If you are a small business owner who sells products or services in Michigan, you may be wondering how to handle Michigan sales tax exemption. Sales tax is a tax that is added to the price of certain goods and services and collected by the seller from the buyer.

The seller then remits the tax to the state or local government. Sales tax rates vary by state and locality, and some items may be exempt from sales tax depending on the nature of the product or service or the status of the buyer or seller.

In this blog post, we will explain what sales tax exemption means, how much sales tax is in Michigan, what the rules are for claiming sales tax exemption, and what types of sales tax exemptions are available in Michigan. We hope this information will help you comply with the sales tax laws and regulations in Michigan and avoid any penalties or interest.

Read How Sales Tax for Businesses Work in the US [2023]

What is Michigan sales tax exemption?

Sales tax exemption is a situation where no sales tax is charged or paid on a transaction. This can happen for two reasons: either the item or service being sold is not subject to sales tax, or the buyer or seller qualifies for an exemption based on their status or use of the item or service.

For example, in Michigan, groceries and prescription drugs are not subject to sales tax, so they are exempt by default. On the other hand, clothing and furniture are subject to sales tax, but they may be exempt if the buyer or seller meets certain criteria, such as being a nonprofit organization, a government entity, or a farmer.

How much is Michigan sales tax?

The base state sales tax rate in Michigan is 6%. This means that most sales of tangible personal property and certain services are taxed at 6% in Michigan. However, some localities may impose an additional sales tax on top of the state rate, resulting in a higher total sales tax rate. For example, the city of Detroit imposes a 2.4% sales tax on restaurant meals and beverages, making the total sales tax rate 8.4% for those items.

To find out the exact sales tax rate for your location, you can use our sales tax calculator. Just enter your state, county, and city, and the tool will show you the combined state and local sales tax rate for your area.

Read Sales Tax Rate (Detailed Guide for Online Businesses)

Michigan sales tax exemption rules

To claim a sales tax exemption in Michigan, you need to follow certain rules and procedures. 

1. First, you need to determine if the item or service you are selling or buying is eligible for a sales tax exemption. 
2. Second, you need to provide a valid claim of exemption to the seller or vendor. This means that you need to fill out and sign a Michigan Sales and Use Tax Certificate of Exemption (Form 3372) and give it to the seller or vendor. The form requires you to indicate the type of purchase, the items covered by the certificate, the basis for the exemption claim, and your business name and type. You also need to provide your sales tax license number, use tax registration number, or direct pay permit number, if applicable.
3. Third, you need to keep a copy of the certificate of exemption and any supporting documents for your records. You may need to show them to the Michigan Department of Treasury or the seller or vendor in case of an audit or a dispute.

List of sales tax exempt items and services in Michigan (Non taxable)

The following items and services are generally exempt from sales tax in Michigan, unless otherwise specified:

