Expanding Sales Tax to Services

January 2017

The Issue:

Snyder Administration officials have begun openly discussing the idea of expanding Michigan sales tax to apply to services. Regardless of how these ideas are characterized, they are intended to do one thing: raise more revenue. 

Michigan already attempted a failed experiment in 2007 by expanding Michigan’s sales tax to a wide range of business and personal services. Michigan job providers and residents revolted in outrage due to this massive tax increase, and the Michigan Chamber led the fight to repeal the job-killing tax hike. After months of opposition, the Michigan Legislature repealed the ill-fated tax. 

The 2007 tax applied to everything from haircuts and landscaping services, to accounting and legal services. 

More recently, the Michigan Department of Treasury spent years illegally attempting to apply sales tax to software services that are provided in the “cloud.” They attempted to assess the sales tax on Michigan-based companies simply because they were accessing software services housed in the “cloud.” 

The Michigan Chamber also fought vigorously against this unlawful “tax on the cloud” effort by Treasury, and in October 2015, the Michigan Court of Appeals finally shut the door on this unauthorized effort by Treasury. 

Unfortunately, bad ideas have a way of re-surfacing. In recent days, Administration officials have made it clear they are seriously considering an expansion of the sales tax to services. 

Ironically, officials are suggesting that sales tax growth is stagnating, yet the numbers tell a different story; seven years of projected growth of nearly $1 billion does not sound like stagnation to the Michigan Chamber. Does Lansing have a revenue problem or a spending problem? 

Software as a Service – often referred to as “the cloud.” 

Adding to the complexity in 2017 is the fact that more business services are provided using software that is formally housed “in the cloud” and more business services are simply provided over the internet. 

In the case of software housed in the cloud, an application service provider (ASP) uses its own hardware and its own proprietary software to provide a service to customers who access the ASP’s webpage using the customers’ own computers. Customers pay a fee for access that can be based on the amount of access (e.g., per month), the volume of transactions processed by the service, or other methods.

The provider owns and has full possession of the software while the customer has no possession or control of the software, and loses access to the software at the end of the contract.

Michigan sales tax currently applies to prewritten software (Turbo Tax bought in a box, or downloaded to your computer for example), but does not apply to these contractual services. 

The Michigan Department of Treasury for years was illegally assessing sales tax on Michigan-based companies simply for accessing these services over the internet. The Michigan Court of Appeals shut the door on this unauthorized effort by Michigan Treasury, but the Administration is clearly considering an expansive sales tax on services as a formal proposal

Technical Background 

Michigan, like most states, applies sales tax to tangible products that can be seen, weighed, measured, felt, or touched or that is in any other manner perceptible to the senses. From a tax policy standpoint, this provides a carefully constructed system so that only the end product is taxed, rather than applying tax to all the business inputs, services, and raw material that go into making a product throughout the process. To do otherwise would result in “tax pyramiding” (similar to double taxation) on products that should only have sales tax applied once -- during the final purchase. 

Where We Stand:

Applying a sales tax to services would result not only in a major tax increase on families and job providers directly, but if all business-to-business “inputs” are not exempted during the process of developing the final “end product,” the tax increase is exacerbated through tax pyramiding. Nonetheless, even if business inputs are exempted, many Michigan Chamber members sell business services to the final consumer. Adding a sales tax to these services will make Michigan uncompetitive for both the seller and the purchaser.

Furthermore, sales tax laws are often highly disputed as it is…expanding the sales tax to services would make an already highly-disputed area of the law that much worse. There is a reason most states’ don’t tax a wide range of services. 

Staff Contact: 
Dan Papineau
Director of Tax Policy
(517) 371-7669