Repeal of Services Tax
As anticipated, the Michigan legislature repealed the Michigan use tax on services on Saturday, December 1, 2007, 15 hours after the tax was effective. The repeal of the service tax was effective immediately and a bill to provide amnesty for those who did not comply has been passed by the House and returned to the Senate, and is expected to be passed this week (House substitute for S.B. 845). The amnesty bill excuses non-compliance with the service tax, and instructs that any tax collected be returned to the taxpayer, or remitted to the Department of Treasury, to which taxpayers may make an application for refund of the tax.

MBT Surcharge
The revenue lost by the repeal of the service tax is to be made up by a surcharge on the Michigan Business Tax. The surcharge is imposed after allocation or apportion, but before calculation of the MBT credits. The surcharge will sunset in 2017 if there has been positive growth in Michigan personal income (indexed) in 2014-2017. In addition, other adjustments were made to the MBT to meet the revenue neutrality required by the Governor for the repeal, and provides some specific credits to the film industry and bottlers.

Highlights

• The FAS 109 deduction applies to the surcharge.
• For general taxpayers, the surcharge rate is 21.99%.
• For Financial Institutions, the surcharge rate is 27.7% for tax year 2008, and 23.4% for years thereafter.
• Insurance companies subject to tax under Ch. 2A, and taxpayers under Ch. 2B that only exercise trust powers, do not pay the surcharge.
• The surcharge is capped at $6M for any taxpayer for any single tax year.
• For 2008, the compensation credit is reduced to .296% and the ITC is reduced to 2.32%. The combination of these two credits may not exceed 50% of a taxpayer's liability. For 2009, the credits return to their prior levels of .370% and 2.9% respectively, but may not exceed 52% of a taxpayer's liability.
• Taxpayers subject to tax under Ch. 2B will be permitted to utilize the compensation credit.
• The R&D credit is reduced to 1.52% in 2008, and with the prior credits, may not exceed 65% of a taxpayer's liability in 2008. The credit returns to its prior rate of 1.9% in 2009.

The new law also adjusts the trigger language for refunds under the MBT, and limits payment of any refunds to taxpayers who claimed credits under sections 403 or 406. Additionally, the refundable property tax credit is extended to certain railroad, telephone and utility personal property.

If you have questions regarding this alert, please contact your Miller Canfield attorney or contact any of the state and local tax experts: Samuel J. McKim III, Joanne B. Faycurry, or Jackie J. Cook.

To read more on the new Michigan Business Tax, visit our MBT Resource Center.