Michigan Legislature Passes House Bill 5408; Repeals Use Tax on Most Services

In an unprecedented, yet expected, move, the Michigan Legislature reversed an action taken two months ago. The Michigan Use Tax, on certain enumerated services, has been repealed, effective 5:10 p.m., Saturday, December 1, 2007. Listening to the protests of Michigan taxpayers (business and individual), the Michigan Senate passed a substitute for House Bill 5408 at approximately 5:00 p.m. on December 1^st; the House passed the bill at 4:45 p.m.; and the Governor signed the bill into law at 5:10 p.m. While this bill repeals the enumerated services contained in House Bill 5198, Michigan still taxes the following services and service-like transactions:

• Commercial laundry services,
• Certain interstate and intrastate telecommunication services,
• Rental of accommodations (hotel, etc.) for less than 30 days,
• Sales of electricity, and
• Leases of tangible personal property.

Although the tax is now repealed, it was legally in effect for 17-plus hours beginning at midnight, December 1, 2007. However, the Legislature has also drafted language to “hold harmless” those service providers who did not collect the tax and provide for refunds of the tax that was collected. Senate Bill 845(h-3) was passed by the House on Saturday, December 1^st. The Senate is expected to concur on December 4, 2007, and the Governor is expected to sign it into law. This bill provides for the following:

• A service provider providing a service enumerated under Public Act 93 (House Bill 5198) shall not collect the tax from a customer prior to the effective date of Senate Bill 845(h-3).
• If the service provider has collected the tax,
  • It may refund the customer;
  • If not refunded, it should be remitted to the State, and the customer may request a refund of the tax from the State.
• A service provider, who provides an enumerated service, is not liable for any penalties associated with not collecting the tax.
• The Michigan Department of Treasury shall not:
  • Collect the tax unless the service provider has collected the tax and did not refund it to the customer, or
  • Penalize a service provider for failure to collect the tax.

This repeal did not come without a price tag. To replace the revenue, House Bill 5408 imposes a surcharge on the new Michigan Business Tax (effective January 1, 2008) to replace revenue that the Service Tax was expected to generate. The surcharge for most taxpayers will be 21.99% of the calculated tax. The surcharge is capped at $6 million for any one taxpayer. It is scheduled to sunset in 2017. However, it may sunset as early as 2014 if certain economic conditions are met.

In addition, House Bill 5408 provides language changing a number of other elements of the Michigan Business Tax:

• The definition of both “Business Income” (MCL § 208.1105) and “Gross Receipts” (MCL § 208.1111) was expanded for individuals, estates, and certain partnerships and trusts organized exclusively for estate or gift planning purposes. It defines what constitutes “business income” and “gross receipts.” It also specifically excludes most personal investment (non-business) income, and gains/losses on the disposition of tangible, intangible, and real property held for personal use and enjoyment, such as a personal residence.
• “Purchases from other firms” (MCL § 208.1113(6)) now contain an exclusion for rent and royalty income paid by a theatre owner or film distributor; it phases in over the 2008 and 2009 tax years.
• The surcharge (MCL § 208.1281) is calculated as follows:
  • Insurance companies and financial organizations (only allowed to exercise trust powers) are exempt from the surcharge.
  • Other financial organizations pay a 27.7% surcharge for the 2008 tax year and a 23.4% surcharge thereafter.
  • All other taxpayers pay a 21.99% surcharge.
• The surcharge is levied on tax computed after apportionment and before credits.
• There are numerous changes to various Michigan Business Tax Credits (Chapter 4 of the statute). Notably, the following credits are affected:
  • MCL § 208.1403 – Michigan Compensation Credit and Investment in Michigan Asset Credit,
  • MCL § 208.1409 – Motorsports Complex Credit,
  • MCL § 208.1413 – Telephone Personal Property Credit,
  • MCL § 208.1445 – Automobile Dealers Credit,
  • MCL § 208.1447 – Retail Credit, and
  • MCL § 208.1451 – Added to allow a credit to Michigan Beverage Distributors for a percentage of the cost of complying with Michigan’s Returnable Bottle law.
• The Michigan Business Tax is supposed to be revenue neutral. The original language (MCL § 208.1601) provides for a refund mechanism if “excess” funds are collected. This section is amended to:
  • Change the formula and control numbers to quantify the over-collection (based on the United States Consumers Price Index), redistribute the over-collection between a taxpayer refund and the Michigan “Rainy Day Fund,” and remove the original sunset from this section; and
  • Beginning in 2009, limit any taxpayer refund to those taxpayers who take a “Michigan Compensation Credit, Michigan Capital Asset Investment Credit, or Michigan Research and Development Credit.”

The legislative changes affecting Michigan taxes have been monumental in 2007. We are certain to see more changes and challenges over the coming months and years. Ryan is committed to keeping you informed of these changes and continuing to bring you “Innovative Solutions to Taxing Problems.”