Michigan Sales Tax for Contractors: Real Property Rules and Material Tax

Short answer: Under Michigan sales tax rules for contractors, a real property contractor is the final consumer of materials affixed to real estate and does not charge the customer sales tax on the contract price or installation labor. Instead, you pay Michigan’s flat 6% sales or use tax when buying materials from your supply house. Only when you act as a retailer selling unaffixed tangible personal property do you collect 6% sales tax from the customer.

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That single distinction — affixing materials to real property versus selling tangible personal property at retail — governs every construction, remodeling, plumbing, electrical, and HVAC invoice in Michigan. Unlike neighboring states with county-by-county surtaxes, Michigan imposes a statewide 6% rate with zero local sales tax layers, administered by the Michigan Department of Treasury under the General Sales Tax Act (MCL 205.51 et seq.) and Use Tax Act (MCL 205.91 et seq.). How that compares with surrounding Midwest rules is detailed in Ohio sales tax for contractors and Illinois sales tax for contractors.

How does Michigan tax construction contractors on materials and labor?

Michigan Revenue Administrative Bulletin (RAB) 2016-18 establishes the baseline rule: a contractor who constructs, alters, repairs, or improves real estate for others is the consumer of all tangible personal property used or consumed in performing that contract. Because sales tax applies to retail sales of tangible personal property, and real estate is not tangible personal property, the transfer of affixed materials from the contractor to the property owner is not a retail sale.

In practice, that creates three clear operational consequences for a trade business:

1. You pay 6% tax at the supply house. When you buy lumber, copper pipe, drywall, wire, roofing shingles, or a furnace to install in a customer’s building, your supplier charges you 6% Michigan sales tax.
2. If a supplier outside Michigan does not charge tax, you owe 6% use tax. Ordering specialized fixtures or cabinetry from an out-of-state vendor that ships into Michigan without collecting Michigan tax triggers a 6% consumer use tax liability under MCL 205.93a, reported on your Michigan Sales, Use and Withholding (SUW) return.
3. Your customer invoice carries no sales tax line. Whether you write a lump-sum contract or itemize materials and labor on the estimate, a real property contractor does not collect sales tax from the homeowner or commercial building owner.

Transaction Type in Michigan	Who Pays the 6% Tax?	Tax Line on Customer Invoice?	Governing Michigan Authority
Real property contract (lump-sum or itemized)	Contractor pays supplier at purchase	No — build the 6% material tax into your cost	MCL 205.51; RAB 2016-18
Time-and-materials real property repair	Contractor pays supplier at purchase	No — separately stating materials does not make you a retailer	RAB 2016-18 Part I
Over-the-counter sale of parts with no installation	Customer pays 6% retail sales tax	Yes — 6% on the retail sale price of the part	MCL 205.52
Qualified nonprofit housing or church affixation	Exempt when supported by Form 3520 and Form 3372	No — materials purchased exempt for the specific job	MCL 205.54w; Form 3520

Does itemizing materials and labor change the tax in Michigan?

No. One of the most expensive bookkeeping mistakes a Michigan contractor can make is assuming that a time-and-materials invoice turns the materials line into a taxable retail sale. Under RAB 2016-18, a contractor performing real property construction, alteration, or repair remains the consumer of the materials regardless of whether the contract is lump-sum, cost-plus, or time-and-materials with separately stated material prices.

If you buy $4,000 of electrical panel components, pay $240 in tax at the supply house, and then bill the homeowner $4,800 for materials plus $3,200 for labor, you do not add 6% sales tax to the $4,800 line. Instead, your $240 tax outlay is part of your cost of goods sold, and your material markup covers your acquisition cost plus overhead.

If you mistakenly charge a line item labeled “6% Michigan Sales Tax” on a real property invoice, Michigan law treats that as tax collected in error. Under MCL 205.73, any person who collects tax under color of the General Sales Tax Act — even erroneously on an exempt or non-taxable real property transaction — must remit the full amount collected to the Michigan Department of Treasury unless it has been refunded to the customer. Worse, paying over the erroneously collected tax to Treasury does not automatically credit the use tax you owed as the consumer on your own material purchases.

What is the difference between a contractor and a retailer-contractor?

