Michigan Computer, Software, and SaaS Tax Guide

Prepared by Sales Tax Helper

Table of Contents

1. Introduction
2. Nexus Considerations
3. General Rules and Compliance Considerations
4. Specific Exemptions
5. Sourcing Rules
6. Audit Considerations
7. Voluntary Disclosure Agreements (VDAs)
8. Conclusion
9. References & Resources

1. Introduction

For software companies, SaaS providers, and technology firms conducting business in Michigan, the state's sales and use tax rules present unique challenges. Unlike some states that treat digital products and cloud-based services uniformly, Michigan distinguishes between prewritten (canned) software, custom software, and various technology services based on their method of delivery and level of customization. Michigan's tax treatment of software and technology-related services depends on multiple factors, including whether software is prewritten or custom, delivered on tangible media or electronically, and whether the hardware qualifies for manufacturing or industrial processing exemptions.

Purpose of This Guide

This guide is designed to help businesses navigate Michigan's sales and use tax rules related to software and technology services. It focuses on:

• Nexus Considerations: Understanding when businesses must register and collect
  Michigan sales tax due to physical or economic presence.
• Taxability of Software & Services: Clarifying the tax treatment of prewritten vs. custom
  software, cloud computing services, and related technology offerings.
• Sourcing Rules: Determining how and where transactions are taxed based on customer
  location and method of software delivery.
• Audit Considerations: Identifying common tax audit triggers and best practices for
  compliance.
• Voluntary Disclosure Agreements (VDAs): Explaining the process for businesses to
  rectify past noncompliance while mitigating penalties and limiting back-tax liability.

Why This Matters for Technology Companies

Michigan's sales tax laws impact software companies, SaaS providers, and technology firms in
multiple ways:

• Complex Sales Tax Obligations: Businesses that sell software or related services to
  Michigan customers have specific collection and remittance responsibilities that vary
  based on product classification. Michigan's 6% sales tax applies to all prewritten software
  regardless of delivery method, creating broader tax obligations than states that exempt
  electronically delivered software.
• Hardware Exemption Complexities: Michigan provides various exemptions for
  computer hardware used in manufacturing or industrial processing, but these require
  precise documentation and proper application.
• Cloud Computing & SaaS Uncertainty: Michigan's Department of Treasury has
  provided some guidance on SaaS taxation, but the area continues to evolve, creating
  compliance challenges for cloud service providers.

Compliance Risks: Failure to correctly assess and collect sales tax can result in
significant penalties, interest, and extended audit exposure, particularly given Michigan's
taxation of prewritten software regardless of delivery method.

This guide will walk through Michigan's specific sales tax rules governing software, SaaS, and
technology-related services while referencing applicable statutes, administrative rules, and
Michigan Department of Treasury guidance. Throughout the guide, official Michigan
Department of Treasury sources will be linked for further reference.

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