THE TAX ATTIC with Jerry Coon

Doing business in Michigan

Jerry Coon

Our Michigan State Senator Mark Jansen came to town last week to meet with concerned Rockford residents and business owners over a topic of concern. That topic was fairness in our sales tax system. I know that seldom are the words “fairness” and “tax” used in the same sentence, but it is appropriate in this situation. Allow me to explain.

Michigan assesses sales tax of 6% on purchases of most types of goods. The tax is collected by the retailer and the money is submitted to the Michigan Department of Treasury in Lansing. A total of approximately $8 billion dollars in collected. About $5.4 billion of those dollars go the school aid fund and the rest goes into the general treasury. The City of Rockford gets a small part of those remaining dollars and we are thankful that for what we do get.

Where the fairness issue comes into play is that only retailers with a physical presence in Michigan are required to charge sales tax and pay it to Lansing. Retailers without a physical presence, like Web-based companies such as Amazon and Dell, are not required to charge sales tax and most of them don’t.

This is patently unfair to the retailers in Michigan, such as brick-and-mortar businesses like Great Northern Trading Co. and Kimberly’s Boutique in downtown Rockford, Rockford Ace Hardware, or even larger companies like Meijer, that are trying to compete with the Web-based companies of the world. The Michigan businesses previously noted spend substantial amounts of money on their physical location. They pay property taxes, utilities and upkeep on that physical location. By employing people in Michigan, they keep the economy going.

Currently, over 406,000 Michigan residents are employed in the retail industry. That means one in 10 of every person working is employed in retail trade. Where it all becomes unfair to the Michigan retailers is that the Web-based retailers may not only undercut the Great Northern Trading Co. businesses of Michigan based on not having a physical retail location, but also because they don’t have to charge the 6% sales tax. Not having to charge the 6% sales tax is what is unfair.

When the sales tax was instituted, the physical presence test was a valid way of determining when sales tax should be collected. If you wanted to do business in Michigan, you had to physically come to Michigan. The Web has changed that ball game today and the physical presence test is no longer appropriate. A company can be physically located anywhere in the United States or the world and do business in Michigan. Those companies “doing business in Michigan” should be charging Michigan Sales Tax, and public opinion agrees with that assessment. It’s that definition of “doing business in Michigan” that is the issue.

To that end, legislation has been introduced in Lansing called the Main Street Fairness Act that will basically define “doing business in Michigan” to include Web-based retailers. The Web-based retailers will be subject to the same sales tax rules as the brick-and-mortar businesses. They will owe sales tax to Michigan on the sales made to Michigan residents. Currently, 16 other states have enacted similar legislation. They have realized there is a problem that needs to be solved.

There are arguments, of course, against the Main Street Fairness Act and one is that the legislation could be considered a tax increase. Actually, that is not true. Currently, Michigan residents who buy items online from retailers without a physical presence but still doing business in Michigan, even though they are not charged the 6%, are supposed to submit the 6% along with their income tax return. Line 22 of the Michigan MI-1040 is used for this purpose. I do know a few people who comply with this rule, but it is a very small minority. My point is that since the law is on the books already, it can’t be called a tax increase.

The Main Street Fairness Act needs our support. The businesses of Michigan who are doing business should not be subjected to unfair competition of this sort. We know these people. They are our neighbors, friends and associates. They support our city by paying local and state taxes. They employ large amounts of people to keep the economy going. They are a philanthropic group of people.

A couple of projects that come to mind are the Meijer-supported White Pine Trail and the downtown Rotary Pavilion. Can you think of one project around here like these two with Amazon or Dell associated with it?

Lansing needs to step up and define “doing business in Michigan” to include Web-based businesses. Now that would be fair to all parties. This is Jerry Coon signing off.

 Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Drive in Rockford. Contact Jerry at www.actiontaxservice.com.

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