Some Michigan trade businesses operate a storefront or counter where they sell parts, fixtures, or materials directly to the public without installing them, while also running installation crews in the field. Treasury classifies these businesses as retailer-contractors.

A retailer-contractor holds a Michigan Sales Tax License and maintains inventory that may either be sold at retail over the counter or pulled from stock and affixed to real estate on a contract job:

• When you sell an item over the counter without installation: You act as a retailer, collect 6% Michigan sales tax from the buyer, and remit it on your SUW return.
• When you pull an item from tax-exempt resale inventory to install on a real property job: You convert that item from resale inventory to personal consumption the moment it is committed to the job. You must accrue and remit 6% Michigan use tax on your purchase cost (not your marked-up contract price) for the reporting period in which the material was withdrawn from inventory.

Keeping those two streams separated requires job-level invoice and inventory records. If a state auditor cannot tell from your books which units were sold at retail and which were affixed on service calls, Treasury can assess tax on the unsubstantiated withdrawals.

How do you determine whether an item becomes real property?

Michigan courts and the Department of Treasury apply a three-part fixture test (derived from Tuomy v. General Tire & Rubber Co. and codified in RAB 2016-18) to decide whether installed equipment becomes part of the real estate or remains tangible personal property after installation:

1. Annexation: Is the item actually or constructively attached to the realty, or to something appurtenant to the realty?
2. Adaptation: Is the item adapted or applied to the use or purpose to which that part of the realty is appropriated?
3. Intention: Was the objective intention of the parties to make the article a permanent accession to the freehold?

Under this test, structural framing, roofing, drywall, plumbing pipes, water heaters, central HVAC systems, wired electrical panels, built-in kitchen cabinets, and hardwired lighting fixtures become real property upon installation. By contrast, freestanding plug-in appliances (such as a standard residential refrigerator or countertop microwave), portable space heaters, and unattached furniture remain tangible personal property. If you sell and plug in a freestanding residential appliance, you are making a retail sale of tangible personal property and must collect 6% sales tax on the appliance price; if you also charge for delivery or installation before title passes, Michigan includes delivery and installation charges in the taxable sales price unless specific statutory exclusions apply.

When can a Michigan contractor buy materials tax-free using Form 3520?

Although a contractor normally cannot use a resale exemption to buy materials for a real property job, Michigan law carves out specific exemptions where the property owner’s exempt status flows through to the contractor’s material purchases for that project. Under RAB 2016-18, a contractor may purchase materials exempt from the 6% tax only when the materials will be affixed to and made a structural part of real estate for one of the following qualified projects:

• Nonprofit hospitals and qualified nonprofit housing entities (MCL 205.54w and MCL 205.94s).
• Sanctuaries of houses of religious worship (the exemption is strictly limited to the sanctuary portion used predominantly for regular religious services, not administrative offices or parsonages).
• Industrial processing facilities where the affixed property directly qualifies under the industrial processing exemption (MCL 205.54t), or qualified agricultural production structures (MCL 205.54a).
• Qualified data centers and certain air or water pollution control facilities holding a State Tax Commission exemption certificate.

Notice who is not on that list: general 501(c)(3) charities, public schools, universities, and state or municipal government buildings. In Michigan, if you build or remodel a municipal fire station, a public school gymnasium, or a standard charity office, you still owe 6% tax on the materials you buy and affix. A school district’s or city’s own sales tax exemption applies only when the government entity buys tangible personal property directly from a vendor with its own funds — not when a contractor buys materials to perform a real property construction contract.

To document a valid pass-through exemption at your supply house, two forms must travel together:

1. Form 3520 (Michigan Sales and Use Tax Contractor Eligibility Statement): Completed by the contractor and the qualified property owner, certifying the exact exempt category (nonprofit hospital, church sanctuary, industrial processing, etc.).
2. Form 3372 (Michigan Sales and Use Tax Certificate of Exemption): Completed by the contractor and handed to the building material supplier, with Form 3520 attached as supporting documentation.

What contractor licensing rules apply alongside Michigan tax law?

