Are Services Taxable in Michigan: Taxed Categories and Exceptions

In Michigan, services are generally not taxable. The state’s 6% sales and use tax applies to tangible personal property, and services are only pulled in when a statute specifically names them. That flips the assumption you may carry from other states: instead of taxing all services and carving out exemptions, Michigan taxes nothing and then lists what’s in. The list is short, but it covers some everyday categories — telecommunications, short-term lodging, commercial textile laundering, and electricity and gas transmission — plus prewritten software and certain bundled sales where a physical good is really what the customer is buying.¹

The Default Rule: Services Are Exempt

Michigan taxes the sale of tangible personal property at 6%, with a matching 6% use tax on taxable items purchased out of state and brought in.¹ Services fall outside that scope unless a statute pulls them in.

Professional and personal services sit safely outside the taxable circle. Medical care from physicians, surgeons, dentists, and veterinarians is nontaxable. So is legal work, accounting, management consulting, and marketing. Treasury’s administrative rules confirm that practitioners of the healing arts provide nontaxable services, and that repair shops whose materials are incidental or negligible are similarly exempt.² If a customer is paying for expertise rather than a physical product, the transaction usually isn’t taxed.

The Services Michigan Does Tax

The Use Tax Act at MCL 205.93a names the services that get the same 6% treatment as goods. There are four categories.

Telecommunications

Michigan taxes intrastate telecommunications (calls and data that originate and terminate in the state) and interstate telecommunications that either originate or terminate in Michigan and are billed to a Michigan address.² Paging services, pay-per-call 900 services, conference bridging, and nonvoice data services are all covered. Several categories are carved out: toll-free 800 services, coin-operated phone calls, fixed wireless service, prepaid calling services, and international calls.

When a phone bill bundles taxable and nontaxable charges without separating them, the entire amount becomes taxable unless the provider can identify the nontaxable portion from its regular business records.²

Short-Term Lodging

Rooms provided by hotels, motels, inns, tourist homes, resort cabins, rooming houses, and similar accommodations are taxable when rented for one continuous month or less.² Stays longer than a continuous month are exempt. The definition of taxable lodging is deliberately wide and covers any building where the public can obtain accommodations for a fee, including apartment hotels and nudist camps. Hospitals, nursing homes, and facilities licensed for child care are excluded.

Commercial Textile Laundering

This is narrower than “all dry cleaning.” The tax applies to laundering or cleaning of textiles under a sale, rental, or service agreement with a term of at least five days.² It targets commercial linen services — the companies that supply and launder uniforms, tablecloths, and shop towels under ongoing contracts. Restaurants and retail businesses are specifically excluded, and one-off dry cleaning of personal clothes doesn’t hit the five-day threshold.

Electricity and Gas Transmission

Transmission and distribution of electricity is taxable whether you buy from your local utility or a third-party energy provider, as long as the sale is to the end user rather than a reseller.² Residential electricity, natural gas, and home heating fuels are taxed at a reduced 4% rate; commercial and industrial energy use pays the full 6%.¹

Repair Labor, Installation, and Delivery

Repair work is one of the areas where the rules trip businesses up. If parts or materials are incidental to the job — watch repair, jewelry soldering, appliance diagnostics — the whole transaction is a nontaxable service. When a repair involves selling parts along with labor, the parts are taxable as tangible personal property. The labor escapes tax only if you separately itemize it on the invoice.³ Lump-sum billing that combines parts and labor into a single line makes the entire charge taxable.

Installation and delivery charges follow the same logic. Since April 2023, they are not subject to sales or use tax as long as the seller separately itemizes them on the invoice and keeps records showing how the tax was calculated.⁴ Bundle the installation fee into the product price without breaking it out, and the whole amount becomes taxable. Sales of electricity, natural gas, or artificial gas by a utility are an exception — delivery charges on those remain taxable regardless of invoice structure.

