Having passed and then rescinded an expansion of the unpopular state sales tax on services, the chair of the House Tax Policy committee reveals he is looking at a plan to up the sales tax from 6% to 7% to pay for a cut in the Michigan Business Tax (MBT) surcharge.

Representative Steven Bieda (D-Warren) makes it clear that he is not proposing that, he is merely looking at it. "I am not saying yes to anything and not saying no to anything," according to MIRS.

Representative Bieda and others in Michigan, specifically the Michigan State Chamber of Commerce and the Michigan Manufacturers Association (MMA), want to give businesses some relief from the newly enacted 21.99 percent MBT surcharge.  Representative Bieda said he never supported the surcharge in the first place.  If the governor does not get her plan to use prison reform savings for the tax cut, Bieda wants an alternative.

He is thinking about upping the sales tax rate, which he contends could bring in enough revenue to eliminate the surcharge, perhaps grant some gas tax relief, along with a property tax cut.  In other words, he's looking at what he terms "comprehensive reforms that broaden the base of the sales tax."  "There is some merit to that argument …" he explains.  Having said that, Bieda concedes that all of this would be "relatively difficult" since a two-thirds legislative vote is required to place this before Michigan voters.  But he adds a one-penny increase would not be "out of whack" with neighboring states, which have higher sales tax rates.

Increasing the sales tax rate does not broaden the sales tax base.  The tax base would be the same with a higher tax rate.  The now dead use tax on services would have broadened the tax base by adding services.  The governor's old two penny tax on services would have broadened the tax base.  Both of these proposals died.  Why?  maybe because both former proposals to expand the tax to services was loaded with exemptions and exclusions.  The legislature was picking winners and losers.

If the legislature wants to expand the sales and use tax base, they should read the Michigan Association of Certified Public Accountants (MACPA) whitepaper titled  Technical Observations on the Possible Imposition of a Sales Tax on Services.  The whitepaper is available on the MACPA website or on the EHTC website.  (See below)

Characteristics of an Effective Sales Tax on Services - (From the MACPA Whitepaper Technical Observations on the Possible Imposition of a Sales Tax on Services)

Single Rate – The rate of tax applied to tangible personal property and all services should be the same. A single rate provides for ease in administration, compliance and audit and eliminates any potential conflict with membership in the Streamlines Sales Tax Agreement. The Agreement, of which Michigan is a member, contains a prohibition against the imposition of multiple rates of tax by members seeking to participate in the sales tax registration and collection program. The program is designed to require out of state sellers to collect sales tax on mail order and internet transactions, which is clearly a growing segment of our economy. Being barred from participation in the
program would frustrate efforts to create a level playing field for Michigan based retailers relative to their out of state competitors.

Limited Exemptions – Exemptions for designated services (as opposed to categories of consumers like government, nonprofit) politicize the tax and create significant equity and competitive issues, as well as increase the administrative complexity. Some exempt service providers compete directly with other taxable service providers for the same consumers and these providers would be competitively disadvantaged. The administrative burden created by exemptions is particularly high given the relative lack of precedent for sales taxes on services in other states. The lack of guidance and experience in defining and interpreting exemptions in other states increases the complexity, uncertainty, and controversy around such exemptions.

Input Exemption – Any sales tax on services proposal should provide an input exemption for items of tangible personal property and/or purchased services consumed in rendering a taxable service. The input exemption would be similar to the resale and industrial processing exemptions currently in the Sales and Use Tax Acts In addition, an exemption comparable to the agricultural production exemption should be allowed. The theory of the sales tax is that the tax is imposed on the final buyer, user or consumer. As such, a sales tax on services should provide an exemption not only for services resold such as payments by a general contractor to a subcontractor, but also for items consumed in rendering a taxable service consistent with the current industrial processing exemption applicable to producers of tangible personal property.