Investment advisors appear to have dodged a bullet as the Financial Services Institute (FSI) and individual advisors rallied lawmakers to repeal a law that would have, effective this month, levied a "6% Use Tax" on investment advice services for Michigan residents. Less than six weeks after Michigan Governor Jennifer Granholm and the state's legislature opted to impose the tax, Michigan's House of Representatives, and Senate, each voted to repeal it, although there remains debate in state political circles over how to replace the revenue that now won't be coming in from the repealed tax.
The Michigan Legislature passed on November 8 "a bill that repeals the services tax, and institutes in its place this surcharge on the Michigan Business Tax to make up for the revenue lost by repealing the service tax," according to David Bellaire, general counsel and director of government affairs at the FSI in Atlanta. "It's a tax on their revenues." But the business tax surcharge was up in the air at press time as the Legislature was out of session, although it was expected to return on November 20 to address how to make up the shortfall.
"Michigan, like many states, is facing a budget crisis," Bellaire says. Originally, the spin on the proposed Use Tax was that it would tax "luxury or optional services, and the laundry list that was being used was that it was a tax on fortune tellers, and masseuses, baby shoe bronzing, and social escorts," he explains, but the bulk of revenues were to have come from "a tax on consulting services, rather broadly defined, included providing investment advice, and then, secondarily, [it was] more carefully and specifically designed to tax investment advice for a fee." That hit a nerve at FSI, because its members often are compensated with a combination of fees and commissions, and the Use Tax applied only to fee revenue, not commission revenue: What are the "unintended consequences," Bellaire wonders. Is it possible that this unevenly applied tax could potentially reshape an advisory practice, causing advisors to skew more toward commissions if fees were to be taxed? Which structure would be better for the investor?
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