UPDATE Oct 25: Carol of ArborLaw.com writes:
I actually have the entire list of services descriptions covered by the law, on my blog at Arborlaw.com. When the law came out, I cross-referenced the NAICS codes (which are incorporated into the new law specifically by reference) with the section numbers from the bill and the expected new numbers for sections in Michigan Compiled Laws. If you want to see this to determine whether your business services are covered, go to http://arborlaw.com/blog/services-tax. (it's a big list!)
Political analyst George Weeks writes that in decades of following how Lansing deals with financial crisis, I have never seen enactment of such a bizarre, crazy quilt, irrational, inexplicable, unfair and — most of all, confusing to taxpayers — tax.
Crain's Detroit Business goes further, calling this The best tax plan lobbyists can buy. Law and accounting services are not taxed, but the broad category of management advice, strategic planning and financial planning and budgeting will be taxed. Hmmm. So a company buying consulting services to help it keep its doors open is making a “discretionary” purchase?
Like many in Michigan, we're wondering which of the services we provide like online publications (probably not), internet consulting (probably so) or graphic design & marketing (who knows??!!) would be subject to the service tax.
Assuming that movements to repeal or change the tax fail, mLive's blog gives some idea of what services might be subject to the tax come December 2007. The nebulous "consulting services" is made a whole lot clearer when you click over to see businesses classified under 5416 Management, Scientific, and Technical Consulting Services. It's surprising to find that in addition the list includes items that are absolutely essential to the development of new businesses in Michigan like site selection, start-up consulting, marketing, and a host of science and technical services.
We invite you to add your thoughts, comments and suggestions for making some sense out of what looks like a fiscal nightmare for Michigan.
21 Comments
My husband and I have an s-corp in Michigan. We are already looking for a home in Nevada or Tennessee and have made the tearful decision to relocate. That is unfortunate, because our initial intention was to remain loyal to Michigan. No longer! We will have to take a bath on our house - but would save tens of thousands of tax dollars by moving our business out of Michigan to avoid paying the newly initiated service tax. This tax further penalizes s-corps and the majority of small business owners in Michigan. At last tally, small businesses in Michigan paid 80% of the previous SBT. In case you are unaware of the impact of this tax on small business owners...a large number of us will now be in the 42-50% range of total taxes paid. This service tax is going to cause small business owners in Michigan to move and take their 80% of Michigan's SBT/service tax base with them! Also, as far as any research shows...the states with the largest growth have the most favorable taxes. What were our legislatures thinking? Isn't this entitlement? Are we never going to insist on accountability from within our government? My suggestion would be to cut spending! We all have to learn to live within our means - our state government needs to make critical budgetary cuts ASAP before they are facing the issue of further loss of business and unemployment!
Hi Joyce, I wonder why you don't contact your legislators to ask them about this before taking such a drastic step? The more they hear from business owners about the dramatic implications of this tax, the better.
Jack Lessenberry has an interview with the Michigan Chamber of Commerce's director of tax policy and economic development, Tricia Kinley ... he then bats the chamber and Democrats around a little for poor decision making.
I actually have the entire list of services descriptions covered by the law, on my blog at Arborlaw.com. When the law came out, I cross-referenced the NAICS codes (which are incorporated into the new law specifically by reference) with the section numbers from the bill and the expected new numbers for sections in Michigan Compiled Laws. If you want to see this to determine whether your business services are covered, go to http://arborlaw.com/blog/services-tax.
The problem with these NAICS codes is that they are merely standard industry classification codes used by the Census Bureau. They are not mutually exclusive, there is a lot of overlap. So if you feel your business belongs in a NAICS code which is NOT on the list, but some of your services COULD fall under another NAICS code description, you have no confidence that the Treasury Department won't decide to nevertheless apply the tax to you. If your services are "consulting," woe unto you.
We are counting down with just over 30 days to go until this tax takes effect. Meanwhile, the Treasury has issued no official guidance or regulations which will help businesses, lawyers and tax professionals to determine who is and who is not covered, and therefore responsible for collecting and paying the tax.
It's a sad state of affairs.
Carol Shepherd, Attorney
Arborlaw PLC, Ann Arbor, MI
Holy cow Carol! That's a whole lot of services!!
I still can't figure out if web development/programming is taxable or not though...
Thanks a bunch for adding this!
@farlane,
Yes, I'm sure that 99% of the business owners out there impacted by this laundry list have no idea that they are on there.
You're not the only one who can figure out if web development and programming are taxable. Straight programming, probably no. "Consulting" with a client on SEO or public relations aspects of websites, probably yes.
Note that the NAICS codes do not operate as exclusive boxes. The State could decide your services fall into several of these 'boxes'.
Then what do you do, collect taxes on "consulting" aspects but not on programming? That's interesting, because right now, under the sales tax (ie the one in effect prior to this change in law), the Treasury regulations specify that mixed taxable/untaxable items on the same invoice, will subject the entire invoice to the application of the tax.
I assume that this will be extended by analogy to the services tax categories -- which will result in many more services being taxed, than what they are admitting to in the official coverage.
