Michigan Updates Guidance on Taxability of Delivery and Installation Charges

by Peter G. Pupke

The Michigan Department of Treasury has issued updated guidance on the taxability of delivery and installation charges in light of 2023 legislation that changed the tax treatment of such charges. (Michigan Revenue Administrative Bulletin No. 2023-16, 09/11/2023; replacing Michigan Revenue Administrative Bulletin No. 2015-17, 09/23/2015.)

2023 legislative changes.

Effective April 26, 2023 (the “effective date”), the General Sales Tax Act (GSTA) and the Use Tax Act (UTA) were amended by Public Acts 20 and 21 of 2023 (the “amendatory acts”). Those amendatory acts changed the tax treatment of delivery charges and installation charges. As explained herein, the tax base under the GSTA and the UTA generally includes delivery and installation charges. But on and after the amendatory acts’ effective date, the charges are excluded from the tax base where the charges are stated separately in the seller’s books or records and on a document, like an invoice, given to the purchaser. Notwithstanding this treatment of delivery charges and installation charges by retailers in general, utilities supplying gas or electricity must include delivery charges such as transmission and distribution charges in the tax base, regardless of how those charges are stated on customers’ bills or in utilities’ books or records.

The amendatory acts also require the Department of Treasury (“Treasury”) to cancel outstanding balances relating to delivery charges and installation charges on notices of intent to assess or on final assessments issued before the effective date and prohibit Treasury from assessing any taxpayer for delivery charges or installation charges for any period before the effective date. The amendatory acts do not require Treasury to issue refunds of tax remitted for periods before the effective date.

Delivery and installation charges defined.

The term “delivery charges” is defined in the GSTA, Mich. Comp. Laws Ann. § 205.51a(e), and the UTA, Mich. Comp. Laws Ann. § 205.92b(e), and means charges by the seller for preparation and delivery to a location designated by the purchaser of tangible personal property or services. Delivery charges include, but are not limited to, transportation, shipping, postage, handling, crating, and packing. That definition is broad. It includes not just expenses for conveying items to the purchaser (i.e., “transportation, shipping, postage”) but also expenses for preparing the items for conveyance (i.e., “handling, crating, and packing”). Delivery charges generally do not include the cost of shipping insurance, i.e., protecting against risks to tangible personal property during transit to the purchaser (although mandatory shipping insurance may be taxable under Mich. Comp. Laws Ann. § 205.51(1)(d)(iii)). Nor do delivery charges include a charge for retrieval.

The statutory definitions of “delivery charges” also state that “delivery charges do not include the charges for delivery of direct mail if the charges are separately stated on an invoice or similar billing document given to the purchaser.” The release does not address that part of the definition of “delivery charges” or anything else about direct mail.

The term “installation charges” is not defined in the GSTA or the UTA, so it is appropriate to consult a dictionary. In the context of “installation charges,” the word “installation” refers to “the act of installing,” i.e., the act of setting something up for use or service. However, when a retailer sells tangible personal property and installs it such that it is consumed, affixed to the real estate, or made a structural part of the real estate, that retailer is a contractor, and amounts charged for installation are not “installation charges” as that term is used in the GSTA or the UTA.

Exempt delivery and installation charges.

While delivery charges and installation charges generally are included in the tax base, they are excluded under certain circumstances. Mich. Comp. Laws Ann. § 205.51(1)(d)(xv), and Mich. Comp. Laws Ann. § 205.92(1)(f)(xv), exclude the following charges: “Delivery or installation charges if such charges are separately stated on the invoice, bill of sale, or similar document provided to the purchaser, and the seller maintains its books and records to show separately the transactions used to determine the tax levied by this act.” Under these provisions delivery charges and installation charges are excluded from the tax base if two conditions are met: (1) those “charges are separately stated on the invoice, bill of sale, or similar document provided to the purchaser” and (2) “the seller maintains its books and records to show separately the transactions used to determine the tax levied by this act.”

Delivery charges or installation charges not associated with the sale of tangible personal property are not taxable under the GSTA or under the UTA.

Taxable delivery and installation charges.

Delivery charges and installation charges not separately listed on documents given to the purchaser or in the seller’s books and records are part of the tax base. Importantly, after the effective date, how the GSTA and the UTA apply to delivery charges and installation charges (as explained previously) no longer depends on when the charges are incurred by the purchaser or when ownership of the property transfers from a seller to a purchaser.

Utility charges for transmission and distribution.

