Operators in state-legal cannabis industries are confronted with a myriad of tax challenges, as we have previously discussed. As a result, opportunities for tax savings for state-legal cannabis businesses are often few and far between. However, Michigan law provides sales and use tax exemptions that cannabis growers and processors may be eligible to receive that could provide significant tax savings and even the prospect of a refund for previously paid sales or use taxes.
Michigan levies a 6% sales and use tax on the sales of most items of tangible personal property when they are sold to the final consumer. However, there are several exemptions provided for in Michigan law that exclude certain entities or industries from having to pay the sales or use tax. For example, certain nonprofit and religious entities may generally claim an exemption from having to pay the 6% sales and use tax. There are also specific exemptions for agricultural production and for industrial processing.
The agricultural production exemption can be found in Section 4a of the General Sales Tax Act, MCL 205.54a, and in Section 4 of the Use Tax Act, MCL 205.94. The agricultural production exemption provides an exemption from sales or use tax on tangible personal property for those who are engaged in a business enterprise for the tilling, planting, draining, caring for, maintaining, or harvesting of things of the soil or horticultural products. Because cannabis cultivators are engaged in the business of cultivating the cannabis plant—which meets the broad definitions of a “thing of the soil” or a horticultural product, they appear to be eligible to avail themselves of this exemption. It should be noted that both the Sales Tax Act and Use Tax Act exclude greenhouses primarily used for marijuana production from qualifying for this exemption.
Similarly, the General Sales Tax Act and the Use Tax Act both provide similar exemptions for those engaged in industrial processing. Section 4t of the General Sales Tax Act, MCL 205.54t, and Section 4o of the Use Tax Act, MCL 205.94o, both exempt tangible personal property used for industrial processing from the sales or use tax. Most licensed cannabis processors are engaged in industrial processing within the definition of the statutes and appear to meet the statutory requirements for these exemptions.
Indeed, the Michigan Department of Treasury has published Revenue Administrative Bulleting 2020-17 that seems to confirm that these exemptions apply to marijuana growers and processors. In RAB 2020-17, the Michigan Department of Treasury confirmed that state-licensed marijuana businesses may avail themselves of all other exemptions from taxation that are generally available to other taxpayers—and included explicit references to the agricultural and industrial processing exemptions.
Accordingly, Michigan marijuana growers and processors have an opportunity to secure some sales and use tax savings by availing themselves of these exemptions. Importantly, if a marijuana grower or processor has previously paid sales or use tax for tangible personal property that was eligible for an exemption, a refund may be claimed. To claim a refund, the taxpayer must file Michigan Department of Treasury Form 5633, Purchaser Refund Request for a Sales or Use Tax Exemption. The refund claim must be made within four years of the original date of the relevant purchase.