Michigan slaps 6% tax on investment advice

Characterization of planning as non-essential service infuriates advisers

Oct 8, 2007 @ 11:30 am

By Jeff Benjamin

Financial planners in Michigan were blindsided last week when the state's Legislature emerged from a late-night budget session with a new 6% tax on investment advice. Both the Financial Planning Association of Denver and the National Association of Personal Financial Advisors in Arlington Heights, Ill., have already hinted that they would support efforts to overturn the tax, which doesn't apply to brokerage commissions. Michigan hopes it will generate $16.8 million next year. The tax was imposed to help the home of the ailing auto industry offset its $1.75 billion budget deficit.
New taxes on 20 previously untaxed services — ranging from lawn care to psychic readings to escort services — are projected to generate more than $600 million a year once they kick in Dec. 1. In addition to the new service tax, Michigan's in-come tax rate was increased to 4.35% from 3.9%. Financial advisers, as well as various in-dustry association representatives, have ex-pressed both outrage and confusion over the tax on a service that Democratic Gov. Jennifer Gran-holm has characterized as non-essential. “I think the whole thing is just so damn typical of this state's government that I shouldn't be surprised, but it really pisses me off,” said Clinton Struthers, who oversees $100 million in client assets as the owner of Struthers Financial Services in Midland, Mich. “They will give tax breaks to businesses that are clearly not growing and then tax the hell out of the only part of our economy that is growing — the service sector.” According to the FPA, similar attempts to tax investment advice over the past several years have failed or been overturned in Florida, New Jersey and Minnesota. “This kind of issue comes up sporadically in different states, and it always comes up when there's a budget crisis,” said Duane Thompson, the FPA's Washington-based managing director. “I don't see how we could possibly support this,” said Diahann Lassus, chairwoman of NAPFA's in-dustry issues task force.

Just a few days after the 11th-hour budget compromise last week averted a threatened state government shutdown, Michigan's financial planning community had more questions than answers about the impact of the tax.

Even lawmakers who sat in on the marathon budget negotiations weren't clear about exactly which services would be affected.

“I don't know how this service tax will affect any of the items targeted,” said Republican Rep. Kenneth Horn, who voted against both the service tax and the income tax hike.

“People have a right to be mad, because what the governor forgot is that this tax is going to passed on to consumers, and these aren't rich people using these services,” he said.

Meanwhile, the state Legislature specifically excluded brokerage commissions, although the rule is so vague that “it doesn't even distinguish between broker regulations and adviser regulations,” Mr. Thompson said.

His initial assessment was that the tax will apply to non-discretionary advice, “in which case a lot of our members would be able to dodge the bullet. It's hard to read the tea leaves at this point, but we still need to look at what their definition of "service' means.”

Mr. Struthers surmises that commissions were left out because of the impact the tax could have on a position's cost basis, essentially making each position more ex-pensive. He also suggested that an added tax on commissions could drive business to online companies based outside Michigan.

“I think everybody came away from this feeling shocked, because the impression we had in Michigan was that this service tax was going nowhere,” Mr. Thompson said.

In February, just weeks after starting a second term, Ms. Gran-holm un-veiled her plan for an across-the-board 2% service tax that would include everything from golf course green fees to tickets to professional sporting events.

The current list of taxed services wasn't made public until after it had been approved by the state Legislature early in the morning of Oct. 1.

According to Terry Stanton, a spokesman for the Michigan Department of Treasury, “The final list was part of the negotiations in the budget process that includes higher-end discretionary-type services that the governor felt folks could opt not to use.”

The list was ultimately pared down through negotiations that often involved lobbyists, according to Mr. Horn.

“Apparently, if you complained loud enough, you got off the list,” he said.

This is a significant point of contention for advisers in Michigan who are feeling abandoned by their respective membership organizations.

“Clearly, we don't have a very good lobby, and I will be calling the FPA's [political action committee],” said Frank Moore, chief executive of Vintage Financial Services LLC, an Ann Arbor, Mich.-based firm that oversees $150 million in client assets.

Seeing investment advice lumped in with such entities as tanning salons and massage services as non-necessities particularly rankled some advisers.

“I think it's a huge mistake, and as a fee-only planner, it pisses me off because it gives the commission[-based] guys a big advantage,” said Theodore Feight, owner of Creative Financial Design in Lansing, Mich. “I guess I'm just going to have to tack [this new tax] onto my bill,” he added.

Jeff Benjamin can be reached at jbenjamin@crain.com.

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