Overview and Recommended Action Plan
Within five hours of the official State of Michigan government shut down that began at midnight on Monday, October 1, 2007, Governor Granholm signed into law an historic expansion of the Michigan use tax to include 82 categories of taxable services.
Taxable services include services as defined by 46 six-digit codes from the 2002 version of the North American Industry Classification System (NAICS), 35 personal services not connected to NAICS definitions, and certain optional repair, maintenance, or replacement contracts. The list of taxable services are provided at the end of this Alert.
The taxation of services is determined by the type of services rendered and not by the NAICS classification of the taxpayer providing the service. Taxpayers have a relatively limited period of time before the December 1, 2007 effective date to address the applicability of the service use tax to services provided to clients and customers and services consumed from vendors. Recommended steps that service providers should undertake are as follows:
- Obtain an understanding of the definitions of both taxable and exempt services (attention to nuances between different but similar service definitions contained within the NAICS may impact the taxability determination)
- Review contract terms, invoice descriptions, and terminology used in books and records to assist in classifying services as taxable or exempt
- Document the taxable versus exempt determination for each type of service or transaction provided
- Determine how to capture and account for taxable services within accounting and information systems
- As needed, register with the Michigan Department of Treasury as a use tax filer
- Establish procedures for reporting and remitting use tax to the Michigan Department of Treasury
Taxable Consulting Services
The original estimate from the State of Michigan indicates that the use tax on services will generate approximately $614 million for the ten months the tax is effective during the State’s fiscal year ending September 30, 2008. Consulting services are projected to be the largest revenue contributer at approximately $188 million, which represents roughly 31% of the total. Taxable consulting services consist solely of business-to-business transactions and includes items such as business management consulting, strategic planning consulting, employee benefit consulting, and manufacturing operations improvement consulting. Exempt services includes items such as architectural design, engineering consulting, custom computer programming, and a number of research and development services.
Persons Responsible for the Tax
The use tax is imposed on the consumer for using or consuming taxable services in Michigan, including services performed by service providers located outside of Michigan. Sellers with Michigan nexus (i.e., taxable presence) providing taxable services that are used or consumed in Michigan are required to collect the use tax from the consumer and remit the tax to the State.
The Sourcing Location of Service Sales
The sourcing location of a service is one of a number of issues that need to be reviewed by service providers. The sourcing rules applicable to “products” are used for sourcing services, which is consist with the Streamlined Sales and Use Tax Agreement adopted by Michigan and many other states to provide sales and use tax uniformity among the states.
The sequential sourcing rules are summarized as follows:
- Location that the purchaser makes first use of the service, which may or may not be the location of the service provider. For example, a manicure performed at a beauty salon would be sourced to the location of the salon. Conversely, the first use of residential lawn care services would be at the residence of the purchaser. The sourcing of items like consulting services will vary based on the service provider and the facts and circumstances of the transaction.
- If the location of first use by the purchaser is not determinable, the sale is sourced to the purchaser’s address maintained in seller’s records.
- If the purchaser’s address is not maintained in the seller’s records, the sale is sourced to the purchaser’s address obtained at the time the sale is consummated (e.g., the address indicated on the purchaser’s payment instrument).
- If the first three rules do not apply or insufficient information is available to apply such rules, the sale is sourced to the location where the service was performed.
Other Issues and Concerns
Other issues and concerns that warrant further consideration include, but are not limited to, the following:
- Determination of when the use tax becomes accruable to the State of Michigan (e.g., the date a service contract is executed, the date that service performance is completed, the date that service fees are billed)
- Taxation of mixed or bundled transactions (i.e., transactions that include a combination of taxable and nontaxable services and/or products)
- Application of the resale exemption for taxable services performed by subcontractors
- Application of the resale exemption to tangible personal property transferred in connection with a taxable service
- Implications to related party transactions
The Future of Use Tax on Services
On October 10, 2007, Senate Bill 824 and House Bill 5280 were introduced to repeal the use tax on services. In addition, other efforts to repeal or amend the use tax on services are being evaluated, including a potential ballot proposal that would constitutionally prohibit use tax on services. The likelihood of passage of legislation to repeal or amend the use tax on services before the tax becomes effective on December 1, 2007, are unknown at the time of publishing this Alert. Ballot initiatives would not occur until 2008.
Taxable Services Based on 2002 NAICS Reference
|6-Digit National Industry Code
||2002 NAICS Title
||Scenic and Sightseeing Transportation, Land
||Scenic and Sightseeing Transportation, Water
||Scenic and Sightseeing Transportation, Other
||Local Messengers and Local Delivery
||General Warehousing and Storage
||Refrigerated Warehousing and Storage
||Farm Product Warehousing and Storage
||Other Warehousing and Storage
||Lessors of Miniwarehouses and Self-Storage Units
||Interior Design Services
||Industrial Design Services
||Graphic Design Services
||Other Specialized Design Services
||Administrative Management and General Management Consulting Services
||Human Resources and Executive Search Consulting Services
||Marketing Consulting Services
||Process, Physical Distribution, and Logistics Consulting Services
||Other Management Consulting Services
||Environmental Consulting Services
||Other Scientific and Technical Consulting Services
||Office Administrative Services
||Document Preparation Services
||Private Mail Carriers
||Other Business Service Centers (including Copy Shops)
||Convention and Visitors Bureaus
||All Other Travel Arrangement and Reservation Services
||Security Guards and Patrol Services
||Armored Car Services
||Security Systems Services (except Locksmiths)
||Carpet and Upholstery Cleaning Services
||Packaging and Labeling Services
||Barber Shops (“hair care services” are not taxable)
||Beauty Salons (“hair care services” are not taxable)
||Nail Salons (“hair care services” are not taxable)
||Diet and Weight Reducing Centers (“hair care services” are not taxable)
||Other Personal Care Services (“hair care services” are not taxable)
Additional Taxable Services Not Referenced to the 2002 NAICS
Personal services as follows:
|Baby shoe bronzing
||Personal fitness trainer services
|Coin-operated blood pressure testing machine
|Coin-operated personal service machine
|Coin-operated photographic machine
|Coin-operated rental locker
|Comfort station operation services
||Rest room operation services
|Consumer buying services
|Credit card notification
|Discount buying services
||Wedding chapel services (excluding churches)
||Wedding planning services
Lastly, service contract services in which the seller, in exchange for the buyer’s single payment, agrees to provide repair, maintenance, or replacement of one or more items of tangible personal property during a specific period of time, which services the buyer is not required to buy in connection with the purchase of tangible personal property, are taxable.
Public Act 93 of 2007 (previously, House Bill 5198)