1. Groceries: Food items that are sold for human consumption off the premises where they are sold are exempt from sales tax. This includes food sold by grocery stores, convenience stores, vending machines, and farmers’ markets. However, prepared food, such as restaurant meals, catering, and bakery items, is taxable. Also, candy and soft drinks are taxable, even if sold as groceries.
2. Prescription drugs: Drugs that are prescribed by a licensed practitioner and dispensed by a licensed pharmacist are exempt from sales tax. This includes prescription medicines, insulin, oxygen, and prosthetic devices. However, over-the-counter drugs, such as aspirin, cough syrup, and vitamins, are taxable unless prescribed by a doctor.
3. Medical services: Services that are performed by a licensed practitioner for the purpose of diagnosis, cure, mitigation, treatment, or prevention of disease or injury are exempt from sales tax. This includes services provided by doctors, dentists, nurses, chiropractors, physical therapists, and psychologists. However, cosmetic services, such as haircuts, manicures, and massages, are taxable unless they are medically necessary.
4. Newspapers: Newspapers that are printed and distributed at least once a week are exempt from sales tax. This includes newspapers that are sold by subscription, by single copy, or by vending machine. However, magazines, periodicals, and books are taxable unless they are sold by a nonprofit organization or a school.
5. Occasional sales: Sales of tangible personal property by a person who is not engaged in the business of selling such property are exempt from sales tax. This includes sales of personal or household items, such as furniture, clothing, or appliances, by individuals, estates, or nonprofit organizations. However, sales of motor vehicles, watercraft, aircraft, or trailers are taxable unless they are sold to a relative of the seller.
6. Optional maintenance contracts: Contracts that provide for the repair or maintenance of tangible personal property are exempt from sales tax if they are optional and separately stated from the sale of the property. This includes contracts that cover labor, parts, or materials for the repair or maintenance of items such as appliances, computers, or vehicles. However, contracts that are mandatory or included in the sale price of the property are taxable, as well as, contracts that provide for the replacement of the property.
7. Transportation services: Services that involve the transportation of persons or property for hire are exempt from sales tax. This includes services provided by taxis, buses, trains, airplanes, or limousines. However, services that involve the rental or lease of tangible personal property, such as vehicles, are taxable unless they are for lease, as explained earlier.
8. Custom software: Software that is designed and developed to the specifications of a single purchaser is exempt from sales tax, regardless of the method of delivery. This includes software that is delivered on tangible media, such as CDs or flash drives, or downloaded from the internet. However, canned or prewritten software that is not designed for a specific purchase is taxable unless it is modified to the extent that it becomes custom software.

List of sales taxable items and services in Michigan

The following items and services are generally subject to sales tax in Michigan, unless otherwise specified:

1. Clothing: Clothing and footwear that are worn on the human body are subject to sales tax. This includes clothing and footwear that are sold by retail stores, online merchants, or mail order catalogs. However, clothing and footwear that are sold by a nonprofit organization or a school are exempt from sales tax, as are clothing and footwear that are used as protective equipment or as part of a uniform.
2. Furniture: Furniture and fixtures that are used in a home or office are subject to sales tax. This includes furniture and fixtures that are sold by furniture stores, department stores, or online merchants. However, furniture and fixtures that are sold by a nonprofit organization or a school are exempt from sales tax, as are furniture and fixtures that are used in industrial processing or agricultural production.
3. Motor vehicles: Motor vehicles that are used for transportation on public roads are subject to sales tax. This includes cars, trucks, motorcycles, and trailers that are sold by dealers, private parties, or auctions. However, motor vehicles that are sold to a relative of the seller are exempt from sales tax, as are motor vehicles that are used in interstate commerce by an authorized motor carrier.
4. Tangible media property: Tangible personal property that is used to store, deliver, or display information or entertainment is subject to sales tax. This includes books, magazines, periodicals, CDs, DVDs, video games, and software that are sold on tangible media. However, newspapers that are printed and distributed at least once a week are exempt from sales tax, as is software that is custom-made for a specific purchaser.
5. Prepared food: Food and beverages that are sold for immediate consumption on or off the premises where they are sold are subject to sales tax. This includes food and beverages that are sold by restaurants, caterers, bakeries, bars, and vending machines. However, groceries that are sold for human consumption off the premises where they are sold are exempt from sales tax, as are food and beverages that are sold by a nonprofit organization or a school.
6. Over-the-counter drugs: Drugs that are not prescribed by a licensed practitioner and are sold over the counter are subject to sales tax. This includes medicines, vitamins, supplements, and remedies that are sold by pharmacies, grocery stores, or online merchants. However, prescription drugs that are prescribed by a licensed practitioner and dispensed by a licensed pharmacist are exempt from sales tax, as are insulin and oxygen.
7. Cosmetic services: Services that are performed for the purpose of enhancing the appearance of a person are subject to sales tax. This includes services provided by hair salons, nail salons, spas, and massage parlors. However, medical services that are performed by a licensed practitioner for the purpose of diagnosis, cure, mitigation, treatment, or prevention of disease or injury are exempt from sales tax, as well as services that are medically necessary.
8. Canned or prewritten software: Software that is not designed and developed to the specifications of a single purchaser is subject to sales tax, regardless of the method of delivery. This includes software that is sold on tangible media, such as CDs or flash drives, or downloaded from the internet. However, custom software that is designed and developed to the specifications of a single purchaser is exempt from sales tax, as is software that is modified to the extent that it becomes custom software.

