Does Your Dealership Pay Too Much SBT?
By Jeffrey Brogley
Auto Dealer Alert , October 2005

Do you think your dealership pays too much in Michigan Single Business Tax ("SBT")? Most dealers answer this questionwith an emphatic "YES!" Employee leasing companies (ELC's) have been successfully used by many dealerships to dramatically reduce Michigan SBT. If you are a dealer with significant payroll expenses and you have not taken advantage of this technique, it might be time to take a second look.

What is Employee Leasing?
Employee leasing is an arrangement where employees and employer rights are transferred from an existing operating company to a leasing company. The leasing company, under a contractual agreement, leases the employees back to the operating company. From a Michigan SBT perspective, the compensation component of the tax base is transferred from the existing operating company to the leasing company. This transfer can result in significant tax savings. For example, a dealer with annual gross payroll of about $4 million could save up to $80,000 of SBT per year by transferring its employees to an ELC. In general you can anticipate that your dealership will pay 60–70% less in SBT after implementing the ELC. Dealers that have annual payroll of at least $1.5–$2 million dollars should consider implementing an ELC.

Should I Have Concerns About Transferring All of My Employees to an ELC?
Some companies have a concern that leasing their employees will create problems with employee morale or cause other administrative problems. However, there are many ways to minimize or eliminate these concerns. The ELC can be specifically tailored to make the transition virtually transparent to your employees. In most situations, the only difference the employee will notice is that the name of the company issuing their paychecks will change.

Will I Be in Control of the ELC?
Typically, the dealer can be the majority owner of the ELC. In order to achieve the maximum tax benefits available under Michigan law, some unrelated ownership of the ELC is necessary. This can typically be achieved by giving a trusted employee or certain relatives a minority interest in the ELC. While the ELC will earn some profit, the amount of profit transferred to the minority owner of the ELC is typically minimal.

How Long Will the ELC Benefit Continue?
Earlier this year, Governor Granholm proposed a major restructuring of the SBT, which would have eliminated much of the ELC benefit. However, it has become very clear that her proposal will not be passed by the legislature. Additionally, the House Republican leadership in the legislature has put forth its own proposal which does not impact leasing companies. Based on the most recent legislative discussions, it is unclear whether an SBT reform bill will be passed this year. While the ELC benefit could be eliminated by future legislative action (like any other tax planning technique), it currently appears that it will still be a viable option for 2006. Even if the ELC benefits are reduced or eliminated in the future, the SBT savings they generate are permanent savings to your dealership.

How Do I Properly Implement an ELC?
It is important that the ELC be properly structured to realize the maximum SBT savings. In general, for calendar year-end companies, the ELC needs to be In place by January 1, 2006 to achieve the maximum tax benefit for 2006. The implementation process does take time, and careful consideration must be given to many issues. We can help you navigate this process and make sure you receive the maximum benefits from an ELC. Contact your Plante & Moran advisor or Jeff Brogley at 248.223.3349.