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Michigan's personal property tax reform: It's not as easy as it sounds
On Aug. 5, Michigan voters elected to repeal Michigan’s personal property tax, or PPT. What does this mean for Michigan businesses?
First, know that the repeal is complicated and that PPT is not completely going away anytime soon. While the repeal is scheduled to begin on Jan. 1, 2016, it actually takes seven years to fully phase in, and after the full phase in, some property will still be subject to PPT.
The reform package includes three provisions to be aware of: a small taxpayer exemption; an exemption for eligible manufacturing property; and an essential service assessment.
The small taxpayer exemption began for the 2014 tax year and allows businesses that have personal property with a true cash value of less than $80,000 in a particular assessing unit to be exempt from PPT. Instead of filing a PPT tax return, those qualifying have to file an affidavit claiming exemption.
For those businesses that do not qualify under the small taxpayer exemption, starting in 2016, the reform package will also allow exemption from PPT of certain eligible manufacturing personal property. To meet this exemption, more than 50 percent of the cost of personal property in a particular location must be used in either industrial processing or in “direct integrated support” of industrial processing.
If the 50 percent test is met, certain personal property in that location is exempt. Exempt property will include all property purchased after 2013 as well as property that is at least 10 years old. Property that is “in the middle” will be subject to the phase in, so that all eligible manufacturing personal property will be exempt by 2023.
The final component of the reform package is the establishment of the state essential service assessment, which is also scheduled to begin on Jan. 1, 2016. This tax will be assessed to replace funds that had previously been generated from the PPT. The essential services tax will be levied based on the purchase price of personal property at a millage ranging from 0.90 to 2.40, declining as the property ages. Only property that is exempt from PPT as eligible manufacturing personal property will be subject to the essential services tax.
There is no doubt that the personal property tax reform is going to save Michigan businesses thousands of dollars each year and will make Michigan a more attractive location for investment. However, as with most tax laws, the reform does not come without some complexities.