Michigan’s New Services Tax: How Hard Will Warehouse and Fulfillment Providers Be Hit?
There’s been quite a bit of discussion about a new Michigan Services Tax that is expected to hit the state’s logistics and warehouse services businesses especially hard. Business leaders reacted angrily and strongly to the State Legislature’s passage of the tax, which will affect some 16,000 businesses, as part of a budget deal in early October. The new law, scheduled to take effect December 1st, imposes a 6 percent tax on 57 categories of services. The tax affects a variety of industries central to Michigan’s economy; inclusion of businesses such as physical distribution and logistics services, and third-party warehousing, hits on operations important to automakers and other manufacturers.
“It’s a tax on specialized services such as outsourced warehousing … and it’s going to discriminate against in-state providers of logistics services,” John Taylor, associate professor of marketing and logistics at Grand Valley State University, told Crain’s Business. He said Michigan firms could lose business to out-of-state providers, or they could move. But Michigan Gov. Jennifer Granholm has described the tax as being on “discretionary services.” Business officials, however, don’t agree with the characterization of certain services—such as environmental consulting to help businesses comply with state laws, or refrigerated warehousing for poultry and meat products—as discretionary. And determining just who the law will affect has been one of the biggest problems. “Right now, people are trying to figure out if they’re included. It’s really difficult,” Sarah Hubbard, vice president of government relations for the Detroit Regional Chamber, told Crain’s. “There’s just a huge unknown right now with this, and our members are panicking. It was literally passed in the dark of night, signed minutes later, no ability to have a public hearing, no cost-benefit analysis. All we’ve got is a chart with revenue projections and the bill, and that’s it.”
A vendor in our industry that may be affected, eFulfillment Service, Inc., of Traverse City, MI, provides services including product storage, fulfillment and packaging, kitting and light assembly, and returns processing. Jordan J. Lindberg, eFullfillment’s Executive Vice President, tells us the company is still looking at the ways in which it will be impacted by the new tax. “We deal with everything from small local accounts to larger international accounts,” he says. “Given the complexity of our business and the complexity of the law, our CPA is still trying to determine which aspects of our business (if any) are subject to this new special taxation, and which are not.” Lindberg confirms that navigating through the legislation has been daunting, and so determining its ultimate effect has been difficult. “Because the details of the tax itself are so hard to figure out—try reading and deciphering the bill and the exceptions sometime!—it is really hard to say. My guess is, however, that the impact will be quite sweeping.”
Lindberg says eFullfillment Service’s overall current strategy is to identify which areas of the business are impacted, and then pass along the cost increase by increasing service fees in those areas. “Fortunately, we’re among the lowest-cost providers of outsourced order fulfillment services in the world, and so I doubt that the small service price increase will put off many potential clients,” Lindberg says, “but you never really know, of course.”
Lindberg also notes that storage and order fulfillment is by nature a fairly low-margin business, and “taxes that cannot be passed on to clients will have a serious impact on the financial health of the companies at risk.” He concurs that, with Michigan suffering from the financial ramifications of the continuing exit of the auto industry, “adding additional tax burdens on Michigan employers and their companies will only add to the problems that the state is facing in retaining tax-paying skilled workers. It would be relatively easy for Michigan service businesses to relocate to adjoining states and benefit from their more favorable tax climates.” The real issue, he says, is in areas where potential clients are comparing pricing and service offerings from across a range of states where any of the candidate companies would do a good job. “If it comes down to pricing in that situation,” says Lindberg, “then obviously any imposed tax adds a burden to the competitive stature of a Michigan-based company.”
“In our case,” Lindberg notes, “because we offer our clients very low service pricing to start, we can obviously raise those prices to some small degree and not suffer disproportionately. But for Michigan-based fulfillment houses with tighter margins and higher prices to start, this tax could be a killing blow.”
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F. Curtis Barry & Co., an operations and fulfillment consulting firm, uses best practices to recommend and implement order management systems for multichannel businesses.