Published: October 23, 2007 12:00 am      

Tax on services confuses businesses

Community wants to repeal it before Dec. 1 start

LANSING (AP) -- Businessman David Rhoa offers a blunt assessment of the confusion surrounding Michigan's expanded tax on business services.

"The Legislature and governor pulled a pin on a grenade and handed it to small businesses and said, 'Hold onto this for a second,'" says Rhoa, 39, whose family owned firm in Kalamazoo, Lake Michigan Mailers, employs 56 workers. "Now we're left to deal with it."

An outraged business community -- which will pay three-fourths of the new tax -- is trying to repeal the 6 percent tax on services before it takes effect Dec. 1. But even under opponents' most optimistic scenario, they'll probably have to deal with the tax at least until next year -- and possibly much longer.

Democratic Gov. Jennifer Granholm says she will consider a repeal only if other new tax revenue is found to avoid cuts to education, public safety and health care. The sales tax was added to more services as part of a deal to fill a $1.75 billion shortfall in the state budget, and supporters say the state needs the money the tax will bring.

But the fast-approaching Dec. 1 deadline has the state Department of Treasury and thousands of businesses, along with their accountants and lawyers, scrambling to get ready. Uncertainty over what businesses the tax applies to seems to be growing, despite treasury officials' efforts to sort out the new law.

Marketing generally would be subject to the sales tax, but it's unclear if the tax affects public relations firms that develop marketing strategies.

Business consulting would be taxed and generate nearly one-third of the $614 million in revenue the tax is expected to pull in over the 10 months remaining in the fiscal year. But it's not clear if the tax applies to consulting in areas such as information technology and Web-site development.

About 16,000 of the 300,000 businesses in the state would have to collect the tax. But many businesses could find themselves paying the tax for services ranging from deliveries to copying. Services provided by accountants, lawyers and lobbyists are exempt from the tax, but gray areas exist even there.

Some of the confusion stems from the way the law is written. It lists 23 new business categories subject to the sales tax. But it also defines the services by referring to classification codes used by the federal government to compare economic activity.

Many companies can't tell if their services match the codes.

Businesses that offer an array of services have little guidance about how to tax some of what they do but not the rest. Advertising agencies, for example, aren't on the tax list. But taxes are supposed to be collected on a major component of their business: graphic design.

"There's a lot of head scratching," says Rhoa, the second generation to run his family's mail and direct marketing business. He wants his company to be in compliance, even as he frets that he might be misinterpreting the new law.

"I'll take a stab at this and hope to hell I'm right," he says.