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Financial Planning > Tax Planning

Death to Tax

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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there remains debate in state political circles over how to replace the revenue that now won’t be coming in from the repealed tax.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?

What Do Investors Need?

In an age when many companies no longer sponsor defined benefit plans, and individuals must save and invest in defined contribution plans if they want to be able to retire, what do most investors need? Advice, of course. “It does not make sense for Michigan to penalize investors who have taken the responsible step of planning for their financial future. Receiving professional advice to assist in the planning for a comfortable retirement, or a child’s education, or the care of aging parents, can hardly be considered an optional or a luxury service,” Bellaire adds. Lumping advisory fees in with fortune telling and escort services does seem really odd. “Those other services were thrown in as kind of a red herring,” to get the tax passed in the first place.

How would the services provided by other professionals–CPAs, attorneys, doctors–have been taxed under the plan? “There was this broad provision dealing with consulting services and it would have covered a lot of other activities,” Bellaire notes, including some of Michigan’s “industrial complex” which includes the big, but troubled, auto makers who “outsource a lot of business activities,” which would have been heavily taxed under the Use Tax. “It’s hard to make a blanket statement about who would have been covered, but certainly some of the activities of CPAs, their business consulting services, would have been covered. But we were really focused on the investment advice provision and its potential impact of a disincentive to do the responsible thing and plan for one’s financial future.”

FSI was part of a coalition called “Ax the Tax” which worked closely with many other associations and the car company lobbyists to bring attention to the Use Tax, and provided a Web site for the latest news on the intense campaign to repeal the tax, and ways to take action. FSI also provided tools on its Web site, asking members to write to lawmakers and Michigan newspapers, call talk-radio shows, and get colleagues to join in the fight. The success of the campaign says volumes about the effectiveness of FSI’s leadership and efforts in getting lawmakers to listen and to understand how what they do affects not only the financial community, but also the investing public as well.

The Michigan law would have taxed not only investment advisors based in Michigan, but also advisors outside of Michigan who advise Michigan residents. Getting this tax repealed is critically important to independent broker/dealers across the nation because so many of those have adopted the dual B/D and investment advisory model, and as Bellaire puts it: “We were concerned that if Michigan was successful in adopting the tax and using it to cover a budget shortfall, that we might see the same thing in other states.”

E-mail Senior Editor Kathleen M. McBride at [email protected].


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