City raced into a 4-0 lead inside the opening 26 minutes thanks to goals from Stevan Jovetic, Scott Sinclair, Jeus Navas and Nigerian youngster Kelechi Iheanacho.
Milan gave themselves hope with a goal back just before the break through former Portsmouth midfielder Sulley Muntari, but man of the match Jovetic grabbed his second and City's fifth goal of the contest early in the second half to condemn Milan to their second defeat in the pre-season tournament.
AC Milan started brightly and former Chelsea defender Alex had a chance to score after just two minutes, but he could not direct his header from Stephan El Shaarawy's corner on target.
City then stunned Milan with two goals in a minute from Jovetic and Sinclair to put them in firm control.
Jovetic latched onto Jesus Navas's fine pass on 12 minutes and he drilled his low shot past Milan keeper Michael Agazzi at his near post.
Sixty seconds later, City doubled their lead as Gael Clichy playing at right-back got down the right and crossed for Sinclair, who took the ball down inside the box before smashing his half-volley high into the net past Agazzi.
City made it 3-0 on 23 minutes when Jovetic picked out Navas at the far post and his acrobatic volley took a wicked deflection off Andrea Poli to wrong-foot the unfortunate Agazzi.
Things got even better for City three minutes later when Nigerian youngster Iheanacho was afforded too much space on the edge of the box and he poked his shot past Agazzi even though the keeper got two hands on the strike.
City goalkeeper Willy Caballero was called into the action on 32 minutes when he made a decent save to keep out El Shaarawy's close-range header.
Milan pulled a goal back three minutes before the break when Alex's header from a corner was poked home at the far post by Sulley Muntari.
The second half was held up for 20 minutes due to severe weather conditions in Pittsburg before the game could resume.
Despite the delay, City soon picked up where they left off as the impressive Jovetic netted his second of the game just before the hour mark when he swapped passes with Aleksandar Kolarov and skilfully lifted the ball over Milan defender Adil Rami before lifting his shot over Agazzi.
City are back in action on Wednesday night when they take on Liverpool at Yankee Stadium in New York, while Milan's final Group B fixture is also against the Reds in Charlotte on Saturday.
Watch Manchester City v Liverpool in the International Champions Cup live on Sky Sports 1HD (kick-off 12am BST on Thursday, July 31).