That's why they ain't sayin'.
Carol Shepherd, Attorney
Arborlaw PLC, Ann Arbor, MI
Glad to see I am not the only web developer that is sitting in limbo land. I was at a business meeting this morning with approximately 40 other SBOs and told them where to find resources and to contact their congressmen, senators and the like.
Bizarre question, but with the idea of collecting enough names to get the recall of the service tax on the ballat by November under way, what happens if they do not pass this budget mess in its entirety until after that election is over? How can Michigan citizens vote to recall something that has not technically "happened" yet? I hate to think it, but it almost appears that is their intention.
Lansing may repeal service tax in today's Detroit News has L Brooks Patterson and the Michigan Chamber calling for a repeal of the tax with no replacement. That doesn't seem very likely, but this is a possibility:
Then we move on to the SE Michigan CEOs:
A suggestion toward the end of the article that Republicans might not want to work toward a replacement tax so they could use it in the 2008 elections about made me want to throw up - sooner or later folks on both sides of the aisle need to grow up and realize that they might be fighting over the ruins of our state.
Meanwhile...business owners are required to register for the new tax.
For business owners who are individuals (I estimate this will be 75% of businesses covered by the new tax), the registration process is extremely misleading and could cause thousands of businesses to apply unnecessarily for a federal employer ID number (FEIN). Further, the online registration process will not allow registration without an FEIN, even though that does not apply to businesses without employees.
I have posted information about this on my blog:
http://arborlaw.com/blog/2007/.....vices-tax/
I recommend that all individuals registering for the services tax read this article to avoid making mistakes that may result in unwanted tax and legal consequences.
In Senate votes to scrap services tax, the Detroit News reports that the Senate voted 23-15 to repeal the service tax. In true Lansing fashion, they offered no replacement, preferring to let the House come up with a tax to replace the $600 million they wished away.
The House Tax Policy Committee will consider a bill Thursday. According to Chairman Rep. Steve Bieda, D-Warren:
I'm HUNTING for a sign that this tax will actually be replaced!
I love that they put snow plowing on the list of service taxes. Seasonal property maintenance
services. (snow plowing in winter, landscaping during other seasons)
This alone will bring back talks of us in the Upper Peninsula, breaking away forming our own state.
I am truly disgusted that the Michigan legislature has chosen to push the services tax issue to the eleventh hour -- yet again. It's obvious that everyone thinks this tax is an ineptly conceived and ill-implemented nightmare for Michigan business that needs to be repealed immediately -- the Senate, the House, the Governor, and the entire populace of the state. Nevertheless, our lawmakers are playing 'chicken' and political footsies up in Lansing. This is apparently more important than causing businesses to incur millions of dollars trying to deal with the thing. These people have forgotten WHO THEY SERVE.
We might as well hang a huge red sign saying "GO AWAY -- MICHIGAN IS A BAD PLACE TO DO BUSINESS" right on the border.
Here's one thing I think we can all agree on: Democrat or Republican, it's time to throw the bums out.
Carol Shepherd, Attorney
Arborlaw PLC
We have an update on service tax madness at The Eleven Seconds to Midnight Gang rides again.
Interesting video statment by Sen. Mike Prusi of Ishpeming asking to be allowed into the discussion.
You just hate it when other people's lack of preparation constitutes your emergency.
I have posted an article on my blog with general tips applicable in the event that the tax goes into effect, with comments specifically applicable to computer-related businesses. (Of course, none of the information constitutes legal advice; businesses will still need to consult an attorney, CPA or tax advisor to determine what steps to take. I'm required to say that, folks.)
It's unfortunate and sad, but yes, I am *this* pessimistic about the Legislature's inability to see beyond its own partisan game-playing to the damage that it is doing to its own core constituencies.
http://arborlaw.com/blog/2007/.....-tomorrow/
Carol Shepherd, Attorney
Arborlaw PLC
Ray of hope on Service Tax? MIRS via Michigan Liberal:
Thanks for suggesting that I bill today, Carol.
You missed the best part of that MIRS update (which was passed on to me charitably by a friend):
"Bishop asked Granholm today to order the Department of Treasury not to
implement the service tax if the Legislature can reach a deal by the end of the day. But state Treasurer Bob KLEINE told MIRS, "We can't do that.""
Eric B is wishing he was Drudge so he could put a flashing blue light on this. He says a deal might appears close:
http://www.michiganliberal.com.....ryId=10797
When I heard about the service tax I could barely believe it was even proposed. It hurts those hit hardest by Michigan's economic situation. A lot of small business owners here are people who have lost their jobs and decided to tough it out and start their own businesses. That's why we need the Michigan Fair Tax Proposal to get on the next ballot and pass. It takes a lot of power away from the lobbyists and our government officials and gives it back to the people.
Well, it looks like the Cardiac Kids have managed to engineer another buzzer-beating agreement and replace the service tax.
If anyone is curious, here's the link for the Michigan Fair Tax movement:
http://www.fairtaxmi.org/
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