Software and Cloud Services

Michigan treats prewritten computer software as tangible personal property, taxable at 6% regardless of how it’s delivered: disc, download, or network.⁵ Custom software developed to a specific buyer’s specifications is exempt. Prewritten software that someone later modifies for a client remains taxable unless the modification charges are separately stated on the invoice.

Software as a Service is more favorable. When a customer accesses software through the cloud without downloading anything, the Michigan Department of Treasury has concluded this is a nontaxable service rather than a sale of tangible property.⁵ Nothing transfers to the customer’s device, so nothing counts as tangible personal property. Pure cloud-based subscriptions, hosted platforms, and browser-accessed tools currently fall outside Michigan’s sales tax.

Transactions that mix a downloaded app with cloud access get analyzed under the true-object test described below. Legislators have periodically discussed expanding the tax to more digital transactions and professional services, but as of 2026 those proposals have not been enacted.

Mixed Transactions and the True-Object Test

Many service transactions involve some physical item changing hands. A graphic designer delivers files. An engineer hands over printed plans. A consultant provides a bound report. Michigan resolves these situations by asking what the buyer was really after.

If the customer is paying for the service and the physical item is just the vehicle for delivering it, the transaction is a nontaxable service. The Use Tax Act’s bundled-transaction rules say so: when tangible personal property is essential to a service and provided exclusively in connection with it, and the true object of the purchase is the service, the whole transaction is exempt.² A client hiring an attorney isn’t buying paper; they’re buying legal advice that happens to arrive on paper.

The analysis flips when the tangible property is the main attraction. Hire someone to build custom furniture and deliver it, and the service is facilitating the sale of a physical product. The full price, labor included, is generally taxable. The line can be blurry, and invoice structure matters. Separately itemizing service charges from material costs gives both sides the cleanest tax treatment.

Out-of-State Sellers and Michigan Buyers

You don’t need a Michigan office or employee to owe the state sales tax. Michigan’s economic nexus rules, in effect since October 2018, require out-of-state sellers to register and collect tax if they meet either of two thresholds in the prior calendar year: more than $100,000 in gross sales sourced to Michigan, or more than 200 separate transactions with Michigan buyers.⁶ Both taxable and nontaxable sales count toward those thresholds, which surprises some service businesses that assume exempt sales don’t matter for nexus purposes.

Physical presence still creates nexus the traditional way. Employees, agents, subcontractors, or representatives performing services in Michigan for any length of time can trigger a collection obligation, as can storing inventory, maintaining an office, or owning property in the state.⁶

What It Costs to Get It Wrong

Michigan’s penalty structure has two tiers, and the difference between them turns on your state of mind.

Negligence with no intent to defraud: a penalty of 10% of the deficiency or $10, whichever is greater, plus interest. You can request a waiver if you show the mistake was due to reasonable cause.⁷
Intentional disregard of the law, still without fraud: a penalty of 25% of the deficiency or $25, whichever is greater, plus interest. This applies when a business knowingly ignores the rules without trying to commit fraud.⁷

Interest accrues at a monthly rate equal to one percentage point above the adjusted prime rate, divided by 12. The adjusted prime rate is recalculated twice a year based on the average prime rate charged by at least three commercial banks during the preceding six-month period.⁷ Interest runs from the original due date until the tax is paid.

Treasury generally has four years to audit your returns and assess additional tax. If you never filed a return for a period, there’s no time limit — the state can assess at any point.⁸ Keep your records for at least four years after filing.

1
State of Michigan Treasury. Sales and Use Taxes
2
Michigan Legislature. Michigan Compiled Laws 205.93a – Use Tax Act
3
Michigan Legislature. Michigan Compiled Laws 205.92 – Use Tax Act
4
State of Michigan. Delivery and Installation Charges
5
State of Michigan. Sales Tax Treatment of Certain Transactions Involving Software
6
State of Michigan Treasury. Nexus
7
Michigan Legislature. Michigan Compiled Laws 205.23 – Revenue Division of Department of Treasury
8
State of Michigan. Statute of Limitations