In most cases, no. In Michigan, SaaS (software as a service) is typically not subject to sales tax unless it includes a downloadable component.
For taxable sales, Michigan applies a uniform 6% sales tax rate statewide, and businesses that sell taxable items or services should understand Michigan’s nexus rules, which determine tax obligations in the state.
Economic nexus is established if a business reaches $100,000 in sales or completes 200 transactions annually with Michigan customers. Physical nexus is established by having a physical presence, such as offices, inventory, or employees, in the state.
Failing to understand these rules can lead to unexpected tax liabilities or penalties, which is why staying informed helps businesses manage compliance effectively and avoid complications down the line.
What does taxability mean for SaaS?
SaaS is software that is accessed over the internet, often via a subscription model, as opposed to being purchased by a customer and then downloaded onto their device. The fact that SaaS is both a product and a service can make it hard to classify for tax purposes.
So states approach SaaS taxability in various ways; some states view SaaS as a service and exempt it from sales tax, while others classify it as prewritten software or tangible property, which may be subject to taxation.
The method of delivery often plays a role in these decisions—for example, downloadable components might shift SaaS transactions into taxable categories. Michigan treats SaaS as non-taxable unless it involves a downloadable element.
SaaS taxation rules in Michigan
In general, Michigan does not tax SaaS unless it includes a downloadable component. This is in line with the state’s approach to prewritten computer software, which is taxable when delivered electronically.
SaaS transactions that involve only remote access without any code downloaded to a user’s device are typically exempt. These rules apply to both B2C (business-to-consumer) and B2B (business-to-business) transactions, with taxability depending on the presence of a downloadable component.
Nexus: How it works in Michigan
Michigan requires businesses with a significant presence in the state to collect and remit sales tax. These thresholds apply to all taxable goods and services, including any SaaS transactions that meet the taxability criteria.
- Physical nexus: This is established if a business has a tangible presence in the state, such as offices, employees, or equipment.
- Economic nexus: This is established if a business exceeds $100,000 in annual sales or completes 200 or more transactions with Michigan customers in a calendar year.
Exceptions or exemptions
There are some exemptions for specific types of software or transactions. Custom software designed exclusively for a single user is exempt, provided that any modifications are itemized on invoices.
Sales to nonprofit and educational organizations may also qualify for exemptions under Michigan law, depending on how the software is used.
What about other digital goods?
Michigan taxes certain digital goods, including prewritten software, gaming products, and any related downloadable content.
However, intangible digital products like e-books, streamed movies or music, and NFTs are not taxed. The distinctions that apply in these cases depend on how the product is delivered and classified under state law.
Example: How local tax rates may apply
Let’s look at a scenario where a SaaS company based outside Michigan is providing project management software to a local Michigan business.
If the service is entirely cloud-based and accessed through a web browser without any downloadable components, the transaction would not be subject to Michigan sales tax.
Now consider a scenario where the SaaS includes a downloadable desktop application that users install to access certain features. In this case, the transaction may be considered taxable as prewritten software under Michigan law if the SaaS provider has nexus in the state (a physical presence, $100,000 in annual sales, or 200 transactions within the state in a calendar year).
Michigan applies a uniform 6% statewide tax rate, with no additional county or city sales taxes applied, which simplifies compliance (some states have additional local rates). Businesses can focus on the statewide rules without worrying about differing local tax obligations.
Navigating compliance for SaaS companies
While only applicable if the SaaS includes a downloadable component, accurate tax collection and remittance are essential for SaaS businesses to operate smoothly in Michigan.
Any missteps in handling sales tax can lead to penalties, interest, and other unnecessary financial burdens.
- Register for a sales tax permit: To begin, you must first visit the Michigan Department of Treasury website and register for a sales tax license. Here, you will provide details about your business, including nexus type, business structure, and taxable goods or services.
- Identify taxable transactions: Confirm which products or services are taxable under Michigan law. For SaaS, determine whether a downloadable component is present and also classify any other taxable goods, such as digital products or prewritten software. Then charge the 6% Michigan sales tax for taxable transactions at the point of sale.
- File sales tax returns: Log in to the Michigan Treasury Online (MTO) system to file your sales tax return. Companies are required to file monthly, quarterly, or annually, depending on their sales volume.
- Remit collected sales tax: Submit the sales tax you’ve collected during the reporting period to the Michigan Department of Treasury. You can easily pay your sales taxes online through the MTO system or another approved payment method.
For companies that have failed to collect tax on past transactions, Michigan offers voluntary disclosure agreements, or VDAs. These agreements allow businesses to settle unpaid taxes while minimizing penalties. Businesses no longer meeting nexus requirements can deregister or close their business, to avoid unnecessary fillings.
To help further simplify compliance efforts, SaaS companies can take advantage of tools like Numeral, which automates tax calculations, filing, and remittance—thereby reducing the chance of errors. These kinds of helpful solutions save time and help businesses focus on growth while staying compliant with Michigan’s tax laws.
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Additional resources for staying compliant
Staying informed about Michigan’s tax laws is essential for compliance. The Michigan Department of Treasury provides resources for understanding tax rates, registering for a sales tax permit, and filing returns.
For more personalized help and assistance, call the Michigan Treasury Business Tax Line at 1-(517)-636-6925. Businesses can also explore third-party resources and tax consultants for additional help.
Michigan SaaS taxes made clear
In the Great Lake State, SaaS is usually not taxable unless it includes a downloadable component. Staying informed about Michigan's shifting tax rules and regularly reviewing changes can help businesses avoid potential compliance issues later on.
For companies looking to streamline their tax management, Numeral is a practical solution that greatly simplifies the process. Consider reaching out to Numeral for a free tax analysis, or set up a demo today—it’s a great way to reduce administrative burdens and focus on growing your business—all while staying compliant.
