Reprinted with permission of Crain’s Detroit Business. For more business news, go to www.crainsdetroit.com.

LANSING — Business leaders have reacted angrily and strongly to the Legislature’s passage of the services tax as part of the state budget deal reached a week ago.

The new law imposes a 6 percent tax on 57 categories of services and will affect about 16,000 businesses.

Business will pay about 74 percent of the tax through the levy on occupations that include consulting, office administration, warehousing and storage, security systems, packaging and labeling, janitorial and landscaping services.

In all, business-to-business services will generate an estimated $453 million of the nearly $614 million raised by the 6 percent tax in its first, 10-month year (Dec. 1, 2007, to Sept. 30, 2008). In fiscal 2009, business’s estimated share will be nearly $555 million out of $751 million raised by the tax.

“Right now, people are trying to figure out if they’re included. It’s really difficult,” said Sarah Hubbard, vice president of government relations for the Detroit Regional Chamber.

“There’s just a huge unknown right now with this, and our members are panicking. It was literally passed in the dark of night, signed minutes later, no ability to have a public hearing, no cost-benefit analysis. All we’ve got is a chart with revenue projections and the bill, and that’s it.”

The tax affects a variety of industries central to Michigan’s economy. For example, the inclusion of businesses such as physical distribution and logistics services, and third-party warehousing, hits on operations important to automakers and other manufacturers.

“It’s a tax on specialized services such as outsourced warehousing … and it’s going to discriminate against in-state providers of logistics services,” said John Taylor, associate professor of marketing and logistics at Grand Valley State University.

He said Michigan firms could lose business to out-of-state providers, or they could move.

“The message is: It has to be changed,” Taylor said.

The Michigan Department of Treasury is working to clarify what is included within each of the federal codes that signify taxable services in the new law, Public Act 93, sponsored by Rep. Steve Tobocman, D-Detroit.

For example, the law lists hair care services as exempt from the tax, but it’s not clear if that applies to just haircuts or also to other services such as permanents, said Terry Stanton, Treasury public information officer.

“We know there are a lot of questions,” he said. “We will continue to work with the business community to get this in place.”

The Treasury’s website, www.michigan.gov/
treasury, lists the services subject to tax and will contain additional information as it becomes available, Stanton said. The department will also work with business and professional organizations.

Peggy Dzierzawski, president and CEO of the Michigan Association of Certified Public Accountants, said Treasury’s guidance will be critical information for the association to use to educate its members on the new tax, so that CPAs can in turn help their clients.

“It’s tough. We’re all on edge here, waiting for this to come through,” she said.

For some companies, there’s no question they’re subject to tax, and they don’t like it.

Tim Doppel, president of Atwood LawnCare Inc., based in Sterling Heights, said his lawn- and tree-fertilization business will lose customers, at least in the short term. About 90 percent of his nearly 8,000 accounts in Oakland and Macomb counties are residential, and customers are “very, very price-conscious.”

“As hard as we will try to explain to them that the price of their service might not have changed … it is because of what the Legislature did … our customers don’t care,” he said. “They’re going to pay 6 percent more. In the long run, it’ll all even out. But in the short run, people are just going to say, ‘I don’t want your service.’ It’s going to make our work much more difficult to retain our customers.”

In addition, Doppel said, he now will have to consider the higher cost of services that he purchases in the operation of his business, such as the cleaning of his office.

Such tax pyramiding — in which a service business pays 6 percent tax on the services it purchases, driving up the price of services that it sells with the new 6 percent tax attached — is a central criticism of the new tax.

Charlie Owens, Michigan director of the National Federation of Independent Business, said, “A business has someone do their lawn. A fire alarm system has to be serviced. Somebody does some HR (human resources) work, and that gets nailed. It just snowballs.”

He and others said that puts small business at a particular disadvantage, because large companies that purchase small-business services might choose instead to handle the work internally.


Gov. Jennifer Granholm has described the tax as being on “discretionary services.”
But business officials don’t agree with the characterization of certain services as discretionary, such as environmental consulting to help businesses comply with state laws, or refrigerated warehousing for poultry and meat products.

Amy Lane: (517) 371-5355 and alane@crain.com.