Michigan Issues Sales & Use Tax Guidance as the U.S. Phases Out the Penny
With the federal government beginning its phase‑out of the penny in 2025, Michigan retailers are already feeling the impact—especially those handling cash transactions. To help businesses navigate this transition, the Michigan Department of Treasury has issued a new Sales and Use Tax Notice explaining how rounding practices interact with state tax rules.
This guidance is essential reading for any Michigan business that accepts cash, including retailers, restaurants, lodging operators, and service providers.
Why the Penny Phase‑Out Matters for Michigan Businesses
As pennies become scarce, many sellers are choosing to round cash totals up or down to the nearest $0.05. While this solves the practical problem of making change, it raises an important question:
Does rounding affect how sales or use tax must be calculated?
Michigan’s answer is clear: No.
Michigan’s Sales & Use Tax Rounding Rules Remain the Same
Under the General Sales Tax Act (GSTA) and Use Tax Act (UTA), sellers must calculate tax using the statutory rounding rules:
Compute tax to the third decimal place
Round up when the third decimal is greater than 4
Round down when the third decimal is 4 or less
These rules—found in MCL 205.73(2) (sales tax) and MCL 205.107 (use tax)—apply before any rounding a seller chooses to do for cash‑handling purposes.
In other words:
Calculate tax normally based on the listed sales price.
Then apply your rounding convention (e.g., to the nearest nickel) to the final amount collected from the customer.
The rounding does not change the seller’s tax liability.
Rounding Up or Down Is Allowed—and Not Considered Unjust Enrichment
Michigan confirms that:
Rounding down is allowed (the seller absorbs the difference).
Rounding up is also allowed, and does not violate the state’s prohibition on unjust enrichment.
This is an important clarification for retailers concerned about collecting slightly more than the exact tax‑inclusive total.
Recordkeeping Still Matters
The Treasury emphasizes that sellers must maintain sufficient records to show the correct tax due. Businesses should review:
Point‑of‑sale systems
Receipts and invoices
Accounting procedures
Documentation of rounding differences
Michigan recommends separately itemizing any additional amounts collected due to rounding.
Examples from the Treasury Notice
The Notice includes several helpful examples:
Example: Retail Sale
Item price: $3.39
Sales tax: $0.20
Total before rounding: $3.59
Seller may charge $3.55 (round down) or $3.60 (round up)
Tax liability remains $0.20
Example: Lodging
Room rate: $79 per night for 2 nights
Use tax: $9.48
Total before rounding: $167.48
Seller may charge $167.45 or $167.50
Tax liability remains $9.48
These examples reinforce that rounding affects only the cash collected, not the tax owed.
What Businesses Operating in Michigan Should Do Now
To stay compliant during the penny phase‑out, businesses should:
1. Review POS and accounting systems
Ensure tax is calculated before rounding.
2. Decide on a rounding policy
Up, down, or nearest nickel—any approach is allowed.
3. Train staff
Cashiers should understand how to apply rounding consistently.
4. Update receipts
Consider itemizing rounding adjustments for transparency.
5. Maintain strong records
Treasury must be able to verify the correct tax was calculated.
Final Thoughts
Michigan’s guidance provides welcome clarity during a nationwide currency transition. While the penny may be disappearing, the state’s sales and use tax rules remain unchanged: calculate tax first, then round the final amount as needed.