Michigan Changes Course -- Repeals Sales Tax on Services

Annette Nellen — Sat, 08 Dec 2007 00:00:00 -0500

Recently, to address budget problems, Michigan lawmakers agreed to expand the sales tax base to include many more types of services (see prior post). Big surprise - taxpayers and service providers did not like the change - a $725 million tax increase (see story in The Detroit News, 11/1/07)

On 12/1/07, the effective date of the expanded tax, Governor Granholm signed HB 5408 (PA 145) to repeal the tax on services. That expected sales tax revenue will be replaced with a business tax surcharge.

There are many good reasons for having a sales tax cover all types of personal consumption rather than just tangible personal property (see prior post). However, change is difficult. Expanding the sales tax base to include more types of services means that businesses, such as nail salons and child care facilities, who have not collected sales tax before and not had to file returns, now have to.

How might the Michigan sales tax expansion to services have been done in a way that might have reduced the desire to immediately repeal it?

Transition in the expansion. This gives the tax agency more time to help businesses that must now collect and remit the tax.
Do not tax services primarily used by businesses. Businesses should not pay sales tax, only final consumers. This prevents pyramiding of the tax where businesses add it to their costs and consumers pay tax on that amount. (see prior post)
Start with education efforts to help consumers better understand the sales tax and why some types of consumption should not be exempt.
Expand the base along with a rate reduction !!!!!

This post was originally published at http://21stcenturytaxation.blogspot.com.

Michigan Will Tax More Services

Annette Nellen — Tue, 02 Oct 2007 01:00:00 -0400

Michigan enacted changes to its sales tax that expands it to cover 23 additional services starting 12/1/07 (HB 5198 signed 10/2/07). The services now subject to sales tax include:

landscaping
bail bonding
balloon-o-grams
astrology, palm reading, fortune-telling and numerology
coin-operated blood pressure testing machines
party planning
house sitting
shoe shining
wedding planning
packaging and labeling
skiing
travel and reservation
courier and messenger
personal care except hair care
personal fitness trainer
personal shopper

Thus, the state is better recognizing that the sales tax is a consumption tax and services are a type of consumption (not only tangible personal property can be consumed). They are also recognizing that as consumer spending on tangible goods decreases while consumption of services an intangibles (including digital downloads) increases, changes are needed to preserve the sales tax base. For more information on modernizing state sales tax, see my report and recent op eds - here.

Hopefully Michigan will provide technical and financial assistance to the businesses that must start collecting, reporting and remitting sales tax as it can be a bit complicated, require new software systems and assistance of tax professionals. Many of the businesses that will need to start collecting sales tax are probably calendar year businesses. One thing that would have made the new task a bit easier is for it to start on January 1 rather than December 1. That's not much time to get ready in either case though (causing headaches for both businesses and the Michigan Department of Treasury).

Michigan also raised its income tax from 3.9% to 4.35%. These changes were made to address a budget deficit. (more from Traverse City Record Eagle)

What do you think?

This post was originally published at http://21stcenturytaxation.blogspot.com.