SOURCE: Detroit Regional Chamber

November 15, 2007 12:00 ET

Service Tax Compliance Costs May Reach $900 Million

Businesses Could Spend $14 Million Each Day the Legislature Waits to Repeal Service Tax

DETROIT, MI--(Marketwire - November 15, 2007) - Today, the Detroit Regional Chamber released a study estimating the expenses service businesses may incur to comply with the new state service tax. Based on a macro analysis, businesses could spend $906 million preparing to comply with the new law. This equates to $14 million a day from Oct. 1 to Dec. 1.

"Our members can't wait with the hope the service tax will just go away," said Sarah Hubbard, vice president of government relations for the Detroit Regional Chamber. "Costs are being incurred right now to figure out how they're going to comply with the law."

According to the Michigan Treasury's Website, state officials are instructing businesses to be ready to pay the service tax starting December 1 as stipulated by current law. Businesses are scrambling to analyze which services are affected by the law, their collection responsibilities, and what impact the tax has on their operations.

"Every day the Legislature fails to act, businesses are spending money on compliance rather than creating jobs and growing business," continued Hubbard.

The Chamber's macro analysis is based on the total number of Michigan businesses with the North American Industry Classification System (NAICS) codes as outlined in state law and the estimated compliance cost for small, medium and large businesses within each NAICS code.

This analysis looks only at the cost of compliance and implementation for a service business providing a potentially taxable service. Substantial costs are also being incurred by businesses who consume these services in Michigan who may also need to identify their purchases which will become subject to the tax.

About the Detroit Regional Chamber

With more than 23,000 members, the Detroit Regional Chamber is the largest chamber of commerce in the country. The Chamber's mission is carried out through business attraction efforts, public policy advocacy, strategic partnerships and quality products and services for members.

                        Detroit Regional Chamber
                   Michigan Service Tax Macro Analysis
                              November 2007

Public Act 93 of 2007 utilizes the North American Industry Classification System (NAICS) to identify which services will be subject to Michigan's new service tax. Twenty-three classifications of services, ranging from consulting services to security system services, have been included.

An estimated 118,686 Michigan businesses will be required to collect the new state service tax. The majority of these businesses (99 percent) employ less than 100 people. Medium and large businesses (employing 100 or more employees) only account for a small percentage of the services businesses whose services will become taxable (1 percent) and will require a more in-depth analysis of the new tax in order to comply. The total cost of initial compliance for these 118,686 businesses in Michigan will exceed $906 million.

                            Small       Medium       Large       Total
                       (less than 100 (100-1,499    (1,500 +     (all
                          employees)   employees)  employees)  businesses)
Number of businesses
 affected(1)               118,013        653          20        118,686
Average estimated
 compliance cost per
 business(2)               $7,500       $30,000      $75,000
Total estimated
 compliance cost(3)     $885,097,500  $19,590,000  $1,500,000  $906,187,500

(1) U.S. Bureau of the Census, County Business Patterns and Nonemployer
    Statistics, 2005.
(2) Estimates based on input from members of the Detroit Regional Chamber.
(3) Estimate costs include hiring accountant to determine tax liability,
    training of personnel on service tax, documenting tax-exempt sales,
    customer service related to service tax issues, service tax-related
    software and license fees and programming and servicing cash registers
    and computers.

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