Types of sales tax exemptions in Michigan (what and who qualifies for sales tax exemption in Michigan)

There are many types of sales tax exemptions in Michigan, depending on the nature of the item or service or the status of the buyer or seller. Here are some of the most common ones:

1. For lease: If you lease or rent tangible personal property to someone else, you can elect to pay sales tax based on the rental receipts instead of paying sales tax when you buy the property. This way, you can pass the sales tax to the lessee or renter, who may be able to claim an exemption.
2. For resale at retail: If you buy tangible personal property or services for the purpose of reselling them at retail, you can claim an exemption from sales tax. You need to have a valid sales tax license and provide it to the seller or vendor.
3. Direct pay: If you are authorized by the Michigan Department of Treasury to pay use tax directly to the state, instead of paying sales tax to the seller or vendor, you can claim an exemption from sales tax. You need to have a valid direct pay permit and provide it to the seller or vendor.
4. Agricultural production: If you buy tangible personal property or services for use in agricultural production, such as tilling, planting, harvesting, or raising livestock, you can claim an exemption from sales tax. You need to indicate the percentage of use for agricultural production on the certificate of exemption.
5. Government entity: If you are a government entity, such as the United States, the state of Michigan, or a political subdivision, you can claim an exemption from sales tax. You need to indicate the type of organization on the certificate of exemption.
6. Nonprofit school, hospital, church, or house of religious worship: If you are a nonprofit school, hospital, church, or house of religious worship, you can claim an exemption from sales tax. You need to indicate the type of organization on the certificate of exemption.
7. Contractor: If you are a contractor who buys tangible personal property or services for use in a construction contract with a qualified exempt entity, such as a government entity or a nonprofit organization, you can claim an exemption from sales tax. You need to provide a Michigan Sales and Use Tax Contractor Eligibility Statement (Form 3520) to the seller or vendor.
8. For resale at wholesale: If you buy tangible personal property or services for the purpose of reselling them at wholesale, you can claim an exemption from sales tax. You do not need to provide a sales tax license number, but you do need to indicate that you are reselling at wholesale on the certificate of exemption.
9. Industrial processing: If you buy tangible personal property or services for use in industrial processing, such as manufacturing, assembling, refining, or processing products for sale, you can claim an exemption from sales tax. You need to indicate the percentage of use for industrial processing on the certificate of exemption.
10. Nonprofit Internal Revenue Code Section 501©(3), 501©(4), or 501©(19) exempt organization: If you are a nonprofit organization that is exempt from federal income tax under Internal Revenue Code Section 501©(3), 501©(4), or 501©(19), you can claim an exemption from sales tax. You need to provide a copy of your IRS determination letter to the seller or vendor.
11. Nonprofit organization with an authorized letter issued by the Michigan Department of Treasury: If you are a nonprofit organization that has an authorized letter issued by the Michigan Department of Treasury before July 17, 1998 (sales tax) or June 13, 1994 (use tax), you can claim an exemption from sales tax. You need to provide a copy of the letter to the seller or vendor.
12. Rolling stock purchased by an interstate motor carrier: If you are an interstate motor carrier who buys rolling stock, such as trucks, trailers, or buses, for use in interstate commerce, you can claim an exemption from sales tax. You need to indicate that you are using the rolling stock in interstate commerce on the certificate of exemption.

How to apply for sales tax exemption in Michigan (step by step approach)

If you want to apply for a sales tax exemption in Michigan, you need to follow these steps:

1. Determine if the item or service you are selling or buying is eligible for a sales tax exemption. You can refer to the list of exempt and taxable items and services in Michigan that we provided earlier.
   
