Time Has Come

This blog was last updated on February 6, 2025 By Tom Wark, Executive Director, National Association of Wine Retailers We are often reminded by the media and those in the wine industry—as well as by wine enthusiasts—that the three-tier system of alcohol distribution in most states hinders consumer access to the expansive number of wines […]

Montana 1099-DA
North America Tax Information Reporting
February 5, 2025
State Filing Alert: Montana’s New 1099-DA Requirements for Crypto Brokers

This blog was last updated on February 5, 2025 Reporting digital asset transactions on Form 1099-DA just got a little more complicated. For 2025 transactions, crypto brokers that file Form 1099-DA with the IRS will be required to file the 1099-DA with the State of Montana. This makes Montana the first state to introduce a […]

North America ShipCompliant
January 23, 2025
DtC Wine Shipping in 2024: A Year-in-Review

This blog was last updated on January 28, 2025 The direct-to-consumer (DtC) wine shipping channel faced a storm of challenges in 2024, navigating some of the toughest market conditions in over a decade. As inflation tightened wallets and consumer behaviors shifted, the industry recorded its steepest declines in shipment volume and value since the inception […]