Michigan: Governor signs numerous tax related bills

Gov. Snyder recently signed numerous bills designed to raise revenue for transportation funding and capture revenue lost from consumers’ failure to pay sales and use taxes associated with their online purchases.

Transportation funding

A 10-bill package that Gov. Snyder signed last week will boost road and school funding, according to the Detroit Free Press. The package is contingent upon voter approval of a May 5, 2015, ballot initiative that would amend the state constitution to increase the sales and use taxes from six percent to seven percent, and result in an estimated $1.2 billion a year to spend on roads and $300 million a year to spend on K-12 schools.

In addition, the plan directs $100 million more toward transit and local governments, and fully restores the cuts made in 2011 to the state's Earned Income Tax Credit.

Here are some of the key provisions contained in the series of bills:

• Increase the maximum sales tax rate from six percent to seven percent, and exempt the sale of gasoline or diesel fuel from the sales tax, beginning Oct. 1, 2015 (HB 4539);
• Increase the maximum use tax rate from six percent to seven percent, and exempt the sale of gasoline or diesel fuel from the use tax, beginning Oct. 1, 2015 (HB 5492);
• Exempt motor fuel from the sales and use tax, dedicate a greater portion of the sales tax to the School Aid Fund, and increase revenue sharing (HJR UU);
• Increase registration fees for vehicles powered “partially, predominately, or solely” by electricity and establish a sunset on the discount that vehicles of the model year 1984 or later receive on their registration fees (HB 4630);
• Subject local road agencies to bidding requirements similar to those that apply to the Michigan Department of Transportation (MDOT); require the MDOT to condition payment of new or renewed road maintenance contracts on performance outcomes; and subject MDOT and local agencies to annual reporting requirements pertaining to maintenance services and contract processes and performance (HB 5167); and
• Require the MDOT to obtain warranties for either full replacement or appropriate repairs for projects exceeding $1 million and undertaken after the effective date of the bill; allow cities to allocate up to 20 percent of the money received for public transit purposes if more than 10 million passengers used public transportation in that city in the previous fiscal year (HB5460).

The Tax Foundation released estimates of the revenue impact of some of these bills. They estimate that increasing the sales tax would boost revenue by $1.34 billion, while exempting motor fuel from the sales and use tax would decrease revenue by $752 million.

Gov. Snyder also signed 14 Senate bills, which address a variety of matters, including appropriating $40 million of the School Aid Fund to the At Risk program (SB 80), delaying the sunset on the deposit of tobacco settlement revenue into the 21st Century Jobs Trust Fund (SB 269), and exempting property, income, and operations of a street railway from taxation (SB 696 and 697).

Online sales tax collections

Included in the bundle of Senate bills are two pieces of legislation, SB 658 and 659. Collectively known as the Main Street Fairness Bill (Fairness Bill), the bills create a rebuttable presumption of a nexus between online retailers and the state of Michigan for purposes of sales tax collection.

The Fairness Bill is set to take effect on Oct. 1, 2015. It amends the General Sales Tax Act of 1933 by requiring certain online sellers to collect a six percent sales tax on consumer purchases. Retailers that wish to avoid collection of sales tax can rebut the presumption of significant nexus with Michigan by establishing that the sales activity is not “significantly associated with the seller's ability to establish or maintain a market in Michigan.”

As we observed during the holidays, Michigan and other states reminded consumers that their online holiday purchases were subject to taxes. They did so because use tax compliance in most jurisdictions is voluntary, resulting in the loss of millions of tax revenue dollars each year. Thus, lawmakers have an incentive to enact laws like the Fairness Bill, compelling the collection of sales taxes.

The Detroit Free Press reported that the legislation “could generate around $50 million a year from Amazon, Overstock, eBay and other internet retailers with a nexus to Michigan.” Supporters, like the Michigan Retailers Association, applaud the move as “good for Michigan's economy, good for our local communities, good for our consumers and good for our retail businesses,” because it removes the advantage that out of state retailers enjoy, who do not invest, create jobs, pay taxes, or otherwise support local communities in Michigan.

The Detroit Free Press recognized that there is no specific link between the Fairness Bill and the road funding bills described above, but that “talk of boosting funding for transportation and education in the negotiations gave the so-called Amazon bills a boost.”

The American Booksellers Association pointed out that Michigan’s Treasury Department has estimated that $445 million in sales and use tax revenue from remote purchases went uncollected in 2014, nearly two-thirds of it from e-commerce. Beyond Michigan, 28 other states have passed legislation addressing the collection of sales taxes by remote retailers.