SALES & USE TAX PAYMENT SCHEDULE S.B. 428 & H.B. 4346:
ANALYSIS AS ENACTED
Senate Bill 428 (as enacted) PUBLIC ACT 118 of 2012
House Bill 4346 (as enacted) PUBLIC ACT 117 of 2012
Sponsor: Senator Dave Hildenbrand (S.B. 428)
Representative John Walsh (H.B. 4346)
House Committee: Tax Policy
RATIONALE
The General Sales Tax Act and the Use Tax Act require certain large taxpayers to make accelerated payments. Some people believe that the way taxpayers must comply with these requirements is overly burdensome and time-consuming, and can result in excessively inaccurate payments. Typically, the Acts require taxpayers, by the 20th day of each month, to file a tax return with the Department of Treasury and remit the amount due. A taxpayer is required to make accelerated payments, however, if the taxpayer's total sales or use tax liability in the previous year was $720,000 or more, after certain amounts have been subtracted. By the 20th day and the last day of the month, the taxpayer must pay amounts equal to 50% of its liability for the same month in the prior year or 50% of the actual liability for the month being reported, whichever is less. The taxpayer also must make a reconciliation payment by the 20th day of the month, if its prior month's payment was insufficient.
It was pointed out that these provisions require a taxpayer to make nine separate transmissions a month: three each for the sales tax, the use tax on purchases, and the use tax on sales and rentals. In addition, if a taxpayer uses prior tax year data as its baseline (rather than calculating the amount actually owed), and its business volume has declined, the taxpayer is likely to make an overpayment. Ultimately, the taxpayer can receive a refund from the State after filing its annual return. To address these issues, some people suggested that the accelerated payment schedule should be revised, payments should be based on a taxpayer's liability in the prior month, and taxpayers should be allowed to make a consolidated payment for sales and use tax liabilities.
CONTENT
Senate Bill 428 amended the General Sales Tax Act and House Bill 4346 amended the Use Tax Act to revise the accelerated payment requirements for taxpayers whose sales or use liability in the previous year was $720,000 or more. The bills will require such a taxpayer to pay, by the 20th day of each month, 75% of its liability in the previous month plus a reconciliation payment, and allow a taxpayer to make a consolidated payment.
Currently, a taxpayer is subject to an accelerated payment schedule if its total tax liability in the previous year was $720,000 or more, after subtracting tax payments made to the Secretary of State under either Act or after subtracting tax credits available under Section 6a of the General Sales Tax Act (which requires taxpayers that purchase gasoline from a refiner or a terminal operator to prepay a portion of their sales tax to the refiner or the terminal operator, and allows them to claim an estimated prepayment credit). A taxpayer that meets the $720,000 threshold, by the 20th day of the month and by the last day of the month, must remit an amount equal to 50% of the taxpayer's liability for the same month in the
prior year or 50% of the actual liability for the month being reported, whichever is less. Also, by the 20th day of the month, the taxpayer must make a reconciliation payment equal to the difference between the tax liability determined for the preceding month and the amount of tax previously paid for that month.
Under the bills, these accelerated payment requirements will apply through December 31, 2013. Beginning January 1, 2014, a taxpayer that had a total sales or use tax liability in the previous year of $720,000 or more (after the same subtractions) will have to remit, by the 20th day of the month, an amount equal to 75% of the taxpayer's sales or use tax liability in the preceding month, plus a reconciliation payment equal to the difference between the tax liability determined for that month minus the amount previously paid for that month. A taxpayer may make a single payment for the tax due under both Acts.
As currently required, the monthly payments will have to be made by an electronic funds transfer method approved by the Department.
205.96 (H.B. 4346)
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
Accelerated sales and use tax payment requirements were first enacted in 1993 to help address a State cash-flow problem. Originally, taxpayers with a sales or use tax liability of $480,000 or more in the previous year had to remit, by the 18th day of the month, an amount equal to 95% of their liability for the same month in the prior year. Subsequent amendments increased the liability threshold to $720,000 and revised the payment schedule and calculation. According to testimony before the Senate Finance Committee, Michigan's system for remitting sales and use tax payments is the most cumbersome, time-consuming, and inaccurate in the nation. This testimony described the experience of one global company, International Paper. For years, this taxpayer evidently has made overpayments to the State in the range of $200,000 to $300,000 due to the inaccuracy of the reporting method. After filing an annual return in February, the company then has usually had to wait six to nine months to receive a refund. For one annual return, the company reportedly had to wait 18 months. While these overpayments might have a negligible impact on a taxpayer the size of International Paper, the cash flow of smaller companies may suffer if they are continually making overpayments and waiting for refunds.
Also, regardless of the relative size of the taxpayer subject to the accelerated payment schedule, the requirement to make nine payments each month can be burdensome. For the sales tax, the use tax on purchases, and the use tax on sales and rentals, a taxpayer must make two 50% payments and a separate reconciliation payment. (Even if no reconciliation payment is owed, the taxpayer still must make a "zero transmission".) While other taxpayers have the option of sending in a return and a single check to cover all tax liability, taxpayers subject to the accelerated payment schedule must pay electronically, which requires a separate transmission for each payment.
Under the bills, beginning in 2014, a taxpayer will be able to make a single monthly transmission that covers its accelerated sales tax and use tax liabilities and reconciliation amounts, and each accelerated payment will be based on the liability for the previous month. These changes will relieve the administrative burden on both the taxpayer and the State and result in more accurate payments. Increased accuracy will reduce the need for the State to make, and the taxpayer to wait for, a refund.
Legislative Analyst: Suzanne Lowe
FISCAL IMPACT
The bills will alter the timing of sales and use tax receipts. The bills will require taxpayers with an annual sales or use tax liability, after subtracting sales and use taxes on motor vehicles, of $720,000 or more, to remit their monthly tax payments according to a different formula. Currently, such taxpayers are required to remit 50% of either the liability in the same month one year ago, or the liability for the current month, plus a reconciliation amount for the prior month's liability by the 20th of each month; with the remaining 50% of either the liability in the same month one year ago, or the liability for the current month, due at the end of the month. The bills will require taxpayers to remit 75% of the prior month's liability, plus a reconciliation payment for the prior month, by the 20th of the month. The bills will eliminate the subsequent payment due at the end of the month.
While the bills will not affect the total liability, they will affect the timing of payments. Approximately 25% of collections from affected taxpayers will be received 10 days earlier, while the remaining portion will be received 20 days later. The State earns interests on its cash balances and the bills will increase the interest earnings on the accelerated portion, and reduce interest earnings on the reconciliation portion. The net impact will roughly equate to 10 days' interest on 25% of collections from affected taxpayers in the initial month the bills are effective. (If all taxpayers were affected, 25% of sales tax collections would total approximately $125.0 million to $140.0 million per month, and 25% of use tax collections would total approximately $25.0 million per month.) The impact is unknown, but given current interest rates, will likely be minimal or negligible.
This analysis was prepared by nonpartisan Senate staff for use by the Senate in its deliberations and does not constitute an official statement of legislative intent.