Governor Granholm Releases Tax Restructuring Proposal
SALT Tax Alert, February 9, 2007

Governor Granholm’s “Tax Restructuring Proposal” was released on February 8, 2007, and provides more than merely replacing the Single Business Tax with another “business tax.” A seventeen (17) bill package related to the proposal is in the legislative drafting process. An overview of the Governor’s proposal based on the information available at the time of drafting this SALT Alert is provided below.

Single Business Tax Replacement

The Governor is re-proposing her Michigan Business Tax (“MBT”) that was originally introduced in November 2006 as a replacement to the Single Business Tax (“SBT”) that expires on December 31, 2007. The new version of the MBT is expected to substantially similar to 2006 version that included gross receipts, assets, and federal taxable income in the tax base. The 2006 version of the MBT was designed to be revenue neutral relative to the SBT. Unspecified revisions to the MBT are claimed to provide a $480 million reduction compared to the revenue currently generated by the SBT.

Excise Tax on Services

A new 2% excise tax is proposed on most services. Although not technically an expansion of the sales or use tax, the service excise tax has the same effect of a sales and use tax by taxing users and consumers on the price paid for services. The target effective date of the excise tax is June 1, 2007. Services subject to tax include, but would not be limited to, construction, repair and maintenance, legal and accounting, landscaping and lawn care, personal care, and most entertainment. Services expected to be exempt include health care, education, government purchases, school district purchases, scientific research and development, and computer systems design.

Reduction of Sales and Use Tax Exemption for Interstate Motor Carriers

Motor carriers are currently exempt from sales and use tax on tractors, trailers, and related parts used in interstate commerce if at least 10% of the equipment use is outside of Michigan. Under the Governor’s plan, motor carriers would pay tax on the portion of equipment use in Michigan.

New Property Tax for Commercial Rental Property

The Governor’s new plan resurrects a previous proposal to exclude commercial rental property from the General Property Tax Act and impose a new property tax on commercial rental property. Under the new tax, the taxable value of commercial property would be adjusted for both decreases and increases in occupancy rates. Due to the 1994 Proposal A, under the General Property Tax, taxable value of commercial rental property can be decreased, but not increased, for changes in occupancy rates.

Income Tax Change for Oil & Gas Activity

Under current law, oil and gas producers are allowed to subtract oil and gas production receipts from Michigan taxable income to the extent such receipts were included in determining federal adjusted gross income. Under the Governor’s tax restructuring proposal, the subtraction for oil and gas production receipts would be reduced by related expenses, essentially changing the subtraction from oil and gas production gross receipts to oil and gas production net income.

Reduction of Sales Tax for Vehicle Trade-Ins

Purchasers of new vehicles are required to pay sales tax on the full purchase price of the new vehicles regardless of whether the purchaser trades-in a previously owned vehicle. Under the Governor’s plan, purchasers of new vehicles would only pay sales tax on the difference between the new vehicle price and the value of the trade-in vehicle. Other than the yet to be disclosed reductions of the revised Michigan Business Tax (noted above), this is the only tax reduction in the Governor’s plan.

Increase in Late Filing and Payment Penalties

In 2002, penalties for the late filing of tax returns and late payment of tax were reduced from a maximum of 50% to a maximum of 25%. The Governor proposes “restoring” the penalties for certain “trust” taxes that are collected from others, such as income tax withholding, sales tax, and use tax.

Expanding Nexus to Certain Affiliates

Before a state tax can be imposed, a business or individual must have a taxable presence in the state referred to as nexus. The Governor proposes expanding the Michigan nexus standard to tax out-of-state affiliates of a Michigan taxpayer if there is a shared trademark or trade name, payment of expenses by one on behalf of another, or a common or substantially coordinated business plan.

Decoupling from the Federal Estate

Tax Governor Granholm proposes to make Michigan’s estate tax independent of the current federal estate tax and impose Michigan estate tax on the same basis as levied prior to 2001. Assets attributable to family owned businesses would be excluded from taxation. According to the Governor’s administration, the change is estimated to “affect” the tax of approximately 350 estates.

Other Items

Additional items included in the Governor’s plan include imposing use tax on out-of-state purchases made by insurance companies, expanding the sales tax on vending machine purchases to include milk and nonalcoholic beverages, imposing sales tax on purchases by prison inmates from prison stores, increasing tax on cigarettes and other tobacco products, and increasing the markup the Michigan Liquor Control Commission receives on the wholesale of liquor to suppliers.



The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC is not rendering legal, tax, accounting, or other professional advice or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.