Michigan Sales and Use Tax: What Contractors Should Know
For most Michigan contractors improving real property, sales and use tax applies to the materials and other taxable items they use to perform the work. The contractor generally pays that tax as the consumer rather than collecting sales tax from the customer on the construction contract.
That distinction affects purchasing, estimates, and invoicing. It also creates potential problems when a supplier does not charge tax, materials are purchased for resale, or a customer claims the project is exempt.
A review before year-end can help identify unpaid use tax and correct purchasing practices before the same issues carry into next year’s jobs.
Understand when you are the consumer
Michigan generally treats contractors constructing, altering, repairing, or improving real estate for others as the consumers of the materials used in that work. Unless an exemption applies, taxable purchases include building materials, supplies, tools, and equipment.
For example, a contractor purchasing lumber and drywall to renovate an office generally pays tax when purchasing those materials. The tax belongs in the job’s cost estimate.
For a real-property construction contract, the contractor may recover that cost through its pricing. However, it should not separately bill the customer as though it were collecting sales tax on the construction service. Separately listing labor and materials does not, by itself, turn the arrangement into a retail sale.
Identify retail sales separately
A construction business may also make retail sales. When an item is sold to a customer and remains tangible personal property rather than becoming part of the real estate, different tax responsibilities can apply.
A contractor selling building supplies over the counter, for example, is acting as a retailer for those transactions. Taxable retail sales generally require sales tax collection and remittance, along with the appropriate Michigan sales tax license.
Businesses that both sell products and install them should review how each type of transaction is classified. The contract, the property involved, and how it is installed matter. The wording on an invoice alone does not resolve the tax treatment.
Do not overlook purchases without tax
Michigan’s sales and use tax rates are generally 6%. Use tax can become due when taxable property is used, stored, or consumed in Michigan and the required tax was not paid at purchase.
This can occur with online orders, out-of-state vendors, or suppliers that accepted an exemption certificate that did not apply. A vendor’s failure to collect tax does not automatically make the purchase exempt.
For a simplified example, assume a contractor purchases $30,000 of taxable materials for a Michigan project, no tax is collected, and no exemption or credit applies. The contractor would owe $1,800 in Michigan use tax.
Credit may be available for qualifying sales or use tax paid to another state. Review the amount and applicable rules before assuming either that no Michigan tax is due or that the full 6% must be paid again.
Check how resale inventory is used
A resale exemption generally applies to property purchased for resale. It does not broadly exempt materials that a contractor will consume in performing real-property work.
If your business purchases inventory tax-free for resale and later withdraws items for use on a construction job, that change in use can create a use tax obligation. Track withdrawals by item, cost, and project so the accounting team can determine the required tax.
Contractors that manufacture or fabricate items before installing them may face additional rules for calculating the taxable amount. Have those activities reviewed separately rather than assuming the tax is always based only on purchased raw materials.
Verify exemptions before pricing the job
A customer’s tax-exempt status does not automatically make the contractor’s purchases exempt. For example, Michigan’s contractor guidance describes circumstances in which a contractor owes use tax on materials supplied by a tax-exempt school for a real-property project. Having the customer buy the materials is not a universal solution.
Specific exemptions exist for qualifying projects and property. Examples include certain materials for qualified not-for-profit hospitals, qualified not-for-profit housing, and qualifying church sanctuaries. Other exemptions have their own requirements.
Michigan’s current Form 3520, Contractor Eligibility Statement, documents specified facts supplied by the property owner. For covered exemption claims, the contractor provides the completed statement with Form 3372, the sales and use tax exemption certificate, to the supplier. These forms do not relieve the contractor of liability if the purchase does not actually qualify.
Confirm eligibility and documentation before relying on an exemption in a bid. Discovering that materials are taxable after signing a fixed-price contract can reduce the expected margin.
Make the review part of job costing
Keep supplier invoices showing the tax charged, exemption documentation, and records of inventory transferred to jobs. Assign sales and use tax costs to the appropriate projects so reported margins include the full cost of materials.
Build a regular review of untaxed purchases into your accounts payable process. Include company credit cards and online purchases, which may not follow the same approval process as larger supplier orders.
DBC can help review contractor tax classifications, identify potential use tax obligations, and improve the connection between purchasing records and job costs. A consistent process makes it easier to price work accurately and support the tax treatment if questions arise.
This article provides general tax and accounting insights and is not intended as advice specific to your organization or a substitute for personal consultation. We do not provide legal advice. Because every organization’s circumstances are unique, we encourage you to consult with your legal, tax, or accounting advisor regarding your specific situation.
