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 !!!!!