While the Department of Treasury audits sales and use tax, the Michigan Department of Licensing and Regulatory Affairs (LARA) regulates residential construction and skilled trades under the Occupational Code (MCL 339.2401 et seq.) and Skilled Trades Regulation Act (MCL 339.5101 et seq.):

• Residential Builder and Maintenance & Alteration (M&A) Contractor License: Required for anyone who contracts with a homeowner for residential construction, remodeling, or repair when the combined contract price for labor and materials is $600 or more. First-time applicants must complete 60 hours of approved prelicensure education, pass the state examination, and maintain their license number on all contracts and invoices.
• M&A Letter Codes: Maintenance & Alteration contractors are licensed only for the specific trade crafts stamped on their license (such as Carpentry, Concrete, Excavation, Insulation, Masonry, Painting & Decorating, Roofing, Siding, or Storm Windows). Working outside your letter code on a job of $600 or more is unlicensed activity.
• State-Licensed Mechanical, Electrical, and Plumbing Trades: Electrical contractors, plumbing contractors, and mechanical (HVAC/refrigeration) contractors are licensed statewide through LARA’s Bureau of Construction Codes at any dollar value, with municipal permit and inspection oversight.

How should you structure a Michigan contractor invoice?

Because Michigan prohibits charging a separate sales tax line on real property contracts, your estimate and invoice structure has to recover the 6% material tax inside your job pricing while staying transparent for the customer:

• On a lump-sum residential or commercial contract: State the scope of work, your LARA license number, and the total contract price. Do not show a sales tax line. In your internal job worksheet, calculate material cost as Supplier Subtotal × 1.06 before applying your overhead and profit margin.
• On an itemized or time-and-materials invoice: List your labor hours and your tax-paid material charges (or material allowance), with the tax line set to $0.00 (or omitted) and a clear footer note such as “Real property improvement contract — Michigan 6% material tax paid by contractor at purchase.”
• On a mixed retail + service call: If you sell unaffixed tangible personal property alongside real property repair work, state the retail sale items separately so the 6% sales tax applies only to the retail sale of tangible personal property.

You can test both lump-sum and itemized layouts in the free invoice generator and review the mandatory legal fields in what to include on an invoice.

In Keel, you can save your supply-house receipts (with the 6% tax paid at the counter) directly under the job, send a clean real-property estimate or invoice with no erroneous tax line, and keep Form 3520 exemption records attached to the client file on your iPhone.

Frequently asked questions

Do contractors charge sales tax on labor in Michigan?

No. Michigan does not tax construction, remodeling, or repair labor on real property. Under RAB 2016-18, a real property contractor is the consumer of the materials affixed to the building and pays 6% sales or use tax when buying those materials from the supplier rather than charging tax on the customer’s invoice.

Can I use a resale certificate to buy building materials in Michigan?

Generally no. Because a real property contractor is the legal consumer of the materials affixed to real estate rather than a reseller of tangible personal property, you cannot give your supply house a resale claim for contract jobs. The only exception is if you are a licensed retailer-contractor buying inventory for over-the-counter retail sales, or buying for a qualified exempt project supported by Form 3520.

Do I pay Michigan sales tax on materials for a government or school construction job?

Yes. In Michigan, construction contractors must pay the 6% sales or use tax on materials affixed to real estate for state agencies, municipalities, public schools, and general 501(c)(3) charities. The property owner’s governmental or charitable exemption does not pass through to real property construction contractors unless the project is a qualified nonprofit hospital, qualified nonprofit housing entity, or church sanctuary.

What happens if I accidentally charge sales tax on a Michigan remodeling invoice?

Under MCL 205.73, any sales tax separately stated and collected from a customer on a real property contract is considered tax collected in error and must either be refunded in full to the customer or remitted to the Michigan Department of Treasury. Remitting erroneously collected customer tax does not automatically relieve you of the 6% consumer use tax owed on your own material purchases.

At what dollar amount do I need a contractor license in Michigan?

Michigan requires a Residential Builder or Maintenance and Alteration (M&A) Contractor license from LARA whenever you contract with an owner for residential building, remodeling, or repair work totaling $600 or more including both labor and materials. Electrical, plumbing, and mechanical HVAC work requires a state trade license through the Bureau of Construction Codes regardless of the dollar amount.

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