State leaders reach deal to change 'disguised' service tax on certain goods
Lansing — A long-debated piece of Michigan tax law covering the delivery and installation of goods could finally get a rewrite under an agreement between Democratic state leaders and Republican members of the Legislature.
House Republicans said last week that Democratic Gov. Gretchen Whitmer agreed to sign off on changes to Michigan's 6% sales tax on delivery and installation charges in exchange for Republicans' limited support last week of a $1.3 billion spending bill.
Amber McCann, a spokeswoman for House Speaker Joe Tate, D-Detroit, confirmed the delivery and installation tax rules would be changed as part of a spending bill deal reached with Republicans.
The delivery and installation sales tax has long been criticized by opponents as a form of disguised service tax that should not be allowed since Michigan generally doesn’t levy taxes on services, such as lawn mowing or accounting.
Whitmer spokesman Bobby Leddy did not respond directly when asked to confirm the deal, but stressed the Democratic governor has always been willing to "find common ground" with lawmakers and expected additional tax cuts would "be an area where we will get bipartisan support." Republicans, while still in the majority in December, were close to a deal with Whitmer on changes to the tax law when other elements of the agreement fell through.
"We're satisfied the changes will clarify the law and help small businesses save and have a fair tax structure," said Jeremiah Ward, a spokesman for House Republican Leader MattHall, R-Richland Township.
In recent years, some industry officials said changing guidelines between the administrations of Republican former Gov. Rick Snyder and Whitmer on when the tax should be assessed have further clouded the policy and left companies in the lurch. Recent government audits produced big bills for businesses that thought they were in compliance with the law.
"It's not like installation and delivery is operating on some huge margin," said Brian Calley, the lieutenant governor under Snyder and current president and CEO of the Small Business Association of Michigan.
"When you have an after-the-fact assessment when the transaction between the buyer and seller is completed, it takes a profitable transaction and, in many cases, turns it into a loss.”
The Department of Treasury, which declined to make any of its tax experts available for aninterview, said through a spokesman that the law had "been in place for decades."
It’s not yet clear what sort of changes Whitmer has agreed to. Past legislation has proposed that the law be clarified to require businesses like furniture stores to separately list delivery and installation from the actual sale of the product to make it clearer what elements are subject to the sales tax.
At the time those bills were being considered last session, the Treasury Department predicted the change to the delivery and installation sales tax would likely amount to a minimum $60 million loss in revenue annually.
Two tales of the tax
The Department of Treasury in recent weeks has maintained that the application of a sales tax to delivery and installation should come as no surprise to businesses. The department has been assessing the tax since 2004, during the administration of then-Democratic Gov.Jennifer Granholm, Treasury spokesman Ron Leix said.
The sales tax is assessed if the delivery or installation charges are incurred before the transfer of property is complete, Leix said. The law was most recently upheld by a 2022 state Court of Appeals opinion related to taxes assessed on aggregate delivery, he added.
But business and industry associations argued the interpretation of when the delivery or installation charge is incurred and when the transfer is complete has long been inconsistent.In recent years, the Whitmer administration seemingly has made a distinct departure from guidelines issued during the Snyder administration.
In 2015, then-Treasurer Nick Khouri issued a bulletin that set out an eight-pronged test for determining whether delivery and installation costs should be taxed in order to clarify its application to businesses, said David Echelbarger, a Grand Rapids certified public accountant and past board chairman for the Michigan Association of Certified Public Accountants.
The guidance essentially instructed businesses that if there were "two separately negotiated transactions, then you do not have to charge tax on the service," Echelbarger said. "But if it's one negotiated transaction, you have to tax the service.”
Sometime between 2020 and 2021, businesses that were still following the 2015 tax guidance were hit with audits saying they owed thousands in unpaid taxes on delivery and installation, he said.
"I think people felt they were following the intent, but now they’re getting tax bills," Echelbarger said. "Now this company is in the position where they owe that tax. They can’t go back to the customer and assess it.”
Leix, the Treasury spokesman, insisted there have been no changes in how the tax was assessed. He would not say whether there'd been an increase in audits around delivery and installation in recent years, citing state law that allows Michigan to conceal information that would reveal how officials select audit targets.
When asked whether the tax revenue collected on delivery and installation had increased in recent years, the Treasury Department said it didn't have data specific to sales tax revenue from delivery and installation transactions. The House Fiscal Agency, in estimating a $60 million hit to revenue should delivery and installation charges change, said those taxes made up about half of 1% of the $11.5 billion in sales and use taxes projected for the 2022 fiscal year that ended Sept. 30, 2022.
Push for clarity
In 2021, the then-Republican-led Legislature began to hold hearings on the issue. Much of the testimony was led by experts from west Michigan, home to some of the state's largest furniture businesses.
"A lot of our folks over here on this side of the state who were not only selling but delivering and installing the furniture were getting hit with audits saying they owed for delivery and installation," said Nate Henschel, director of government affairs for the Grand Rapids Chamber.
"From everything that we’ve seen, we truly believe this is against the spirit of the law."
The legislation proposed in 2021 and nearly adopted in December would require companies to list delivery and installation as a separate line item on an invoice to exempt it from taxes.The outgoing Republican-led Legislature, in late-night negotiations with Whitmer on Dec. 8, neared an agreement regarding adoption of the plan but other elements of the deal fell through. Ultimately, no action was taken.
Business trade groups worry that, if left unaddressed, the assessment of sales tax on delivery and installation would spread to other industries with continued confusion over how and when it is assessed.
"Right now, this is a problem for the seller," Calley said. "Ultimately, if it's not rectified, it becomes an additional expense for the buyer. Our concern about this is on both sides of the transaction.”
The National Federation for Independent Businesses of Michigan argued that delivery and installation should never be taxed since they are both services. But short of an explicit ban on the tax in state law, the business group is looking for clarity, especially for small businesses, said Amanda Fisher, state director for NFIB.
"They are their own HR department, regulatory department, tax department,” Fisher said of small business owners. "So to have that clarification — and make sure Treasury is following it— is important.”
This article was originally published by The Detroit News.