2. Download the Michigan Sales and Use Tax Certificate of Exemption (Form 3372). You can get this from the Michigan Department of Treasury website or request a paper copy by calling 517-636-6925.
   
3. Fill out the form according to the instructions on the form. You need to provide the seller’s name and address, the items covered by the certificate, the basis for the exemption claim, and your business name and type. 
   You also need to provide your sales tax license number, use tax registration number, or direct pay permit number, if applicable. You can refer to our tips on how to fill out the form that we provided earlier.
   
4. Sign and date the form, and give the original form to the seller or vendor. Keep a copy of the form and any supporting documents for your records. You may need to show them to the Michigan Department of Treasury or the seller or vendor in case of an audit or a dispute.

How to fill out Michigan sales tax exemption form?

To fill out the Michigan sales tax exemption form, you need to follow the instructions on the form. Here are some tips to help you complete the form correctly:

1. Use a black or blue ink pen and print clearly.
2. Fill in all the required fields and check the appropriate boxes.
3. Provide the seller’s name and address in Section 1.
4. Specify the items covered by the certificate in Section 2. You can check the box for “All items purchased” or list the specific items.
5. Select the basis for the exemption claim in Section 3. You may need to provide a number or a document to support your claim, depending on the type of exemption.
6. Sign and date the form in Section 4. Provide your business name and type of business.
7. Give the original form to the seller or vendor, and keep a copy for your records.

How to get Michigan sales and use tax certificate of exemption (step by step approach)

If you want to get a Michigan sales and use tax certificate of exemption, you need to follow these steps:

1. Download the Michigan Sales and Use Tax Certificate of Exemption (Form 3372) from the Michigan Department of Treasury website, or request a paper copy by calling 517-636-6925.
2. Print the form and fill it out according to the instructions on the form. You need to provide the seller’s name and address, the items covered by the certificate, the basis for the exemption claim, and your business name and type. 

You also need to provide your sales tax license number, use tax registration number, or direct pay permit number, if applicable.

3. Sign and date the form, and keep the original form for your records. You do not need to send the form to the Michigan Department of Treasury unless they request it.
4. Give a copy of the form to the seller or vendor when you make a purchase that qualifies for a sales tax exemption. The seller or vendor must keep a copy of the form for their records and report the exempt sales on their sales tax return.

Download a copy of Michigan sales tax exemption form

To download a copy of the Michigan sales tax exemption form, you can visit the Michigan Department of Treasury website and look for the Michigan Sales and Use Tax Certificate of Exemption (Form 3372). You can also click on this link to access the form directly. You can print the form and fill it out according to the instructions on the form.

Where to send Michigan sales tax exemption

You do not need to send the Michigan sales tax exemption form to the Michigan Department of Treasury, unless they request it. You only need to give the original form to the seller or vendor when you make a purchase that qualifies for a sales tax exemption. The seller or vendor must keep a copy of the form for their records and report the exempt sales on their sales tax return.

Michigan Tax Exempt Codes

Michigan tax exempt codes are used to indicate the type of business or organization that is claiming an exemption from sales or use tax. The codes are listed on page 2 of the Michigan sales tax exemption form.

Read list of Michigan tax exempt codes

Michigan Sales Tax Exemption Number

Michigan does not issue tax-exempt numbers, and a seller may not rely on a number for the substitution of an exemption certificate. Sellers should not accept a number as evidence of exemption from sales or use tax. A purchaser who claims exemption for “resale at retail” or “for lease” must provide the seller with an exemption certificate and their sales tax license number or use tax registration number.