A utility’s charges for transmission and distribution subject to sales tax or use tax. Mich. Comp. Laws Ann. § 205.51(1)(d)(xv), and Mich. Comp. Laws Ann. § 205.92(1)(f)(xv), exclude delivery charges and installation charges if the charges are shown separately on documents given to the purchaser and in the seller’s books and records. But those statutory provisions do not apply “to delivery or installation charges involving or relating to the sale of electricity, natural gas, or artificial gas by a utility.”

Under the GSTA, Mich. Comp. Laws Ann. § 205.51(1)(o), and the UTA, Mich. Comp. Laws Ann. § 205.92(1)(v), the term “utility” includes all suppliers of electricity and natural gas regulated by the Michigan Public Service Commission as well as other suppliers of electricity that are not regulated by the Commission. A utility’s delivery charges and installation charges are subject to the GSTA and the UTA just as they were before the amendatory acts’ passage, regardless of whether the charges are “separately stated” on customer-facing documents or maintained separately in a utility’s books and records. The term “utility” excludes entities, like suppliers of propane gas, that do not supply electricity and that are not regulated by the Michigan Public Service Commission.

Relief to taxpayers.

As previously stated, on nd after the effective date, the GSTA, Mich. Comp. Laws Ann. § 205.51(3), and the UTA, Mich. Comp. Laws Ann. § 205.92(2), require Treasury to cancel outstanding balances relating to delivery charges and installation charges on notices of intent to assess or on final assessments issued before the amendatory acts’ effective date. Balances are “outstanding” even if they are the subject of an informal conference or litigation. The same provisions bar Treasury from issuing new assessments based on delivery charges or installation charges for any period before the effective date.

The above-described treatment of delivery charges and installation charges under the GSTA and the UTA is not retroactive. The amendatory acts thus do not create a new basis for Treasury to refund sales tax or use tax on delivery charges or installation charges related to sales that took place before the effective date.

Notwithstanding the amendments and subject to Mich. Comp. Laws Ann. § 205.73(4), taxpayers may seek refunds relating to sales that took place before the amendatory acts’ effective date if the refunds are supported by the law in effect before the amendatory acts’ enactment.

Tax treatment of a delivery charge for a shipment of taxable items and exempt items.

The GSTA, Mich. Comp. Laws Ann. § 205.51(1)(d)(iv), and the UTA, Mich. Comp. Laws Ann. § 205.92(1)(f)(iv), exclude from the tax base ‘delivery charges allocated to the delivery of exempt property.” If a shipment contains taxable items and exempt items and the delivery charge is not separately stated, the tax base includes the part of the delivery charges attributable to the taxable items. To calculate that part of the delivery charges, the GSTA, Mich. Comp. Laws Ann. § 205.51a(e), and the UTA, Mich. Comp. Laws Ann. § 205.92b(e), offer two methods: allocating by sales price and allocating by weight.

Allocating by sales price: The part of the delivery charge allocated to taxable items is the full delivery charge multiplied by the sales price of the taxable property divided by the sales price of all items in the shipment. That part of the delivery charge thus is included in the tax base.

For example, a for-profit daycare provider places an online order with RetailCo, for pencils, crayons, and graham crackers, paying $10 for delivery. The graham crackers, which cost $25, are food and thus exempt. The pencils, which cost $14, and the crayons, which cost $40, are taxable. RetailCo does not separately itemize its delivery charges; therefore, the charges are taxable. Allocating according to sales price, the delivery charge allocated to taxable items is $10 times $54 divided by $79, or $6.84. The tax base is the price of the taxable goods, $54, plus the amount of shipping allocated to the taxable goods, $6.84. At a rate of 6%, the tax levied on the order is $3.65.

Allocating by weight: The part of the delivery charge allocated to taxable items is the full delivery charge multiplied by the weight of the taxable property divided by the weight of all items in the shipment. That part of the delivery charge thus is included in the tax base.

For example, a for-profit daycare provider places an online order with RetailCo, for pencils, crayons, and graham crackers, paying $10 for delivery. The graham crackers, which cost $25 and weigh 7 pounds, are food and thus exempt. The pencils, which cost $14 and weigh 2 pounds, and the crayons, which cost $40 and weigh 11 pounds, are taxable. RetailCo does not separately itemize its delivery charges; therefore, the charges are taxable. Allocating according to weight, the delivery charge allocated to taxable items is $10 times 13 pounds divided by 20 pounds, or $6.50. The tax base is the price of the taxable goods, $54, plus the amount of shipping allocated to the taxable goods, $6.50. At a rate of 6%, the tax levied on the order is $3.63.