What If You Don’t Pay Sales Tax in Michigan? Penalties, Collection Actions, and Other Risks

If you own a business in Michigan, you need to understand how sales taxes work. You have to learn how to collect and remit the taxes to the state government – unfortunately, the rules are confusing, and it’s easy to get behind. 

Paying late can lead to intense penalties, and if you don’t make payment arrangements, you will face involuntary collections, including wage garnishments, asset seizures, loss of your business license, and personal liability for the unpaid tax. To get help with unpaid sales tax, contact our sales tax attorneys for help today.

Key Takeaways 

• Michigan has a base sales tax of 6% with no local taxes.
• You’re required to collect sales tax if you have a physical presence in Michigan. It also applies if you exceed 200 transactions or $100,000 online in sales to Michigan customers in a calendar year.
• Filing late in Michigan attracts a 5% fee penalty for the first two months plus interest.

How does Sales Tax Work in Michigan?

Michigan imposes a state sales tax of 6% and doesn’t allow cities or other localities to levy local sales taxes. However, there are exceptions to this tax rate. For example, the sale of home heating fuels, natural or artificial gas, and electricity is only taxed at 4%.

Businesses with a physical presence in the state must collect and remit sales tax on all taxable sales. If you’re an online seller who sends goods to Michigan customers, you have to remit sales tax to the state if you process 200 or more orders in Michigan or make $100,000 in total sales in the state. 

Due dates vary based on your volume of sales – most businesses file monthly by the 20th of the month following the month of sales. 

Consequences of Failing to Pay Sales Tax in Michigan 

But what if you don’t pay your sales tax obligations? Then, you can face very serious consequences that put you and your business at risk.

Penalties and Interest for Late or Unpaid Sales Taxes

Failing to pay your sales tax on time is subject to a penalty of 5% of the unpaid tax for the first two months. Then, you incur another 5% penalty each month, up to a maximum of 25%. 

Here is a table to give you a clearer idea. If your tax liability was $10,000 and you paid late, here is how much you’d pay:

The penalty is assessed as soon as you’re late. If you pay even a day late, you incur the 5% penalty. That penalty applies until you’re up to 2 months late. If you pay exactly two months after the due date, the penalty is still 5%. If you pay 2 months and one day after the due date, the penalty jumps to 10%. This trend continues until you reach the maximum penalty at 5 months and one day late.

Besides the penalty, your tax liability starts accruing interest from the time the tax is due until you make payment at 1% above the “adjusted prime rate.” This rate is adjusted on July 1 and January 1 and is published on the Treasury’s website in Revenue Administrative Bulletins (RABs). 

Collection Actions

If you fail to pay sales taxes, the Michigan Treasury may take other measures to cover the delinquent taxes, like issuing a tax lien or levy. Here’s what to expect with the Michigan collection process.

• Offsetting refunds or other monies owed to you

If you’re responsible for the unpaid sales taxes, the state can use your income tax refund to offset your tax debt. In addition, the Michigan Treasury can offset any money you receive from the state, such as lottery winnings and payments from vendors, to pay your tax debt.

• Financial institution levies

The department can serve a levy against your financial institutions, including credit unions, banks, and brokerage firms. The institutions will be required to send any funds held to the department up to the total past due tax, penalty, and interest amount. 

• Wage levies 

The department may levy against your wages, bonuses, salaries, commissions, and any other kind of compensation from the employer. A wage garnishment requires your employer to deduct a portion of your income until your debt is paid. 

• Asset seizure

The state can seize business assets for unpaid taxes, including inventory, cash drawers, equipment, and real estate.

Personal Liability 

Regardless of how your business is structured, you can be held personally liable for unpaid sales taxes. In Michigan, even if your company is a Limited Liability Company (LLC) or a corporation, the state can still pursue you for unpaid sales tax if you’re considered a “responsible person” for the tax debt. 

The state considers the people responsible for making returns or payments liable for the sales tax. If it’s determined that the failure to file was willful, your personal assets are at risk. 

Liquor License Revocation or Renewal

If your business holds a liquor license and you’re past due in filing or returning business taxes, the Department of the Treasury can ask the Michigan Liquor Control Commission to revoke or not renew the liquor license. 

It’s illegal to sell any products containing alcohol without a valid liquor license, meaning your business operations would essentially cease to operate if your business relies heavily on selling alcohol. Manufacturers, wholesalers, and brewers can’t legally sell or deliver products to retailers who don’t have a valid liquor license.

Increased audit risk

Failing to pay sales taxes can bring unwanted attention to your business and result in being audited. Sales tax audits are time-consuming, expensive, and disrupt business operations. The state government can also extend the period subject to audit, exposing your business to scrutiny for years. Audits often result in additional penalties if there are discrepancies or unpaid taxes found.

Damaged to Credit Rating

Collection actions like tax liens can negatively impact your business credit rating. This makes it challenging to secure lines of credit and loans, and it may ruin your terms with suppliers and lenders, limiting your operations and ability to grow. 

Legal Consequences

Persistent noncompliance with sales tax can potentially lead to criminal charges like fraud and tax evasion. This is rare, but if the state government has reason to believe you’re committing tax fraud or willingly evading taxes, it can lead to substantial fines and even jail time. The severity of the consequences is based on the tax debt and the perceived intent behind the failure to file returns.

