MBT: GROSS RECEIPTS DEDUCTION S.B. 192:
ANALYSIS AS REPORTED FROM COMMITTEE
[Please see the PDF version of this analysis, if available, to view this image.]
Senate Bill 192 (as reported without amendment)
Sponsor: Senator Nancy Cassis
Committee: Finance
Date Completed: 1-27-10
RATIONALE
Under the Michigan Business Tax Act, taxpayers are subject to a modified gross receipts tax, as well as a business income tax. The modified gross receipts tax is imposed on a taxpayer's gross receipts, subject to certain adjustments, less purchases from other firms. Gross receipts include all amounts a taxpayer receives from any activity in intrastate, interstate, or foreign commerce carried on for direct or indirect benefit to the taxpayer or others, subject to various exceptions. Because the gross receipts tax applies to virtually all nonexempt transactions, including business-to-business commerce, it essentially creates an extra layer of taxation at each stage of production--often called tax "pyramiding" or "cascading". To alleviate this impact, the Act allows businesses to deduct purchases from other firms. The definition of "purchases from other firms" includes such items as inventory, depreciable assets, and other materials and supplies. As a rule, the term does not include payment for services. Under an amendment enacted in 2008, however, for certain builders and contractors, purchases from other firms include payments to subcontractors for a construction project. To reduce the impact of tax pyramiding in another area of the construction industry, it has been suggested that payments made by a joint venture for certain services also should be considered purchases from other firms.
CONTENT
The bill would amend the Michigan Business Tax Act to allow a deduction from the modified gross receipts tax base for payments by joint ventures for construction management, architectural, and engineering services for a construction project under a contractual agreement specific to that project.
Except as otherwise provided, the Act imposes a modified gross receipts tax on every taxpayer with nexus in the State. The tax is imposed on the modified gross receipts tax base, after allocation or apportionment to the State, at a rate of 0.8%. The modified gross receipts tax base is a taxpayer's gross receipts, subject to certain adjustments, less purchases from other firms before apportionment under the Act.
Under the bill, "purchases from other firms" would include payments by joint ventures to a person included in Major Group 87 under the Standard Industrial Classification (SIC) Code, as compiled by the United States Department of Labor, for construction management, architectural, and engineering services for a construction project under a contractual agreement specific to that project.
(Major Group 87 includes establishments that are primarily engaged in providing engineering, architectural, and surveying services; accounting, auditing, and bookkeeping services; research, development, and testing services; and management and public relations services.)
MCL 208.1113
ARGUMENTS
(Please note: The arguments contained in this analysis originate from sources outside the Senate Fiscal Agency. The Senate Fiscal Agency neither supports nor opposes legislation.)
Supporting Argument
The modified gross receipts tax can have the effect of subjecting services to taxation at multiple stages. Public Act 177 of 2008 addressed this problem for one component of the construction industry, by including payments made to subcontractors for a construction project in the definition of "purchases from other firms", removing those payments from the gross receipts tax base. Similarly, the bill would address the problem for another area, by extending the definition to payments by joint ventures for management, architectural, and engineering services for a construction project.
Undertaking a construction project can be risky in today's economy, and forming a joint venture is a common way to mitigate the risk, especially on large, complex, and long-term projects. In some cases, a joint venture might be necessary because the project is a public work, a local presence is needed, or the owner requires this business structure for bonding assurances. The joint venture structure operates where employees of the partner firms provide the construction management, architectural, and engineering services to a joint venture that holds the contract with the owner of a construction project. The profitability of the joint venture is reduced, however, when it must pay the gross receipts tax on payments made for these services-services that would not increase a firm's tax base if they were performed by the taxpayer absent a joint venture arrangement.
The following example, provided by the Associated General Contractors of Michigan, illustrates this situation: When an equal partner of a joint venture incurs $200,000 for construction management, architectural, and engineering services for a project and bills it to the joint venture, the partner includes the $200,000 in its gross receipts tax calculation. The joint venture, as the pass-through entity to the owner, invoices the $200,000 to the owner for payment. The joint venture cannot deduct the partner's $200,000 invoice in calculating its gross receipts tax, since construction management, architectural, and engineering services are classified under SIC Code 87 (rather than SIC Code 15, 16, or 17, which are eligible for a deduction). As a result, the partner that provided the services pays the gross receipts tax based on its sale to the joint venture, which then pays the gross receipts tax on the same services.
By allowing a joint venture to deduct these payments from the gross receipts tax base, the bill would provide fair tax treatment to the affected businesses.
Response: The language of the bill is confusing, if not unworkable. The term "joint venture" is undefined and it is not clear who would take the deduction. Unless the bill is clarified, it is not possible to know how it would be implemented or how much it would cost.
Legislative Analyst: Suzanne Lowe
FISCAL IMPACT
The bill would reduce General Fund revenue by an unknown amount, depending upon several factors, including how much business with affected groups is accomplished through joint ventures and the specific characteristics of affected agreements and projects. Assuming that joint ventures account for approximately 10% of activity referred to by the bill, and that firms classified under SIC 15-17 (Construction) do not reclassify themselves under SIC Group 87 (the group affected by the bill), the bill would reduce MBT revenue to the General Fund by approximately $6.0 million per year.
Fiscal Analyst: David ZinAnalysis was prepared by nonpartisan Senate staff for use by the Senate in its deliberations and does not constitute an official statement of legislative intent. sb192/0910