How Does Michigan Classify Real Property vs. Tangible Personal Property and Why Does It Matter for Sales and Use Tax Purposes?

Michigan recently released a bulletin that lays out its three-factor test for determining whether property should be treated as tangible personal property or real property.

By Tina Chunn, SALT senior manager

In almost every state, it is a general principle that sales and use tax applies to tangible personal property (absent any applicable exemption), but real property is not subject to sales and use tax. However, how do you determine whether an item is classified as tangible personal property or real property? Recently, Michigan issued Revenue Administrative Bulletin 2016-4 that discusses how Michigan determines whether property should be treated as tangible personal property or if it has become a fixture and is treated as real property for sales and use tax purposes.

In Michigan, the sale, use, storage or consumption of tangible personal property is subject to sales and use tax. [1] Tangible personal property is defined as personal property that can be seen, weighed, measured, felt or touched. [2] Conversely, real property is described as land or anything permanently affixed to the land. The term fixture is typically used to describe something that may be tangible personal property as a stand-alone item, but has been affixed to the real property and thus has been converted to being treated as real property. This conversion is where the distinction lies in determining whether the property is subject to sales and use tax.

Michigan does not have a bright-line test to determine if tangible personal property has become a fixture and been converted to real property. Thus, Michigan courts have applied three factors to make this determination: 1) annexation to the real estate, either actual or constructive, 2) adaptation or application to the use or purpose of the real estate and 3) intention to make the article a permanent accession to the real estate. In applying these factors, Michigan weighs each factor in the decision as no one factor would meet the requirement alone.

The first test, annexation to real estate, requires that the tangible personal property be attached to the land (or a structure or appliance attached to the land) which will categorize the property as a fixture of the land. However, even if an object is not physically attached to the land, it may still be classified as a fixture (and thus treated as real property) if its removal would harm the real property or the removed property to where it is not capable of further use. If the property does not meet this test to become a fixture, then it will continue to be treated as tangible personal property despite any intention for permanent use on the land. Fire protection sprinklers, ductwork for a building and built-in cabinets are examples of items that were once personal property but become converted to real property due to the fact that (i) said property is attached to the land or (ii) removing this property would cause harm to the real property or make the item incapable of further use upon its removal.

The second test is the adaptation or application to the use or purpose of the real estate. In this test, the tangible personal property may become a fixture if it functions as a part of the real property. Examples of property meeting this test would include screens that are built to fit the windows of a particular building, drive-up window equipment, vault doors and theater seats bolted to the floor of the theater.

The final test is the intention to make the property a permanent accession to the real estate. This intention can be inferred from the type of article, its purpose and its manner of being affixed. It is important to note that permanence does not require that the property be affixed to last forever. It shall be considered permanent if the intent is for it to remain affixed until it is worn out, it is superseded by a more suitable product or the purpose of the realty is accomplished. Items that would meet this test include greenhouses, central air conditioning systems and built-in appliances, as these items are intended to remain with the property permanently or to be replaced when worn out.

Whether property is classified as tangible personal property or real property for sales and use tax purposes is based on the particular facts and circumstances of each case and the application of the three-factor test (or other criteria as determined by the governing jurisdiction) to those facts. As such, determinations could vary from case to case depending on the particular facts involved. Some examples of items not meeting the test for real property in Michigan include freestanding appliances, air conditioner window units and generators used specifically for equipment only.

This classification of property becomes specifically important when determining whether sales and use tax and/or any available exemptions would apply to an item. Many traditional industrial and agricultural exemptions are limited to the sale of tangible personal property and would not apply to property that becomes or is affixed to real property. Additionally, the property classification may determine whether a taxpayer is treated as a retailer or a contractor. Sales tax is charged to the customer on a retail sale, but contractors will remit a use tax on tangible property that is converted (or affixed to) real property. Finally, it is important to note that the classification of property for sales and use tax purposes should not be relied upon for other taxes which are governed by different laws, legal interpretations and principles that may result in a different treatment for the same property.

As evidenced by this Revenue Administrative Bulletin, the classification of property for sales and use tax as well as other taxes can be quite complex and will require a thorough analysis of the applicable states’ guidance. The SALT Team at Aprio is experienced with classification of property for sales and use tax purposes as well as assessing the impact to the treatment of the taxpayer and any exemptions that may be available. We are happy to assist you in reviewing your transactions to identify proper sales and use tax treatment.

We constantly strive to keep our clients advised of important issues and developments in state and local taxes in order to help them address their specific tax situations. We will continue to monitor these and other significant sales and use tax developments, and we will include any updates in future issues of the Aprio SALT Newsletter.

Contact Tina Chunn, SALT senior manager, at or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This article was featured in the April 2016 SALT Newsletter. To view the newsletter, click here.

[1] MCL 205.52(1); 205.93(1).

[2] MCL 205.51a(q); 205.92(k).

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.