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Saturday, December 8, 2007

Michigan Changes Course - Repeals Sales Tax on Services

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?

  1. Transition in the expansion. This gives the tax agency more time to help businesses that must now collect and remit the tax.
  2. 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)
  3. Start with education efforts to help consumers better understand the sales tax and why some types of consumption should not be exempt.
  4. Expand the base along with a rate reduction !!!!!

2 comments:

Liberty said...

You are so right on your analysis of the repealed services tax in Michigan. It was a last minute, ill conceived tax that was rightfully repealed on its effective date. The proper tax reform would have been the Michigan FairTax which has been introduced in the Michigan Legislature last May as HJR L.
The repealed services tax was flawed from its inception due to 2/3rd of its revenue coming from business taxation (a hidden tax to the consumer) and not having been applied across the board but to a myriad of 60 some service categories. A nightmare for the business to determine and confusing for the consumer. The Michigan FairTax constitutionally eliminates any business tax and a personal income tax to be replaced by a broad based retail only consumption tax with a prebate to offset ALL households tax cost on expenditures to their poverty level spending. Michigan is currently one of the only states left with a Personal Property tax on businesses plus an onerous business tax on income, revenue and payroll. The MI FairTax would drive Michigan's economy forward and create jobs of which we have lost for some time. It's time Michigan stopped embedding our tax cost into our products and services while fouling our citizens to think 'Businesses' pay taxes when only individuals do.

Liberty said...

Sorry, that last sentence should read "fooling" not fouling! Sticky fingers!