In reaction to a budget crisis that threatened to shut down the state government, the Michigan legislature passed an amendment to the Use Tax Act, which would expand the tax to various categories of services on 12/1/07.
Status / Implementation
The 6% “service tax” met immediate opposition. In fact, two bills were introduced in the Senate that would delay and / or repeal the amendment to the Use Tax Act that created the service tax. However, it was a House Bill (HB5408) that was eventually enacted because it included an alternative means of financing. It was approved by both the Senate and the House on December 1, 2007, just a few hours after the service tax amendment went into effect. Governor Granholm signed the bill on Tuesday, December 4, and was assigned Public Law 145 of 2007.
PA 145’07 retroactively repealed the service tax amendment in favor of the amendments to the Business Tax Law, among which is the imposition of a business surcharge that will take effect on January 1, 2008.
SB 845 was passed by both houses on December 4, and provides for refunds to anyone who had the service imposed on it on Saturday, December 1, 2007.
Fundamental reason
Why a service tax? Mainly because extending the sales tax to services provides a new and expandable source of income. It also better reflects the economy in Michigan, which is shifting from an auto-based economy to one based on services / information.
Approaches in other states
Arguably, all states have a “service” tax, including Michigan ( See 1996 Sales Services Tax Update, p. 12 ), but not many have a comprehensive service tax scheme.
Of the states that do, most express it in different terms and apply it by a different method. According to Wikipedia’s list of sales taxes in the United States, the most notorious is New Mexico with a 7% state gross income tax on businesses. Ohio calls its own a business tax. Several other states, including Hawaii, Maine, Washington state, and Texas, also associate the service tax with business receipts.
Of the states that apply the service tax as an extension of the sales tax, it has been an unpopular move. In fact, Florida repealed its 1987 service tax within the year. Of course, opposition to a services tax often depends on how gradually it is applied, whether services are taxed fairly across the board, and ease of reporting.
Note: For the most part, all states avoid taxing professional services.
History in Michigan
Michigan enacted the Use Tax Act in 1937 to close a hole in the loop with respect to products purchased in other states. According to a 2003 Michigan Sales and Use Tax Report, the use tax was extended through amendments over the years. Like most states, the effort to capture more and more revenue eventually blurred the line between products and services. For example, telephone services, hotel rentals, and construction-related services have been subject to Michigan use tax for years.
Previous proposals
The idea of enacting a bona fide service tax has been a recurring one in our state in recent years. In 2003, the Cedar Coalition Network, of which the Michigan Education Association is a member, considered a much more modest 1% service tax in exchange for a 1% reduction in sales tax.
The issue was officially addressed earlier this year after multiple reports from Standard & Poor lowered Michigan’s credit rating and warned of dire financial consequences stemming from the repeal of the Michigan Single Business Tax and the chronic budget crisis. state. In an effort to balance the budget, the Governor proposed a 2% service tax on virtually all services except those that fall within the categories of education and medicine. ( Note: the link is no longer available ). The proposal was met with fierce opposition from various service industries.
Rushed services
Given the urgency within which the legislature had to act in September 2007 (the state government would close without a resolution to the budget deficit), the 6% sales tax was simply extended to various categories of services. Given the speed with which services were selected, the natural concern is whether services were selected arbitrarily or under the influence of service industry lobbyists.
Taxed service categories
The services subject to tax under the law are divided into several categories. The first category is indirect business services. These services are generally contracted agreements between one company and another, such as copy / print services, consulting, transcription and the like.
The other categories of taxable services are included in the broader category of “personal services” and include discretionary or high-end luxury services, as well as “other personal services” as defined in the Industry Classification System of North America. In other words, taxable personal services were selected because they are considered non-essential. For example, astrology, bail, party planning, nail care, and facials are included, but hair care and permanent makeup are specifically excluded.
They stand out in the list of taxed services:
- Weight Loss and Appointments – Since federal income tax liability deductions and credits are carefully selected to promote certain values, specific selection of weight loss related services and tax appointments by the state possibly impede / discourage values related to good health and marriage.
- Travel / Tourism : In a state plagued with budget problems, taxing tourism-related services seems counterproductive.
- Skiing : One of the only recreational activities taxed under the amendment is skiing. Either skiing is high on the list, or golf is conspicuously absent. Perhaps senators and representatives consider golf to be an essential activity.
- Real Estate : After a campaign by the real estate industry earlier this year opposing Governor Granholm’s proposed 2% service tax, real estate-related services are not included in the amendment.
- The lobbyist’s influence may have unfairly affected which services are taxed.
- The income projections are too speculative.
- The tax can be the legislature’s ATM when a budget crisis looms.
- Services are not clearly included in the sales / use tax manufacturing and retail scheme. The tax on indirect business services could lead to a tax on a small business tax.
- Small businesses can be disproportionately affected because they are more likely to outsource taxable services.
- The approved service tax can be a reporting headache. The long-term effect may be that people move from independent contractor status to traditional employment.
- The tax could affect the demand for services and / or advice given to service professionals.