Read How to Calculate Sales Tax for Small Businesses (Simple Guide for Online and Remote Seller)

Relevant Items Required for Michigan Sales and Use Tax Exemption

To claim an exemption from Michigan sales or use tax, a purchaser must provide the following items to the seller or vendor:

1. A completed and signed Michigan Sales and Use Tax Certificate of Exemption (Form 3372) or the same information in another format.
2. The type of purchase (one-time or blanket), the items covered by the certificate, and the basis for the exemption claim.
3. The sales tax license number, use tax registration number, or direct pay permit number, if applicable.
4. Any supporting documents, such as a copy of the IRS determination letter, the Michigan Department of Treasury authorized letter, or the Michigan Sales and Use Tax Contractor Eligibility Statement (Form 3520), if applicable.

Read Sales Tax Exemption (The Dos & Don’ts)
Read Sales Tax Audit (Triggers, Penalties, Mistakes, Process, and More)

Michigan Sales Tax License

A Michigan sales tax license is required for individuals or businesses that sell tangible personal property to the final consumer in Michigan. The sales tax license allows the seller to collect and remit the 6% sales tax on their taxable retail sales to the State of Michigan. 

The sales tax license is valid from January to December of the current calendar year and must be renewed annually. To apply for a sales tax license, a seller must register with the Michigan Department of Treasury online or by mail and provide the necessary information and documents.

Michigan Sales Tax Exemption FAQs

What is exempt from sales tax in Michigan?

Michigan exempts certain items and transactions from sales tax, such as:

• Food and prescription drugs
• Machinery and equipment used in industrial processing or agriculture
• Rolling stock purchased or leased by an interstate motor carrier
• Sales to the federal, state, or local government, or to nonprofit organizations
• Sales of vehicles to a relative of the seller
• Occasional or isolated sales by individuals or businesses not engaged in retail sales

How do I avoid paying sales tax on a car in Michigan?

• Buying or leasing a car in a state that does not have sales tax, such as Alaska, Delaware, Montana, New Hampshire, or Oregon, and registering it in that state. However, you must have a legitimate residence or business in that state to do so.
• Buying a car from a private seller who is not a dealer and claiming the exemption for occasional or isolated sales. However, you must make sure that the seller is not habitually engaged in selling cars and that the sale is not part of a business activity.
• Trading in your old car when buying a new one from a dealer and deducting the trade-in value from the purchase price. However, you must make sure that the trade-in vehicle is titled in your name and that the dealer is authorized to collect sales tax.

What is an occasional sales tax exemption?

An occasional sales tax exemption is an exemption that applies to sales of tangible personal property that are not made in the ordinary course of the seller’s business or activities. For example, if you sell your old furniture or clothes at a garage sale, you do not have to collect or pay sales tax on those sales. However, if you sell items that you bought for resale or that you regularly sell as part of your business, you cannot claim this exemption.

Can I claim an exemption for out-of-state purchases?

Yes, if you meet certain criteria, such as:

• You are a nonresident of Michigan, and you purchase an item in another state that does not have sales tax or has a lower sales tax rate than Michigan. However, you must not bring the item into Michigan or use it in Michigan within 90 days of the purchase.
• You are a resident of Michigan, and you purchase an item in another state that has sales tax, and you pay the sales tax to that state. However, you must not owe any use tax to Michigan on the same item, which may happen if the sales tax rate in the other state is lower than Michigan’s 6% rate.
• You are a resident of Michigan, and you purchase an item in another state that is exempt from sales tax in that state and also in Michigan. However, you must make sure that the item qualifies for the same exemption in both states.

Read What is Sales Tax Compliance [Tips, Issues & Requirements to Know]

Conclusion

Sales tax exemption is a way to save money on your purchases or sales of goods or services in Michigan, if you qualify for it. However, you have to follow the rules and requirements for sales tax exemption and provide a valid claim of exemption to the seller. You also have to keep records of your exemption claims and be prepared to prove them in case of an audit or a dispute. 

If you need help with sales tax exemption or any other aspect of sales tax management, you can use AtomicTax sales tax management software. Our software can help you register, collect, file, process, monitor Nexus, and manage your sales tax in Michigan and other states. You can sign up for a free trial with ATomicTax and see how we can simplify your sales tax compliance.