What Notices to Expect From the Michigan Treasury

The state sends you several notices to inform you of the unpaid taxes and the agency’s intention to levy assets. The exact notices you receive vary based on the situation. 

• Letter of Inquiry: The first notice you receive is an inquiry letter, which may ask for clarification, supporting documents, and may also mention a potential tax deficiency. This letter arrives 1-4 weeks after the tax due date. 

• Notice of Intent to Assess: This is to inform you that you owe the Michigan Department of Treasury additional tax. The notice includes an explanation of the debt owed. It also mentions the type of levy the state plans to carry out against you. This comes about 30 days after the inquiry letter. It offers a chance to submit documentation to challenge the claim. 

• Final Bill for Taxes Due (Final assessment): This confirms the tax obligation, which includes penalties and interest. Once you receive the final assessment, the balance is final and it’s legally enforceable. It comes 35 days after the Notice of Intent to Assess.

• Referral to the Collection Service Bureau: After the final assessment, your account is forwarded to the Collection Service Bureau, which deals with delinquent tax collection. 

• Enforcement action: The state may then initiate bank levies, tax liens, wage garnishment, or seizure of personal or real property. This usually happens 1-2 weeks after referral. 

How to Resolve Unpaid Sales Tax in Michigan

The Department of the Treasury (DOT) understands that businesses and individuals can’t always pay all of their tax liability on time or in full. They’ve come up with a variety of options, including payment plans and settlements, to make tax payments possible. 

Michigan Tax Payment Installment Agreements 

For businesses that are in operation, the maximum time frame for an installment agreement is 36 months. In this case, the company needs to provide financial details. 

If the business is no longer operating, the DOT offers a 36-month installment agreement with no requirement to provide financial information. Extended agreements may be possible on a case-by-case basis.

Penalty Abatements

The state may waive your penalties for reasonable cause. For example, if you can prove you failed to file due to a natural disaster, fire, or illness, the DOT can remove the penalties. 

In Michigan, businesses can request an abatement of penalty for a particular period or year after first paying the tax and interest.

Voluntary Disclosure Agreement (VDA)

For businesses that have been non-compliant for too long, the best action sometimes is to come clean. Michigan DOT allows qualifying taxpayers to come forward and report unpaid taxes voluntarily. In exchange for payment of tax, interest, and future compliance, the department will limit the lookback period and may also waive the penalty.

Michigan CNC: Currently Not Collectible

If the DoT assesses the sales tax against you personally, you may qualify for currently not collectible (CNC) status. To qualify, your “allowable” monthly expenses must meet or exceed your monthly income, and you must prove you have no disposable income to pay back taxes. 

For individual taxpayers, allowable living expenses include housing, utilities, medical costs, clothing, food, and other necessary items when possible. The state has detailed guidelines on how much you should be spending in all of these categories.

Michigan Offer in Compromise

As of 2015, the DOT allows taxpayers to submit three different offer types to pay less than what is owed. The three categories are:

• Doubt to Collectability (you can’t pay what you owe)
• Doubt as to Liability ( you don’t believe you owe the tax), and 
• OIC based on Federal Acceptance (you’ve received an accepted federal OIC from the IRS). 

Practical Tips When Dealing with the DOT

State tax issues can be very overwhelming and frustrating, but these tips will help you when dealing with the DOT:

• Respond to the DOT notices: Ignoring the notices is tempting, but it limits your options if it leads to missed deadlines.

• Respond in time: Many deadlines are tied to state statutes and have no room for exceptions, especially if you’re appealing or dealing with collection actions.

• Talk to supervisors: If you feel like you’re not getting anywhere with the DOT employee, request to talk to their supervisor for more insights. 

• Appeal as needed: Use your right to appeal if you think it could help get a more desired outcome. 

• Reach out to a tax professional: A tax attorney can help resolve problems with the DOT. Their experience ensures your payment plans are approved and your appeals work in your favor. 

At W Tax Group, we take over the communication and negotiate the best possible terms on your behalf. 

Frequently Asked Questions (FAQs)

Can I apply for the Michigan tax amnesty program? 

Unfortunately, you can’t in 2025. The “Tax Amnesty Program” in 2011 was for businesses and individuals who failed to report income or those who couldn’t afford to pay taxes. The program doesn’t currently exist. 

Do I have to file Michigan sales tax if I didn’t collect any sales tax?

Yes, if you have a sales tax permit, you’re required to file a zero return each period, even when you don’t collect any sales tax. 

Are groceries taxable in Michigan?

No, groceries for home consumption are exempt from the sales tax under the food exemption. However, pre-packaged meals, pre-made salads, and carry-out restaurants and other prepared foods might be taxed.

Is clothing taxable in Michigan?

Yes, footwear and clothing are taxable in Michigan unless they are specifically exempt.

Need Help With Michigan Sales Taxes?

Understanding Michigan sales taxes can be overwhelming, especially on top of your daily activities. Staying on the right side of the state government ensures you’re not audited or end up having to close your business due to its collection efforts. 

Whether you’re a new business owner who needs help understanding the sales tax system or a seasoned vendor who wants to fix their sales tax mistakes other other business tax problems, we can help. Schedule a free consultation call (pressure-free) with us. We want to help.